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Questions and Answers
Which of the following ratios is most commonly used to measure a company's ability to meet its short-term obligations?
Which of the following ratios is most commonly used to measure a company's ability to meet its short-term obligations?
Which of the following is NOT considered a current asset in a company's Statement of Financial Position?
Which of the following is NOT considered a current asset in a company's Statement of Financial Position?
Which of the following is a non-current liability?
Which of the following is a non-current liability?
Which of the following best describes the relationship between a credit card balance and a past event?
Which of the following best describes the relationship between a credit card balance and a past event?
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How does a credit card balance typically affect an entity's resources?
How does a credit card balance typically affect an entity's resources?
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What is the primary reason a bank loan is considered a present obligation for a company?
What is the primary reason a bank loan is considered a present obligation for a company?
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What does it mean for a loan to result from a past event?
What does it mean for a loan to result from a past event?
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If a company makes a purchase using a credit card, resulting in a balance, which of the following criteria for a liability is met?
If a company makes a purchase using a credit card, resulting in a balance, which of the following criteria for a liability is met?
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What best describes the effect of a bank loan on an entity?
What best describes the effect of a bank loan on an entity?
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If a company has a credit card balance, can this be considered a liability?
If a company has a credit card balance, can this be considered a liability?
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A business borrows money to buy new machinery, which criterion below best indicates this is a liability?
A business borrows money to buy new machinery, which criterion below best indicates this is a liability?
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According to the fundamental accounting equation, which of the following relationships is always true?
According to the fundamental accounting equation, which of the following relationships is always true?
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In a post-closing trial balance, which of the following is typically listed in the debit column?
In a post-closing trial balance, which of the following is typically listed in the debit column?
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If a company has total liabilities of $235,300 and total equity of $562,700, what is the total value of assets according to the accounting equation?
If a company has total liabilities of $235,300 and total equity of $562,700, what is the total value of assets according to the accounting equation?
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Which of the following best describes the purpose of a post-closing trial balance?
Which of the following best describes the purpose of a post-closing trial balance?
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What is the significance of the debit and credit columns in a post-closing trial balance?
What is the significance of the debit and credit columns in a post-closing trial balance?
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What does the Equity section represent in the Statement of Financial Position?
What does the Equity section represent in the Statement of Financial Position?
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Which equation correctly represents the relationship between assets, liabilities, and equity?
Which equation correctly represents the relationship between assets, liabilities, and equity?
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What is included in the Current Assets section of the Statement of Financial Position?
What is included in the Current Assets section of the Statement of Financial Position?
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Which of the following is a liability located within the Current Liabilities section?
Which of the following is a liability located within the Current Liabilities section?
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What does the term 'Total Liabilities' refer to in the Statement of Financial Position?
What does the term 'Total Liabilities' refer to in the Statement of Financial Position?
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Which account is not typically classified as an intangible asset?
Which account is not typically classified as an intangible asset?
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Which of the following best describes 'Total Assets' in the financial statement?
Which of the following best describes 'Total Assets' in the financial statement?
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What represents the 'current portion of long-term debt' in the financial position?
What represents the 'current portion of long-term debt' in the financial position?
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Which of the following accurately describes retained earnings?
Which of the following accurately describes retained earnings?
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What is the primary purpose of liquidity ratios in financial analysis?
What is the primary purpose of liquidity ratios in financial analysis?
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If a company has current assets of $200,000 and current liabilities of $100,000, what is its current ratio?
If a company has current assets of $200,000 and current liabilities of $100,000, what is its current ratio?
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Which of the following statements about equity is true?
Which of the following statements about equity is true?
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What does a liquidity ratio of around 2 generally indicate?
What does a liquidity ratio of around 2 generally indicate?
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On the Statement of Financial Position, which items are typically found in the equity section?
On the Statement of Financial Position, which items are typically found in the equity section?
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What does a greater current ratio indicate about a company?
What does a greater current ratio indicate about a company?
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Why is it important for financial statement users to evaluate a company's condition?
Why is it important for financial statement users to evaluate a company's condition?
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Study Notes
Chapter 2: Assets and Liabilities
- Fundamental Accounting Equation: Assets = Liabilities + Equity
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Assets: Resources controlled by an entity resulting from past events, expected to generate future economic benefits
- Examples: Cash, sneakers, building, land, equipment, inventory
- Flowchart for Identifying Assets: Resources must be controlled by the entity, result from a past event, and bring future economic benefits to the entity
- Cash in Bank Account as Asset: Ask and answer the flowchart questions to determine if it is an asset
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Liabilities: Present obligations of an entity arising from past events, expected to result in an outflow of entity resources
- Examples: Borrowings, wages payable, accounts payable, mortgage, unearned revenue
- Flowchart for Identifying Liabilities: Determine if the obligation is present, if it results from a past event, and if settlement will result in an outflow of resources
- Equity: Ownership interest in the assets, representing the residual interest after deducting liabilities
- Entity: A company, group of companies, unincorporated business, or other relevant business activity
- Asset Example: Cash in a bank account. Follow the flowchart to determine if it is a current asset.
- Liability Example: Credit card balance, a current liability
- Financial Position: A statement that reports a company's assets, liabilities, and equity at a specific point in time.
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Liquidity Ratios: Measures a company's ability to pay off current liabilities in the short term
- Current Ratio: Current assets divided by current liabilities, a higher ratio suggests greater liquidity.
- Quick Ratio: Current assets (excluding inventory and prepaid expenses) divided by current liabilities, measures quick conversion to cash.
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Solvency Ratios: Measure a company's ability to pay off all liabilities, including long-term obligations, in the long term
- Debt to Total Assets Ratio: Total liabilities divided by Total assets. A lower ratio signifies greater ability to pay off debt
Example Companies and Activities
- Vintage Bookstore: Examples of assets (bookshelves, books), and liabilities (amounts customers owe), and explanations of why each is an asset or liability.
- Graphics Co: Example of machinery as an asset.
- KWH Ltd: Example of a post-closing trial balance, including assets, liabilities, and equity account figures.
- Tryme Ltd: Example of a post-closing trial balance, including assets, liabilities, and equity account figures.
- Gubba's Grub: Example Company with Statement of Financial Position.
- Kenny's Kitchen: Example Company with Statement of Financial Position.
- Ted's Twinkies: Example Company with Statement of Financial Position.
Explanation of Concepts
- Detailed Analysis for Accounts: Show how to classify accounts presented as current or non-current.
- Accounting Equation & Its Importance: Explain, showing examples of how the accounting equation shows the balance of a company's financial position.
- What does the Equity section represent?: Explain that the Equity section represents the residual interest left over after liabilities have been subtracted from assets. In simpler terms, Equity is simply "assets minus liabilities."
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Description
Test your knowledge of financial ratios and asset management with this quiz focused on Kenny's Kitchen and Gubba's Grub. Answer questions related to current assets, debt-to-equity ratios, quick ratios, and more. See how well you understand financial statements and company valuation.
