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Questions and Answers
Which of the following is NOT a primary section of a classified balance sheet?
Which of the following is NOT a primary section of a classified balance sheet?
What do liquidity ratios primarily measure?
What do liquidity ratios primarily measure?
What is the primary focus of solvency ratios?
What is the primary focus of solvency ratios?
Which of the following is NOT typically classified as a current asset?
Which of the following is NOT typically classified as a current asset?
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Which of the following is generally NOT included as a basic financial reporting concept?
Which of the following is generally NOT included as a basic financial reporting concept?
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If a company has total current assets of $500,000 and total current liabilities of $250,000, what is their current ratio?
If a company has total current assets of $500,000 and total current liabilities of $250,000, what is their current ratio?
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What is the primary criterion used to distinguish between a current asset and a long-term investment?
What is the primary criterion used to distinguish between a current asset and a long-term investment?
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Which of the following items would be classified as a long term investment on a balance sheet?
Which of the following items would be classified as a long term investment on a balance sheet?
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Prepaid expenses are considered current assets because:
Prepaid expenses are considered current assets because:
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A company holds stocks of another corporation for over 18 months, which of the following financial statement categories would they be classified under?
A company holds stocks of another corporation for over 18 months, which of the following financial statement categories would they be classified under?
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What is the primary difference in investment strategy between the two individuals mentioned regarding a specific stock?
What is the primary difference in investment strategy between the two individuals mentioned regarding a specific stock?
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According to the provided balance sheet data for The Walt Disney Company, what is the total net value of amortizable intangible assets?
According to the provided balance sheet data for The Walt Disney Company, what is the total net value of amortizable intangible assets?
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Based on the provided information, which of the following is classified as an indefinite-lived intangible asset for The Walt Disney Company?
Based on the provided information, which of the following is classified as an indefinite-lived intangible asset for The Walt Disney Company?
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If an individual invested $10,000 in a stock based on Broachman's advice, approximately how much would that investment be worth five years later, according to the content?
If an individual invested $10,000 in a stock based on Broachman's advice, approximately how much would that investment be worth five years later, according to the content?
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Considering the classifications of assets, where would a 'Patent' be most appropriately categorized on a balance sheet?
Considering the classifications of assets, where would a 'Patent' be most appropriately categorized on a balance sheet?
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What is the primary purpose of calculating Earnings Per Share (EPS)?
What is the primary purpose of calculating Earnings Per Share (EPS)?
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Which financial statement is primarily used to determine a company's success in generating profit from its operations?
Which financial statement is primarily used to determine a company's success in generating profit from its operations?
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Which of these is an example of an intercompany comparison?
Which of these is an example of an intercompany comparison?
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What does the 'net sales and other revenues' line item on the income statement represent?
What does the 'net sales and other revenues' line item on the income statement represent?
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Which of the following best describes how to calculate Earnings Per Share (EPS)?
Which of the following best describes how to calculate Earnings Per Share (EPS)?
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What is the primary role of the 'cost of goods sold' line item in an income statement?
What is the primary role of the 'cost of goods sold' line item in an income statement?
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Best Buy's 2020 net income was $1,541 million, and they had 256 million shares outstanding at the end of that year. Assuming there are no preferred dividends, what is their 2020 EPS?
Best Buy's 2020 net income was $1,541 million, and they had 256 million shares outstanding at the end of that year. Assuming there are no preferred dividends, what is their 2020 EPS?
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Which of these comparisons would be most suitable to evaluate a company's performance over time?
Which of these comparisons would be most suitable to evaluate a company's performance over time?
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What is the current ratio for the year 2022?
What is the current ratio for the year 2022?
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Which of the following measures a company's ability to pay interest on its debts historically?
Which of the following measures a company's ability to pay interest on its debts historically?
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What was Best Buy's debt to assets ratio in 2020?
What was Best Buy's debt to assets ratio in 2020?
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What does a higher debt to assets ratio imply about a company?
What does a higher debt to assets ratio imply about a company?
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How did the current ratio change from 2021 to 2022?
How did the current ratio change from 2021 to 2022?
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In which year did Best Buy experience a decrease in solvency?
In which year did Best Buy experience a decrease in solvency?
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Which company had the highest debt to assets ratio among the listed companies?
Which company had the highest debt to assets ratio among the listed companies?
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What percentage of total financing is provided by stockholders if a company has a debt to assets ratio of 41%?
What percentage of total financing is provided by stockholders if a company has a debt to assets ratio of 41%?
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What is the primary indicator of a company's ability to meet short-term financial obligations?
What is the primary indicator of a company's ability to meet short-term financial obligations?
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According to the REL Consultancy Group, what is the consequence of companies having excessive working capital?
According to the REL Consultancy Group, what is the consequence of companies having excessive working capital?
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Based on the balance sheet provided, what was the company's total current liabilities in February 2019?
Based on the balance sheet provided, what was the company's total current liabilities in February 2019?
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Which of the following is NOT considered a current liability?
Which of the following is NOT considered a current liability?
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How much did the company's total liabilities increase from February 2019 to February 2020?
How much did the company's total liabilities increase from February 2019 to February 2020?
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What is the ideal level of liquidity for a company, according to the text?
What is the ideal level of liquidity for a company, according to the text?
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Which of the following correctly describes the relationship between liquidity and profitability?
Which of the following correctly describes the relationship between liquidity and profitability?
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What is NOT a potential consequence of excessive working capital?
What is NOT a potential consequence of excessive working capital?
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Study Notes
Accounting: Tools for Business Decision Making
- This is an accounting textbook, eighth edition, by Kimmel, Weygandt, and Mitchell.
- The book's Chapter 2, prepared by Diane Tanner of the University of North Florida, focuses on financial statements.
- The learning objectives for Chapter 2 are:
- Identifying sections of a classified balance sheet.
- Using ratios to evaluate profitability, liquidity, and solvency.
- Discussing financial reporting concepts.
Learning Objective 1: Identifying Sections of a Classified Balance Sheet
- A classified balance sheet presents a snapshot of a company's financial position at a specific point in time.
- It enhances user understanding by grouping similar assets & liabilities
- Standard Classifications:
-
Assets:
- Current assets (expected to convert to cash within a year or operating cycle)
- Long-term investments
- Property, plant, and equipment
- Intangible assets
-
Liabilities and Stockholders' Equity:
- Current liabilities
- Long-term liabilities
- Stockholders' equity
-
Assets:
Current Assets
- Current assets are converted to cash or used up within a year or the operating cycle whichever is longer.
- The operating cycle is the average time to purchase inventory, sell on account, and collect cash.
- Often one year.
- Listed in order of liquidity (the order in which they are expected to become cash).
- Examples include:
- Cash
- Investments (short-term US government securities)
- Receivables (accounts receivable, notes receivable, interest receivable)
- Inventories
- Prepaid expenses (insurance, supplies)
Long-Term Investments
- Realizable in cash, but conversion not expected within a year.
- Often referred to as investments.
- Consist of investments in stocks and bonds of corporations held for longer than one year.
- Long-term assets not currently used in operating activities (e.g., land, buildings).
- Long-term notes receivable.
Property, Plant, and Equipment
- Assets with relatively long useful lives used in operations.
- Sometimes called fixed assets or plant assets.
- Includes land, buildings, equipment, delivery vehicles, and furniture.
- Reported on the balance sheet at book value (cost less accumulated depreciation).
- Depreciation: systematic allocation of cost to expense over a number of years.
- Accumulated depreciation: total amount of depreciation that the company has expensed.
Intangible Assets
- Assets without physical substance.
- Give exclusive right of use for a specific time period (e.g., goodwill, patents, copyrights, and trademarks).
- Sometimes reported under the broader category "other assets."
Learning Objective 2: Using Ratios to Evaluate Company Performance
- Ratio analysis expresses the mathematical relationship among selected items of financial statement data.
- Profitability ratios measure income or operating success over a specific time period.
- Liquidity ratios measure a company's ability to pay short-term obligations and meet unexpected cash needs.
- Solvency ratios measure a company's ability to survive in the long term.
- Ratio comparisons are critical, such as intra-company comparisons (same company over two years) and industry-average comparisons for industries.
Using the Income Statement
- The income statement reveals how successful a company is at generating profit from selling products or services.
- It reports annual revenues and related expenses during a specific period.
- Profitability is evaluated using profitability ratios.
- Earnings per share (EPS) is a key profitability ratio. It calculates the net income earned on each share of common stock.
Liquidity: Working Capital and Current Ratio
- Working capital: Current assets less current liabilities. A positive working capital indicates a greater likelihood that the company will pay its liabilities. A negative value raises concerns about the company's ability to meet short-term obligations.
- Current ratio: Current assets divided by current liabilities. A higher ratio suggests better short-term liquidity.
Solvency: Debt to Asset Ratio
- Debt to assets ratio: total liabilities divided by total assets. This ratio shows the percentage of financing from creditors (loans). A higher ratio indicates greater risk of default.
Learning Objective 3: Discussing Financial Reporting Concepts
- Generally accepted accounting principles (GAAP): sets of rules and practices with authoritative support, used by companies. It guides the type, format, and measurement of information.
-
Standard-setting bodies:
- Securities and Exchange Commission (SEC) oversees US financial markets & standard-setting bodies.
- Financial Accounting Standards Board (FASB). The primary standard-setting body in the US.
- International Accounting Standards Board (IASB) creates international accounting standards (IFRS).
-
Qualitative characteristics of useful information:
- Relevance: predictive & confirmatory value, materiality.
- Faithful representation: complete, neutral, free from material error.
- Enhancing qualities: comparability, consistency, verifiability, timeliness, and understandability.
-
Concepts and principles:
- Monetary unit assumption: uses only measurable items in $
- Economic entity assumption: separate company records from personal accounts.
- Going concern assumption: expects the company to remain in operation.
- Periodicity assumption: divides the company's life into accounting periods.
- Historical cost principle: assets are recorded at their purchase price.
- Fair value principle: assets & liabilities are recorded at their current market price.
- Full disclosure principle: all significant information is revealed.
- Cost constraint: weighs information cost versus benefits to users
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Description
Test your knowledge on balance sheet classifications, liquidity, and solvency ratios. This quiz covers essential concepts in financial reporting and helps clarify the distinctions between current and long-term assets. Perfect for accounting students and finance enthusiasts!
