Balance Sheet: Practice Questions - Chapter 4

Chapter 4 Practice Questions

• Limitations of the balance sheet include the omission of many items of financial value, the use of judgments and estimates, and the fact that current fair value is not reported.
• The balance sheet is useful for analyzing liquidity, solvency, and financial flexibility, but not profitability.
• Balance sheet information helps compute rates of return, evaluate capital structure, and assess future cash flows, but not analyze cash inflows and outflows for the period.
• Balance sheet data can assess a company's risk, liquidity, and financial flexibility, but not determine free cash flows.
• A limitation specific to the balance sheet, not shared with the income statement, is the valuation of items at historical cost.
• The balance sheet provides a basis for computing rates of return, evaluating capital structure, and assessing liquidity and financial flexibility, but not for determining the increase in cash due to operations.
• A criticism typically not directed at a balance sheet prepared using current accounting and reporting standards is the extensive use of separate classifications.
• The amount of time expected to elapse until an asset is realized or converted into cash is liquidity.
• The net assets of a business equal total assets minus total stockholders' equity.
• The correct order to present current assets is: cash, accounts receivable, inventories, prepaid items.
• Assets are classified as current or noncurrent based on conversion to cash within the operating cycle or one year, whichever is longer.
• Classifying assets as current or noncurrent depends on the time needed to convert cash invested in inventory back into cash, or 12 months, whichever is longer.
• DLD Company's cash provided by operating activities in 2012 was $54,500; the net income was $55,000, accounts receivable increased by $3,000, accounts payable increased by $1,000, building decreased by $4,000, depreciation expense increased by $1,500, and bonds payable increased by $8,000.
• Harding Corporation should report $530,000 as cash provided by operating activities; net income was $450,000, depreciation expense was $140,000, and the increase in accounts receivable was $60,000.
• Sauder Corporation reports $340,000 cash from operating activities; the net income was $300,000, depreciation expense was $70,000, and the increase in accounts receivable was $30,000.
• Packard's cash debt coverage ratio is 0.94: net cash from activities $235,000, average current liabilities $150,000, average long-term liabilities $100,000, dividends declared $60,000, capital expenditures $110,000, payments of debt $35,000.
• Packard's free cash flow is $65,000: net cash from operating activities is $235,000, average current liabilities is $150,000, average long-term liabilities is $100,000, dividend paid is $60,000, capital expenditures is $110,000, payments of debt is $35,000.
• Pedigo's cash debt coverage ratio is 1.10: net cash provided by operating activities is $275,000, average current liabilities is $150,000, average long-term liabilities is $100,000, dividends paid is $60,000, capital expenditures is $110,000, payments of debt is $35,000.
• Pedigo's free cash flow is $105,000: net cash from operating activities $275,000, average current liabilities $150,000, average long-term liabilities $100,000, dividends paid $60,000, capital expenditures $110,000, payments of debt $35,000.

Chapter 5 Practice Questions

• The balance in a savings account paying 6% annually with an initial $25,000 deposit after two years will be $28,090, given a future value factor of 1.06 for one period.
• Dunston Company will receive $500,000 in 7 years: the future receipt is discounted at 10%, its present value is $256,580.
• Milner Company will have $1,070,584 in the investment fund after 5 years: the company invests $800,000 today at 6% with no withdrawals.
• Barber Company will receive $1,500,000 in 7 years, and if the interest rate is 10%, the present value of the $1,500,000 receipt is $769,740.
• To have $1,140,000 after 12 years on a $452,000 investment, Charlie must earn an interest rate of approximately 8%.
• With a 4% annual interest rate, it will take approximately 18 years for Ethan's $240,000 investment to grow to $486,000.
• To determine the maturity value of the certificate, the future value of one concept would be used.
• Based on the provided options, Jerry should choose the signing bonus of $26,000 payable after one year of employment.
• To determine the monthly payment, the future value of an ordinary annuity concept would be used.
• This is a future value of an ordinary annuity problem.
• Charlie Corp. will pay $56,640 in interest over the term of the loan.
• The amount of $1 left on deposit for 8 years with interest at 4% compounded quarterly would be found using 32 periods at 1%.
• To determine the amount to deposit today to reach $10,000 in three years, calculate $10,000 ÷ 1.260.
• The amount available in three years if $3,000 is put in a savings account today is $3,000 x 1.260.
• The amount in a bank account three years from now if $6,000 is invested each year for four years, with the first investment made today, is ($6,000 × 1.260) + ($6,000 × 1.166) + ($6,000 × 1.080) + $6,000.
• With $4,000 put in a savings account today, the amount available in six years is $4,000 x 1.080 x 1.469.

Chapter 6 Practice Questions

• Becky's net realizable value of receivables at December 31, 2017, is $970,000 with net sales of $8,000,000, accounts receivable of $1,000,000, and a debit balance of $2,000 in the allowance for doubtful accounts; 3% of accounts receivable are estimated to be uncollectible.
• The balance in the allowance for doubtful accounts after the year-end adjustment is $456,000.
• The adjustment for uncollectible accounts is $8,600: Debit: $56,000, Accounts receivable: $172,000, Credit: $1,700,000, Allowance for doubtful accounts: $3,040.
• Smithson's bad debt expense for 2017 is $27,600, accounts written off are $21,600, accounts previously written off are $6,300, accounts receivable balance $600,000, accounts receivable balance $720,000, and 5% of accounts receivable will prove to be uncollectible.
• Shelton should report accounts receivable at a net amount of $132,800; accounts receivable is $140,000, the allowance for doubtful accounts is $7,200, and sales discounts are $4,800.
• Postdated checks and I.O.U.'s are not considered cash for financial reporting.
• All of the listed options may be included under the heading of “cash” except savings account balance.
• A compensating balance is the minimum deposit required to be maintained in connection with a borrowing arrangement.
• Cash restricted for plant expansion is reported under the non-current assets section of the balance sheet.
• A cash equivalent is a short-term, highly liquid investment convertible into known cash amounts with insignificant risk of interest rate changes due to its near maturity.
• Kaniper should report cash and cash equivalents of $35,800: cash in bank $30,000, petty cash $300, short-term paper with maturity of 2 months $5,500, postdated checks $1,400.
• Lawrence should report cash of $22,000: cash in bank $22,000, restricted cash $4,000, and bank overdraft $2,000.
• Steinert should report cash and cash equivalents of $43,700: cash in bank $35,000, petty cash $500, short-term paper $8,200, postdated checks $2,100.
• AG Inc. should record $14,850 as revenue: terms 1/15, n/30, and uses the net method.
• AG Inc. should debit Accounts Receivable for $15,000: terms 1/15, n/30, and uses the gross method.
• AG Inc. should debit Accounts Receivable for $14,700, made on the terms 2/10, n/30, and uses the net method.