Exercises/Assignments

Answer the following Problems.

Problem 1

Indicate the proper classification or presentation of the items below. Use the following classifications:

A. Current Assets

B. Noncurrent Assets

C. Current Liabilities

D. Noncurrent Liabilities

E. Equity

F. Notes to financial statements

Items

A 1. Financial assets held for trading

B 2. Investment in associates

C 3. Estimated warranty liability

A 4. Sinking fund for the payment of bond payable due next year

A 5. Instalments accounts receivable, average normal collection period, 18 months

B 6. Leasehold improvement

E 7. Reserves

E 8. Share premium

E 9. Stock dividend payable

B 10. Trademark

Problem 4

True or False. Write True if the statement is correct otherwise write false.

False 1.Liquidity refers to the ability of an enterprise to pay its debts as they mature.

True 2.The balance sheet omits many items that are of financial value to the business but cannot be
recorded objectively.

True 3.Financial flexibility measures the ability of an enterprise to take effective actions to alter the

amounts and timing of cash flows.

financial statements.

True 5.An asset which is expected to be converted into cash, sold, or consumed within one year of the

balance sheet date is always reported as a current asset.

False 6.Land held for speculation is reported in the property, plant, and equipment section of the
balance sheet.

True 7.The account form and the report form of the balance sheet are both acceptable under GAAP.

False 8.Because of the historical cost principle, fair values may not be disclosed in the balance sheet.

False 9.Companies have the option of disclosing information about the nature of their operations and
the use of estimates in preparing financial statements.

True 10.Companies may use parenthetical explanations, notes, cross references, and supporting
schedules to disclose pertinent information.

Problem 5

Multiple Choice. Choose the letter of the correct answer.

1.Which of the following is a limitation of the balance sheet?

a. Many items that are of financial value are omitted.

b. Judgments and estimates are used.

c. Current fair value is not reported.

d. All of these

2. The balance sheet is useful for analyzing all of the following except

a. liquidity.

b. solvency.

c. profitability.

d. financial flexibility.

3. Balance sheet information is useful for all of the following except to

a. compute rates of return

b. analyze cash inflows and outflows for the period

c. evaluate capital structure

d. assess future cash flows

a. assessing a company's risk

b. evaluating a company's liquidity

c. evaluating a company's financial flexibility

d. determining free cash flows.

5. A limitation of the balance sheet that is not also a limitation of the income statement is

a. the use of judgments and estimates

b. omitted items

c. the numbers are affected by the accounting methods employed

d. valuation of items at historical cost

6. The balance sheet contributes to financial reporting by providing a basis for all of the

following except

a. computing rates of return.

b. evaluating the capital structure of the enterprise.

c. determining the increase in cash due to operations.

d. assessing the liquidity and financial flexibility of the enterprise

7. One criticism not normally aimed at a balance sheet prepared using current accounting and

reporting standards is

a. failure to reflect current value information.

b. the extensive use of separate classifications.

c. an extensive use of estimates.

d. failure to include items of financial value that cannot be recorded objectively.

8. The amount of time that is expected to elapse until an asset is realized or otherwise converted

into cash is referred to as

a. solvency.

b. financial flexibility.

c. liquidity.

d. exchangeability.

9. The net assets of a business are equal to

b. total assets plus total liabilities.

c. total assets minus total stockholders' equity.

d. none of these.

10. The correct order to present current assets is

a. cash, accounts receivable, prepaid items, inventories.

b. cash, accounts receivable, inventories, prepaid items.

c. cash, inventories, accounts receivable, prepaid items.

d. cash, inventories, prepaid items, accounts receivable.

11. The basis for classifying assets as current or noncurrent is conversion to cash within

a. the accounting cycle or one year, whichever is shorter.

b. the operating cycle or one year, whichever is longer.

c. the accounting cycle or one year, whichever is longer.

d. the operating cycle or one year, whichever is shorter.

12. The basis for classifying assets as current or noncurrent is the period of time normally required

by the accounting entity to convert cash invested in

a. inventory back into cash, or 12 months, whichever is shorter.

b. receivable back into cash, or 12 months, whichever is longer.

b. receivables back into cash, or 12 months, whichever is longer.

c. tangible fixed assets back into cash, or 12 months, whichever is longer.

d. inventory back into cash, or 12 months, whichever is longer.

13. The current assets section of the balance sheet should include

a. machinery.

b. patents.

c. goodwill.

d. inventory.

14. Which of the following is a current asset?

a. Cash surrender value of a life insurance policy of which the company is the beneficiary.

b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.

d. Trade installment receivables normally collectible in 18 months.

15. Which of the following should not be considered as a current asset in the balance sheet?

a. Installment notes receivable due over 18 months in accordance with normal trade practice.

b. Prepaid taxes which cover assessments of the following operating cycle of the business.

c. Equity or debt securities purchased with cash available for current operations.

d. The cash surrender value of a life insurance policy carried by a corporation, the

beneficiary, on its president.

16. Equity or debt securities held to finance future construction of additional plants should be

classified on a balance sheet as

a. current assets.

b. property, plant, and equipment.

c. intangible assets.

d. long-term investment

17. When a portion of inventories has been pledged as security on a loan,

a. the value of the portion pledged should be subtracted from the debt.

b. an equal amount of retained earnings should be appropriated.

c. the fact should be disclosed but the amount of current assets should not be affected.

d. the cost of the pledged inventories should be transferred from current assets to noncurrent

assets.

18. Which of the following is not a long-term investment?

a. Cash surrender value of life insurance

b. Franchise

c. Land held for speculation

d. A sinking fund

19. A generally accepted method of valuation is

1. trading securities at market value.

2. accounts receivable at net realizable value.

3. inventories at current cost.

b. 2

c. 3

d. 1 and 2

20. Which item below is not a current liability?

a. Unearned revenue

b. Stock dividends distributable

c. The currently maturing portion of long-term debt

d. Trade accounts payable

21. Working capital is

a. capital which has been reinvested in the business.

b. unappropriated retained earnings.

c. cash and receivables less current liabilities.

d. none of these.

22. An example of an item which is not an element of working capital is

a. accrued interest on notes receivable.

b. goodwill.

c. goods in process.

d. temporary investments

23. Long-term liabilities include

a. obligations not expected to be liquidated within the operating cycle.

b. obligations payable at some date beyond the operating cycle.

c. deferred income taxes and most lease obligations.

d. all of these.

24. Which of the following should be excluded from long-term liabilities?

a. Obligations payable at some date beyond the operating cycle

b. Most pension obligations

c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking

fund
d. None of these

25. Treasury stock should be reported as a(n)

a. current asset.

b. investment.

c. other asset.

d. reduction of stockholders' equity.

26. Which of the following should be reported for capital stock?

a. The shares authorized

b. The shares issued

c. The shares outstanding

d. All of these

27. Which of the following would be classified in a different major section of a balance sheet from

the others?

a. Capital stock

b. Common stock subscribed

c. Stock dividend distributable

d. Stock investment in affiliate

28. The stockholders' equity section is usually divided into what three parts?

a. Preferred stock, common stock, treasury stock

b. Preferred stock, common stock, retained earnings

c. Capital stock, additional paid-in capital, retained earnings

d. Capital stock, appropriated retained earnings, unappropriated retained earnings

29. Which of the following is not an acceptable major asset classification?

a. Current assets

b. Long-term investments

c. Property, plant, and equipment

d. Deferred charges

30.Which of the following is a contra account?

a. Premium on bonds payable

c. Patents

d. Accumulated depreciation

31. Fulton Company owns the following investments:

Trading securities (fair value) P60,000

Available-for-sale securities (fair value) 35,000

Held-to-maturity securities (amortized cost) 47,000

Fulton will report investments in its current assets section of

a. P0.

b. exactly P60,000.

c. P60,000 or an amount greater than P60,000, depending on the circumstances.

d. exactly P95,000.

32. For Grimmett Company, the following information is available:

Capitalized leases P200,000

Trademarks 65,000

Long-term receivables 75,000

In Grimmett’s balance sheet, intangible assets should be reported at

a. P65,000.

b. P75,000.

c. P265,000.

d. P275,000.

33. Houghton Company has the following items: common stock, P720,000; treasury stock,

P85,000; deferred taxes, P100,000 and retained earnings, P313,000. What total amount should

Houghton Company report as stockholders’ equity?

a. P848,000.

b. P948,000.

c. P1,048,000.

d. P1,118,000.

34. Kohler Company owns the following investments:

Available-for-sale securities (fair value) 35,000

Held-to-maturity securities (amortized cost) 47,000

Kohler will report securities in its long-term investments section of

a. exactly P95,000.

b. exactly P107,000.

c. exactly P142,000.

d. P82,000 or an amount less than P82,000, depending on the circumstances.

35. For Randolph Company, the following information is available:

Capitalized leases P280,000

Trademarks 90,000

Long-term receivables 105,000

In Randolph’s balance sheet, intangible assets should be reported at

a. P90,000.

b. P105,000.

c. P370,000.

d. P385,000.

36. Olmsted Company has the following items: common stock, P720,000; treasury stock,

P85,000; deferred taxes, P100,000 and retained earnings, P363,000. What total amount should

Olmsted Company report as stockholders’ equity?

a. P898,000.

b. P998,000.

c. P1,098,000.

d. P1,198,000.

37. Presented below are data for Antwerp Corp.

2020 2021 2022

Assets, January 1 P2,800 P3,360 ?

Liabilities, January 1 1,680 ? $2,016

Stockholders' Equity, Jan. 1 ? ? 2,100

Common Stock 504 448 500

Stockholders' Equity, Dec. 31 ? ? 1,596

Net Income 560 448 ?

Stockholders' Equity at January 1, 2020 is

a. P 504.

b. P 560.

c. P1,120.

d. P1,624.

38. Presented below are data for Bandkok Corp.

2020 2021 2022

Assets, January 1 P5,400 P6,480 ?

Liabilities, January 1 3,240 ? $3,888

Stockholders' Equity, Jan. 1 ? ? 4,050

Dividends 1,080 810 918

Common Stock 972 864 920

Stockholders' Equity, Dec. 31 ? ? 3,078

Net Income 1,080 864 ?

Stockholders' Equity at January 1, 2021 is

a. P1,890.

b. P1,998.

c. P3,132.

d. P3,186.

39. Stine Corp.'s trial balance reflected the following account balances at December 31, 2020:

Accounts receivable (net) P24,000

Trading securities 6,000

Accumulated depreciation on equipment and furniture 15,000

Cash 11,000

Inventory 30,000
Equipment 25,000

Patent 4,000

Prepaid expenses 2,000

Land held for future business site 18,000

In Stine's December 31, 2010 balance sheet, the current assets total is

a. P90,000.

b. P82,000.

c. P77,000.

d. P73,000.

40. On January 4, 2020, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an annual

rental of P75,000. At inception of the lease, Dodd received P300,000 covering the first two

years' rent of P150,000 and a security deposit of P150,000. This deposit will not be returned

to Dodd upon expiration of the lease but will be applied to payment of rent for the last two

years of the lease. What portion of the P300,000 should be shown as a current and long-term

liability in Kiley's December 31, 2020 balance sheet?

Current Liability Long-term Liability

a. P0 P300,000

b. P75,000 P150,000

c. P150,000 P150,000

d. P150,000 P75,000