Balance sheet multiple choice



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CHAPTER 3—BALANCE SHEET

MULTIPLE CHOICE

1. The balance sheet reports:



a.

the assets, liabilities, gains, and losses for a period of time

b.

the changes in assets, liabilities, and equity for a period of time

c.

the assets, expenses, and liabilities as of a certain date

d.

the probable future benefits, probable future sacrifices, and residual interest for a period of time

e.

the financial condition of an accounting entity as of a particular date

ANS: E

2. Which of the following would not appear on a conventional balance sheet?



a.

income taxes payable

b.

funds from operations

c.

cash surrender value of life insurance

d.

appropriation for contingencies (restriction of retained earnings)

e.

patents

ANS: B

3. At the beginning of the year, Execon Company had total assets of $200,000, total liabilities of $110,000, and shareholders' equity of $90,000. For the year, Execon Company earned net income of $75,000 and declared cash dividends of $30,000. At the end of the year, the company had total assets of $300,000 and its shareholders' equity was at $135,000. At the end of the year, Execon Corporation had total liabilities of:



a.

$0

b.

$45,000

c.

$50,000

d.

$165,000

e.

none of the answers are correct

ANS: D

4. Ownership of debt instruments of the government and other companies that can be readily converted to cash are best reported as:



a.

long-term investments

b.

cash

c.

marketable securities

d.

intangibles

e.

inventory of near-cash items

ANS: C

5. Tangible assets on the balance sheet should include:



a.

equipment

b.

taxes payable

c.

trademarks

d.

bonds payable

e.

none of the answers are correct

ANS: A

6. The current asset section of the balance sheet should include:



a.

land

b.

trademarks

c.

investment in C Company (for purposes of control)

d.

dividends payable

e.

work in process inventory

ANS: E


7. The current liability section of the balance sheet should include:

a.

buildings

b.

goodwill

c.

land held for speculation purposes

d.

accounts payable

e.

none of the answers are correct

ANS: D


8. Which of the following is not a current asset?

a.

marketable securities

b.

material inventory

c.

unearned rent income

d.

prepaid interest

e.

prepaid insurance

ANS: C


9. If a parent has some control over a subsidiary but the subsidiary is not consolidated, the subsidiary is accounted for as:

a.

a marketable security

b.

an investment

c.

a liability

d.

a fixed asset

e.

none of the answers are correct

ANS: B


10. Which of the following is not a proper use of notes?

a.

To describe the nature and effect of a change in accounting principle, such as from FIFO to LIFO.

b.

To indicate the basis for asset valuation.

c.

To indicate the method of depreciation.

d.

To correct an improper financial statement presentation.

e.

To describe a firm's debt.

ANS: D


11. Company A owns shares of Company B and Company C. The statements of Company B are consolidated with those of Company A. The statements of Company C are not consolidated. Company A reports "Minority Interest" on its balance sheet. This account represents:

a.

A's minority share of the stock of B

b.

A's minority share of the stock of C

c.

the minority share by outside owners of the stock of A

d.

the minority share by outside owners of the stock of B

e.

the minority share by outside owners of the stock of C

ANS: D

12. Drama Products Inc. has issued redeemable preferred stock. For analysis purposes, these securities are best classified as:



a.

marketable securities

b.

long-term investments

c.

long-term debt

d.

paid-in capital

e.

retained earnings

ANS: C

13. Treasury stock is best classified as:



a.

a current asset

b.

a long-term investment

c.

a contra liability

d.

a reduction of stockholders' equity

e.

a reduction of retained earnings

ANS: D

14. Which of the following is not a common characteristic of preferred stock?



a.

voting rights

b.

preference as to dividends

c.

preference in liquidation

d.

callability by the corporation

e.

none of the answers are correct

ANS: A

15. Which of the following is not a problem inherent in balance sheet presentation?



a.

Most assets are valued at cost.

b.

Varying methods are used for asset valuation.

c.

Not all items of value to the firm are included as assets.

d.

Liabilities related to contingencies may not appear on the balance sheet.

e.

The owners' interest will be indicated.

ANS: E

16. Which of the following is not true relating to treasury stock?



a.

A firm creates treasury stock when it repurchases its own stock and does not retire it.

b.

Treasury stock lowers the stock outstanding.

c.

Treasury stock may be recorded at the cost of the stock.

d.

Treasury stock may be recorded at par or stated value.

e.

Treasury stock is, in essence, an increase in paid-in capital.

ANS: E

17. Which of the following is not true about an ESOP?



a.

An ESOP will reduce the amount of voting stock in the hands of employees.

b.

An ESOP must be a permanent trusted plan for the exclusive benefit of the employees.

c.

The plan participants become eligible for favorable taxation of distributions from the plan.

d.

Commercial lending institutions, insurance companies, and mutual funds are permitted an exclusion from income for 50% of the interest received on loans used to finance an ESOP's acquisition of company stock.

e.

An ESOP may reduce the potential of an unfriendly takeover.

ANS: A


18. The most popular depreciation method for financial reporting is the following:

a.

units-of-production

b.

sum-of-the-years’-digits

c.

declining-balance

d.

straight-line

e.

other

ANS: D


19. Which of the following is a current liability?

a.

prepaid insurance

b.

account receivable

c.

unearned rent revenue

d.

building

e.

common stock

ANS: C


20. Which of the following accounts would not be classified as an intangible?

a.

franchises

b.

research and development

c.

patent

d.

trademarks

e.

goodwill

ANS: B


TRUE/FALSE

1. The purpose of a balance sheet is to show the financial condition of an accounting entity for a period of time.

ANS: F

2. In a period of rising prices, LIFO usually results in a realistic cost of goods sold.



ANS: T

3. Generally accepted accounting principles and the Internal Revenue Code of tax law require that the same depreciation method be used for both the financial statements and the federal tax return.

ANS: F

4. All intangibles are amortized over their useful lives or their legal lives, whichever is shorter.



ANS: F

5. Deferred taxes are caused by using different accounting methods for tax and financial reporting purposes.

ANS: T

6. Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.



ANS: T

7. Minority interest reflects the ownership of minority shareholders in the equity of consolidated subsidiaries that are less than wholly owned.

ANS: T

8. The stockholders' equity section of the balance sheet includes redeemable preferred stock.



ANS: F

9. When a firm repurchases its own stock and retires it, the stock is called treasury stock.

ANS: F

10. A sole proprietorship form of business has only one owner.



ANS: T

11. The financial statements of legally separate entities may be issued to show the financial position and income as they would appear if the companies were one legal entity. Such statements reflect a legal, rather than an economic, concept of the entity.

ANS: F

12. Current assets are listed on the balance sheet in order of liquidity.



ANS: T

13. Long-term investments, usually stocks and bonds of other companies, are often held to maintain a business relationship or exercise control.

ANS: T

14. When preferred stock has a preference as to dividends, the current year's preferred dividend must be paid before a dividend can be paid to common stockholders.



ANS: T

15. If dividends are not declared by the board of directors in a particular year, a holder of cumulative preferred stock will never be paid that dividend.

ANS: F

16. Preferred stock usually has voting rights.



ANS: F

17. Warranty obligations are estimated in order to recognize the obligation at the balance sheet date and to charge the expense to the period of the sale.

ANS: T

18. Corporations do not use a standard title for owners' equity.



ANS: T

19. A quasi-reorganization is an accounting procedure equivalent to an accounting fresh start.

ANS: T

20. The principal financial statements are the balance sheet, income statement, and statement of cash flows.



ANS: T

21. The deferred compensation element of an equity-based deferred compensation arrangement is the amount of compensation cost deferred and amortized (expensed) to future periods as the services are provided.

ANS: T

22. An ESOP is a qualified stock-bonus or combination stock-bonus and money-purchase pension plan designed to invest primarily in stock, other than the employer's securities.



ANS: F

23. The Internal Revenue Code penalizes borrowing for an ESOP.

ANS: F

24. The balance sheet is presented with the assets equal to liabilities plus equity. When this presentation is presented side by side, it is called the account form.



ANS: T

25. The analyst must assume that securities classified as marketable securities are readily marketable.

ANS: T

26. There are many alternative titles for the statement of stockholders’ equity. The most frequently used alternative title is the statement of shareholders’ equity.



ANS: T

27. When the bond market interest rate is 6% and the bond contractual interest rate is 8%, the bond will sell at a premium.

ANS: T


  1. Noncontrolling interest reflects the ownership of noncontrolling shareholders in the equity of consolidated subsidiaries less than wholly occurred.

ANS: T



  1. Noncontrolling interest should be presented at the bottom of stockholders equity.

ANS: T



  1. IFRS require a standard format for the balance sheet.

ANS: F



  1. Using IFRS, usually noncurrent assets are presented first, followed by current assets.

ANS: T



  1. Under IFRS, reserves may result from upward revaluations of properties and investments.

ANS: T
PROBLEMS

1. Assume that Eugene Motor Corp. uses the following headings on its balance sheet:


A.

Current Assets

B.

Investments

C.

Property, Plant, and Equipment

D.

Intangible Assets

E.

Current Liabilities

F.

Long-Term Liabilities

G.

Capital Stock

H.

Retained Earnings

I.

Stockholders' Equity




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