Balance Sheet quiz Financial Accounting Quiz On Feb 4, 2025 Share /30 123456789101112131415161718192021222324252627282930 Balance Sheet 30 questions in 30 minutes Pass Score 70% The questions change when you repeat the exam 1 / 30 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 : 33 % 67 % 20 % On a common-size balance sheet, each line item is stated as a percentage of total assets : 2,000 / 10,000 = 20% . 2 / 30 Under U.S. GAAP, land owned by the firm is most likely to be reported on the balance sheet at : historical cost less accumulated depreciation historical cost fair market value minus selling costs 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. 3 / 30 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: trading securities available for sale held to maturity 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 . 4 / 30 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 ($2.2 million) . Amortization required (no) Goodwil ($1.8 million) . Amortization required (yes) Goodwil ($1.8 million) . Amortization required (no) 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. 5 / 30 Given the following income statement and balance sheet for a company : Balance Sheet Year 2023 Year 2022 : Assets 450 500 Cash 660 600 Accounts Receivable 550 500 Inventory 1660 1600 Total CA 1250 1000 Plant, prop. equip 2910 2600 Total Assets : Liabilities 550 500 Accounts Payable 1002 700 Long term debt 1552 1200 Total liabilities : Equity 538 400 Common Stock 820 1000 Retained Earnings 2910 2600 Total Liabilities & Equity Income Statement 3000 Sales - 1000 Cost of Goods Sold 2000 Gross Profit - 500 SG&A - 151 Interest Expense 1349 EBT - 405 Taxes (30%) 944 Net Income What is the current ratio for 2023 ? 2.018 0.331 3.018 Current ratio = (CA / CL) = (1,660 / 550) = 3.018 6 / 30 A vertical common-size balance sheet expresses each category of the balance sheet as a percentage of: equity revenue assets Each category of the balance sheet is expressed as a percentage of total assets . 7 / 30 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 $5 million zero Under IFRS, research costs must be expensed . but development costs under certain circumstances may be capitalized. 8 / 30 A firm's balance sheet prepared under IFRS is least likely to include : fair value of firm PPE market value of inventory market value of the firm’s equity 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 . 9 / 30 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 balance sheet can be used to measure the firm’s capital structure The value of the firm’s reputation is reported on the balance sheet at amortized cost 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 . 10 / 30 The most appropriate measurement base for unimpaired goodwill is : amortized cost historical cost fair value Goodwill is measured at historical cost and is not amortized. Goodwill must be tested for impairment at least annually and written down to fair value if it is impaired. 11 / 30 Century Company’s balance sheet follows : Century company Balance sheet (in millions) 2023 2022 Current assets 340 280 Noncurrent assets 660 630 Total assets 1000 910 Current liabilities 170 110 Noncurrent liabilities 50 50 Total liabilities 220 160 Equity 780 750 Total liabilities and equity 1000 910 Century’s balance sheet presentation is known as : an account form balance sheet a liquidity-based balance sheet a classified balance sheet A classified balance sheet groups together similar items (e.g., current and noncurrent assets and liabilities) to arrive at significant subtotals . 12 / 30 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 ? $0 $1,500,000 $500,000 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. 13 / 30 An analyst has gathered the following information about a company : Balance Sheet Assets : 100 Cash 750 Accounts Receivable 300 Marketable Securities 850 Inventory 900 Property, Plant & Equip -150 Accumulated Depreciation 2750 Total Assets Liabilities and Equity : 300 Accounts Payable 130 Short-Term Debt 700 Long-Term Debt 1000 Common Stock 620 Retained Earnings 2750 Total Liab. and Stockholder's equity Income Statement 1500 Sales 1100 COGS 400 Gross Profit 150 SG&A 250 Operating Profit 25 Interest Expense 75 Taxes 150 Net Income What is the quick ratio ? 0.62 1.53 2.67 Quick ratio = [100(cash) + 750(AR) + 300(marketable securities)] / [300(AP) + 130(shortterm debt)] = (1,150 / 430) = 2.67 14 / 30 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 : $1,714,000 $1,618,000 $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. 15 / 30 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. 16 / 30 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 (No) . Characteristic #2 (Yes) Characteristic #1 (Yes) . Characteristic #2 (No) 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. 17 / 30 Under IFRS, firms may report an investment in the equity securities of other companies at fair value through : profit and loss only either profit and loss, or other comprehensive income other comprehensive income only Under IFRS, firms have an irrevocable choice at the time of purchase to report equity securities at fair value through other comprehensive income. If they do not make this election, equity securities are reported at fair value through profit and loss. 18 / 30 Consider the following: Statement #1 – Copyrights and patents are tangible assets that can be separately identified. Statement #2 – Purchased copyrights and patents are amortized on a straight line basis over 30 years. With respect to the statements about copyrights and patents acquired from an independent third party: only statement #2 is incorrect both are incorrect only statement #1 is incorrect Acquired copyrights and patents are intangible assets that can be separately identified. Identifiable intangible assets are amortized over their useful lives . 19 / 30 A liquidity-based balance sheet, on which assets and liabilities are not classified as current or non-current, is permitted under : U.S. GAAP only Both IFRS and U.S. GAAP IFRS only Liquidity-based balance sheet presentation is an exception, under IFRS only, to the requirement (under both IFRS and U.S. GAAP) for assets and liabilities to be classified as current or non-current. Under IFRS, a firm may present a liquidity-based balance sheet if this format is more reliable and relevant than a classified balance sheet. 20 / 30 Which of the following statements about a classified balance sheet is least likely accurate ? A classified balance sheet : groups accounts by subcategories presents the net equity of each asset by subtracting its related liability distinguishes between current and noncurrent assets 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. 21 / 30 The balance sheet is most likely to provide an analyst with information about a firm's : investing and financing activities solvency operating profitability An analyst can use the balance sheet to assess a firm's solvency and liquidity. Operating profitability can be assessed by examining the income statement. Information on a firm's investing and financing activities appears in a firm's statement of cash flows. 22 / 30 Which of the following is most likely an essential characteristic of an asset ? An asset provides future benefits An asset is tangible An asset is obtained at a cost An asset is a future economic benefit obtained or controlled as a result of past transactions. Some assets are intangible (e.g., goodwill), and others may be donated . 23 / 30 Resources controlled as a result of past transactions that are expected to provide future benefits are referred to as : assets equity liabilities 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. 24 / 30 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 (Increase) . Warranty expense (No effect) Bad debt expense (No effect) . Warranty expense (Increase) Bad debt expense (No effect) . 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. 25 / 30 Duster Company reported the following financial information at the end of 2022 : in millions 240 Unearned revenue 30 Common stock at par 440 Capital in excess of par 1,150 Accounts payable 2,000 Treasury stock 5,160 Retained earnings 830 Accrued expenses 210 Accumulated other comprehensive loss 1,570 Long-term debt Calculate Duster's liabilities and stockholders' equity as of December 31, 2022. liabilities ($3,550 million).stockholders' equity ($7,840 million) liabilities ($3,790 million).stockholders' equity ($3,420 million) liabilities ($3,790 million).stockholders' equity ($7,420 million) Liabilities are equal to $3,790 million ($240 million unearned revenue + $1,570 long term debt + $1,150 accounts payable + $830 accrued expenses). Stockholders' equity is equal to $3,420 million ($30 common stock at par + $440 capital in excess of par – $2,000 treasury stock + $5,160 retained earnings – $210 accumulated other comprehensive loss). 26 / 30 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 ? Unearned revenue is recognized to the extent that costs have been incurred Revenue is recognized to the extent that costs have been incurred Revenue is deferred until the sporting event is held 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. 27 / 30 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 (no) Treasury shares (1.6 million) . Reported as an asset (Yes) Treasury shares (600,000) . Reported as an asset (Yes) 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. 28 / 30 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 . 29 / 30 The following data is from Delta's common size financial statement: Earnings after taxes 18 % Equity 40 % Current assets 60 % Current liabilities 30 % Sales $ 300 Total assets $ 1,400 What is Delta's total liabilities to equity ratio ? 2.0 1.5 1.0 If equity = 40 % of assets, total liabilities = 60 % of assets, thus 60 / 40 = 1.5 . 30 / 30 What is the appropriate measurement basis for equipment used in the manufacturing process ? Lower of cost or net realizable value Historical cost Fair value Equipment is reported in the balance sheet at historical cost less accumulated depreciation . 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