QUESTIONS
1. How does information from the balance sheet help users of the financial statements?
2. What is meant by solvency? What information in the balance sheet can be used to assess a company’s solvency?
3. A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?
4. Discuss at least two situations in which estimates could affect the usefulness of information in the balance sheet.
5. Perez Company reported an increase in inventories in the past year. Discuss the effect of this change on the current ratio (current assets ÷ current liabilities). What does this tell a statement user about Perez Company’s liquidity?
6. What is meant by liquidity? Rank the following assets from one to five in order of liquidity.
(a) Goodwill. (d) Short-term investments.
(b) Inventory. (e) Accounts receivable.
(c) Buildings.
7. What are the major limitations of the balance sheet as a source of information?
8. Discuss at least two items that are important to the value of companies like Intel or IBM but that are not recorded in their balance sheets. What are some reasons why these items are not recorded in the balance sheet?
9. How does separating current assets from property, plant, and equipment in the balance sheet help analysts?
10. In its December 31, 2017, balance sheet Oakley Corporation reported as an asset, “Net notes and accounts receivable, $7,100,000.” What other disclosures are necessary?
11. Should available-for-sale securities always be reported as a current asset? Explain.
12. What is the relationship between current assets and current liabilities?
13. The New York Knicks, Inc. sold 10,000 season tickets at $2,000 each. By December 31, 2017, 16 of the 40 home games had been played. What amount should be reported as a current liability at December 31, 2017?
14. What is working capital? How does working capital relate to the operating cycle?
15. In what section of the balance sheet should the following items appear, and what balance sheet terminology would you use?
(a) Treasury stock (recorded at cost).
(b) Checking account at bank.
(c) Land (held as an investment).
(d) Sinking fund.
(e) Unamortized premium on bonds payable.
(f) Copyrights.
(g) Pension fund assets.
(h) Premium on common stock.
(i) Long-term investments (pledged against bank loans payable).
16. Where should the following items be shown on the balance sheet, if shown at all?
(a) Allowance for doubtful accounts.
(b) Merchandise held on consignment.
(c) Advances received on sales contract.
(d) Cash surrender value of life insurance.
(e) Land.
(f) Merchandise out on consignment.
(g) Franchises.
(h) Accumulated depreciation of equipment.
(i) Materials in transit—purchased f.o.b. destination.
17. According to generally accepted accounting principles, what is the balance sheet valuation of each of the following assets?
(a) Trade accounts receivable.
(b) Land.
(c) Inventories.
(d) Trading securities (common stock of other companies).
(e) Prepaid expenses.
18. Refer to the definition of assets on page 204. Discuss how a leased building might qualify as an asset of the lessee
(tenant) under this definition.
19. Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?
20. The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer.
21. What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement?
22. The net income for the year for Genesis, Inc. is $750,000, but the statement of cash flows reports that the net cash provided by operating activities is $640,000. What might account for the difference?
23. Net income for the year for Carrie, Inc. was $750,000, but the statement of cash flows reports that net cash provided by operating activities was $860,000. What might account for the difference?
24. Differentiate between operating activities, investing activities, and financing activities.
25. Each of the following items must be considered in preparing a statement of cash flows. Indicate where each item is to be reported in the statement, if at all. Assume that net income is reported as $90,000.
(a) Accounts receivable increased from $34,000 to $39,000 from the beginning to the end of the year.
(b) During the year, 10,000 shares of preferred stock with a par value of $100 per share were issued at $115 per share.
(c) Depreciation expense amounted to $14,000, and bond premium amortization amounted to $5,000.
(d) Land increased from $10,000 to $30,000.
26. Sergey Co. has net cash provided by operating activities of $1,200,000. Its average current liabilities for the period are $1,000,000, and its average total liabilities are $1,500,000.
Comment on the company’s liquidity and financial flexibility, given this information.
27. Net income for the year for Tanizaki, Inc. was $750,000, but the statement of cash flows reports that net cash provided by operating activities was $860,000. Tanizaki also reported capital expenditures of $75,000 and paid dividends in the amount of $30,000. Compute Tanizaki’s free cash flow.
28. What is the purpose of a free cash flow analysis?
29. What are some of the techniques of disclosure for the balance sheet?
30. What is a “Summary of Significant Accounting Policies”?
31. What types of contractual obligations must be disclosed in great detail in the notes to the balance sheet? Why do you think these detailed provisions should be disclosed?
32. What is the profession’s recommendation in regard to the use of the term “surplus”? Explain.
