Balance Sheet quiz Financial Accounting Quiz On Mar 15, 2024 Share /25 12345678910111213141516171819202122232425 Balance Sheet 25 questions in 30 minutes Answers at the end of the exam Pass Score 70% The questions change when you repeat the exam enter full-screen mode by pressing the icon located in the top- right comer of the exam 1 / 25 Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over 36 months for customers who make a minimum down payment of 10%. Historically, Galaxy has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3% of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at the time of sale affect Galaxy's liabilities ? Bad debt expense (No effect) . Warranty expense (Increase) Bad debt expense (No effect) . Warranty expense (No effect) Bad debt expense (Increase) . Warranty expense (No effect) The recognition of bad debt expense has no effect on liabilities, current revenues are reduced by the expected amount of uncollectable accounts. Bad debt expense reduces net income and reduces assets. The recognition of expected warranty expense decreases net income (following the matching principle), and since it is not currently paid (doesn't reduce assets) it creates or increases a liability at the time of sale. 2 / 25 Which of the following would most likely result in a current liability ? Estimated income taxes for the current year Recognizing impairment of PP&E Possible warranty claims Estimated income taxes for the current year are likely reported as a current liability. To recognize the warranty expense, it must be probable, not just possible. Recognizing impairment of PP&E does not create a liability. 3 / 25 GTO Corporation purchased all of the common stock of Charger Company for $4 million. At the time, Charger reported total assets of $3 million and total liabilities of $1 million. At the acquisition date, the fair value of Charger's assets was $3.5 million and the fair value of Charger's liabilities was $1.3 million. What amount of goodwill should GTO report as a result of the acquisition and is it necessary for GTO to amortize the goodwill ? Goodwil ($1.8 million) . Amortization required (no) Goodwil ($2.2 million) . Amortization required (no) Goodwil ($1.8 million) . Amortization required (yes) The acquisition goodwill is equal to $1.8 million [$4 million purchase price – $2.2 million fair value of net assets acquired ($3.5 million assets at fair value – $1.3 million liabilities at fair value)]. Under IFRS or U.S. GAAP, goodwill is not amortized but is subject to an annual impairment test. 4 / 25 The statement of changes in equity is least likely to provide information on the firm's : payment of dividends comprehensive income repayment of bond principal The statement of changes in equity shows a firm's comprehensive income (net income and other comprehensive income) and transactions with shareholders, such as dividends paid and issuance or repurchases of stock. Repayment of bond principal is not a change in equity : assets (cash) decrease and liabilities (long-term debt) decrease. 5 / 25 How should the proceeds received from the advance sale of tickets to a sporting event be treated by the seller, assuming the tickets are nonrefundable ? Revenue is recognized to the extent that costs have been incurred Revenue is deferred until the sporting event is held Unearned revenue is recognized to the extent that costs have been incurred The ticket revenue should not be recognized until it is earned. Even though the tickets are nonrefundable, the seller is still obligated to hold the event. 6 / 25 Which of the following characteristics are required for recognition of a balance sheet asset ? Characteristic #1: Future economic benefits to the firm are probable. Characteristic #2: The asset is tangible and is obtained at a cost. Characteristic #1 (No) . Characteristic #2 (No) Characteristic #1 (Yes) . Characteristic #2 (No) Characteristic #1 (No) . Characteristic #2 (Yes) An asset is recognized on the balance sheet only if it is probable that it will provide future economic benefits. Assets can be tangible or intangible. In some cases, assets are acquired without cost, but will be reported to the extent that they will provide future economic benefit, and thus have value. 7 / 25 A firm's balance sheet prepared under IFRS is least likely to include : market value of the firm’s equity market value of inventory fair value of firm PPE The market value of the firm's common equity (common stock) is not included on the balance sheet. IFRS allows some PP&E assets to be carried at fair value and some types of inventory to be carried at their market values . 8 / 25 Under U.S. GAAP, land owned by the firm is most likely to be reported on the balance sheet at : fair market value minus selling costs historical cost historical cost less accumulated depreciation Unless impairment has been recognized, land is reported at historical cost and is not subject to depreciation. Increases in value are not reflected in balance sheet values under U.S. GAAP. 9 / 25 Earlier this year, Slayton Corporation repurchased 5% of its total shares outstanding. At the time, the book value of Slayton shares exceeded their market value. The shares are expected to be reissued in the future when the market price of Slayton's stock increases. Do Slayton's repurchased shares continue to have voting rights and to pay cash dividends ? Voting rights (yes) . Cash dividends paid (yes) Voting rights (no) . Cash dividends paid (no) Voting rights (no) . Cash dividends paid (yes) Repurchased stock that is not cancelled is called treasury stock. Treasury stock does not have voting rights and does not receive cash dividends . 10 / 25 SF Corporation has created employee goodwill by reorganizing its retirement benefit package. An independent management consultant estimated the value of the goodwill at $2 million. In addition, SF recently purchased a patent that was developed by a competitor. The patent has an estimated useful life of five years. Should SF report the goodwill and patent on its balance sheet ? patent (no) . goodwill (no) patent (no) . goodwill (yes) patent (yes) . goodwill (no) Goodwill developed internally is expensed as incurred. The purchased patent is reported on the balance sheet. 11 / 25 Liquidity-based presentation of a balance sheet is most likely to be used by a : manufacturer retailer bank The liquidity-based format of balance sheet presentation is most common in the banking industry. 12 / 25 Which of the following firms is most likely to present a liquidity-based balance sheet rather than a classified balance sheet ? Chain of retail stores Manufacturing firm Banking institution Banks often present liquidity-based balance sheets, which list all assets and liabilities in order of liquidity, because for banks this format is typically more relevant and reliable than a classified balance sheet. Firms in most other industries typically present classified balance sheets . 13 / 25 Selected balance sheet data for Parker Company are as follows : Current assets 3,000 Long-lived assets 7,000 Total assets 10,000 Current liabilities 2,000 Long-term liabilities 4,000 Total liabilities 6,000 Shareholders' equity 4,000 On a common-size balance sheet, Parker's current liabilities would be stated as : 67 % 20 % 33 % On a common-size balance sheet, each line item is stated as a percentage of total assets : 2,000 / 10,000 = 20% . 14 / 25 A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $3 million. The maximum amount the company can record as the value of the new product on its balance sheet is : $3 million zero $5 million Under IFRS, research costs must be expensed . but development costs under certain circumstances may be capitalized. 15 / 25 Carpenter Corporation reported the following statement of shareholders' equity as of December 31, 2022 : $600,000 Common stock at par 900,000 Additional paid-in-capital - 200,000 Treasury stock 10,500,000 Retained earnings 450,000 Accumulated other comprehensive income $12,250,000 During 2023, Carpenter: 1- earned net income of $1,700,000. 2- declared dividends of $300,000. $75,000 of the dividends remain unpaid. 3- purchased held-to-maturity securities for $100,000. The securities have a fair value of $110,000 at year-end. 4- purchased available-for-sale securities for $250,000. The securities have a fair value of $225,000 at year-end. 5- translated the financial statements of a foreign subsidiary and calculated a $90,000 unrealized gain. 6- purchased treasury stock for $75,000. The stock was valued at $60,000 when issued. Calculate Carpenter's accumulated other comprehensive income as of December 31, 2023. $ 515,000 $ 440,000 $ 65,000 As of December 31, 2023, Carpenter's accumulated other comprehensive income is $515,000 [$450,000 beginning balance – $25,000 unrealized loss from available for sale securities ($225,000 fair value – $250,000 cost) + $90,000 unrealized translation gain]. There is no impact on accumulated other comprehensive income from unrealized gains and losses on held-to-maturity securities since the securities are not reported at fair value on the balance sheet. The purchase of treasury stock does not affect comprehensive income because it is a transaction with shareholders. 16 / 25 At the beginning of the year, Parent Company purchased all 500,000 shares of Sub Incorporated for $15 per share. Just before the acquisition date, Sub’s balance sheet reported net assets of $6 million. Parent determined the fair value of Sub’s property and equipment was $1 million higher than reported by Sub. What amount of goodwill should Parent report as a result of its acquisition of Sub ? $500,000 $1,500,000 $0 Purchase price of $7,500,000 [$15 per share × 500,000 shares] – fair value of net assets of $7,000,000 [$6,000,000 book value + $1,000,000 increase in property and equipment] = goodwill of $500,000. 17 / 25 Ascot Corporation has 4 million shares of common stock authorized, 2.4 million shares of common stock issued, and 1.8 million shares of common stock outstanding. How many shares of treasury stock does Ascot own and is the treasury stock reported as an asset in Ascot's balance sheet ? Treasury shares (600,000) . Reported as an asset (Yes) Treasury shares (1.6 million) . Reported as an asset (Yes) Treasury shares (600,000) . Reported as an asset (no) Shares that were issued previously but are not outstanding are treasury shares (owned by the firm). Thus, there are 600,000 treasury shares (2.4 million issued – 1.8 million outstanding). Treasury shares are reported as a reduction in shareholders' equity on the balance sheet. Treasury stock is not an asset. 18 / 25 Which of the following statements about analyzing the balance sheet is most accurate ? Shareholders’ equity is equal to the intrinsic value of the firm The value of the firm’s reputation is reported on the balance sheet at amortized cost The balance sheet can be used to measure the firm’s capital structure The balance sheet lists the firm’s assets, liabilities, and equity. The capital structure is measured by the mix of debt and equity used to finance the business . 19 / 25 Resources controlled as a result of past transactions that are expected to provide future benefits are referred to as : liabilities equity assets Assets are resources that are expected to provide future benefits and are controlled as a result of past transactions. Liabilities are obligations resulting from past events that are expected to require a future outflow of resources. Equity is a residual interest in assets after deducting liabilities. 20 / 25 A U.S. GAAP reporting company invests $50 million in a bond portfolio yielding 4% with an average maturity of seven years. After one year, interest rates have fallen by 50 basis points. The company will report the highest retained earnings if the securities in the portfolio are classified as: available for sale held to maturity trading securities The trading securities classification includes the unrealized gain from the bond in net income, which increases retained earnings. Unrealized gains on available-for-sale securities are reported as other comprehensive income for the period and are recorded in accumulated other comprehensive income, a component of owner's equity. Unrealized gains on held-to-maturity securities are not reported on the financial statements . 21 / 25 Which of the following inventory valuation methods is required by the accounting standard setting bodies ? Weighted average cost First-in, first-out Lower of cost or net realizable value Inventories are required to be valued at the lower of cost or net realizable value (or “market” under U.S. GAAP). FIFO and average cost are two of the inventory cost flow assumptions among which a firm has a choice . 22 / 25 Balance sheet data for two comparable firms are presented below : Brevis, Inc Amplus, Inc 500 3,800 Cash and equivalents 700 2,400 Accounts receivable 1,100 5,800 Inventories 2,300 12,000 Current assets 100 400 Land 6,400 24,600 Property, plant and equipment 6,500 25,000 Noncurrent assets 8,800 37,000 Total assets 400 1,800 Accounts payable 100 600 Unearned revenue 500 2,400 Current liabilities 3,300 9,600 Long-term borrowing 3,800 12,000 Total liabilities 300 1,500 Common stock 4,700 23,500 Retained earnings 5,000 25,000 Total equity 8,800 37,000 Total liabilities and equity Based on common-size analysis of the two firms' balance sheets, Amplus Company: uses relatively more êxed assets then Brevis Company has a greater investment in working capital than Brevis Company is more financially leveraged than Brevis Company Common-size balance sheets for the two firms are as follows : Brevis, Inc Amplus, Inc 5.7% 10.3% Cash and equivalents 8.0% 6.5% Accounts receivable 12.5% 15.7% Inventories 26.1% 32.4% Current assets 1.1% 1.1% Land 72.7% 66.5% Property, plant and equipment 73.9% 67.6% Noncurrent assets 100% 100% Total assets 4.5% 4.9% Accounts payable 1.1% 1.6% Unearned revenue 5.7% 6.5% Current liabilities 37.5% 25.9% Long-term borrowing 43.2% 32.4% Total liabilities 3.4% 4.1% Common stock 53.4% 63.5% Retained earnings 56.8% 67.6% Total equity 100% 100% Total liabilities and equity Working capital (current assets minus current liabilities) is 32.4% – 6.5% = 25.9% of assets for Amplus and 26.1% – 5.7% = 20.4% of assets for Brevis. Fixed assets (property, plant, and equipment) are relatively larger for Brevis than for Amplus. Based on long-term borrowing and total liabilities, Brevis is significantly more leveraged than Amplus. 23 / 25 Under IFRS, a firm may report the value of property, plant, and equipment using : the cost model or the fair value model only the cost model the cost model or the revaluation model IFRS permits either the cost model or the revaluation model for property, plant, and equipment. 24 / 25 Which of the following statements about a classified balance sheet is least likely accurate ? A classified balance sheet : distinguishes between current and noncurrent assets presents the net equity of each asset by subtracting its related liability groups accounts by subcategories A classified balance sheet groups assets and liabilities by subcategories. It distinguishes between current and noncurrent assets and current and noncurrent liabilities. The assets and related liabilities are reported separately, they are not netted. 25 / 25 Selected data from Alpha Company’s balance sheet at the end of the year follows : 150,000 investment Beta company, at fair value 86,000 deferred taxes 550,000 common stock , $1 par value 175,000 preferred stock , $100 par value 893,000 retained earnings 46,000 accumulated other comprehensive income The investment in Beta Company had an original cost of $120,000. Assuming the investment in Beta is classified as available-for-sale, Alpha’s total owners’ equity at year-end is closest to : $1,618,000 $1,714,000 $1,664,000 Total stockholders’ equity consists of common stock of $550,000, preferred stock of $175,000, retained earnings of $893,000, and accumulated other comprehensive income of $46,000, for a total of $1,664,000. The $30,000 unrealized gain from the investment in Beta is already included in accumulated other comprehensive income. 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