ACCT 621 Chapter 2

Question 1

Classified balance sheet

Answer 1

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Question 2

Current assets

Answer 2

Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.

Question 3

Current liabilities and examples

Answer 3

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

such as accounts payable, salaries and wages payable, notes payable, interest payable, income taxes payable and current maturities of long-term obligations—payments to be made within the next year on long-term obligations

Question 4

Current ratio

Answer 4

A measure of liquidity computed as current assets divided by current liabilities.

Question 5

Debt to assets ratio

Answer 5

A measure of solvency calculated as total liabilities (current and long-term) divided by total assets. It measures the percentage of total financing provided by creditors.

Question 6

Solvency

Answer 6

The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Question 7

Solvency ratios

Answer 7

Measures of the ability of the company to survive over a long period of time.

Question 8

Earnings per share (EPS)

Answer 8

A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the weighted-average number of common shares outstanding during the year.

Question 9

Free cash flow

Answer 9

Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.

Question 10

Intangible assets

Answer 10

Assets that do not have physical substance.

Question 11

Liquidity

Answer 11

The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.

Question 12

Liquidity ratios

Answer 12

measure the short-term ability to pay maturing obligations and to meet unexpected needs for cash.

Question 13

Long-term liabilities (long-term debt) and its examples

Answer 13

Obligations that a company expects to pay after one year.

such as: bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.

Question 14

Operating cycle

Answer 14

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

Question 15

Profitability ratios

Answer 15

Measures of the operating success of a company for a given period of time. such as earnings per share.

Question 16

Property, plant, and equipment

Answer 16

Assets with relatively long useful lives that are currently used in operating the business.

Question 17

Ratio

Answer 17

An expression of the mathematical relationship between one quantity and another.

Question 18

Ratio analysis

Answer 18

A technique that expresses the relationship among selected items of financial statement data.

Question 19

Working capital

Answer 19

one measure of liquidity that is the difference between the amounts of current assets and current liabilities.

Question 20

Standard Balance sheet classification

Answer 20

Assets:

• Current assets
• Long-term investments
• Property, plant, and equipment
• Intangible assets

Liabilities and Stockholders’ Equity:

• Current liabilities
• Long-term liabilities
• Stockholders’ equity

Question 21

Standard Balance sheet classification helps

Answer 21

help readers determine:

(1) whether the company has enough assets to pay its debts as they come due,
(2) the claims of short- and long-term creditors on the company’s total assets.

Question 22

common tyoes of current assets

Answer 22

(1) cash
(2) investments (such as short-term securities)
(3) receivables (accounts receivable, notes
receivable, and interest receivable)
(4) inventories
(5) prepaid expenses
(insurance and supplies).

Question 23

order of current assets

Answer 23

in the order in which they expect to convert them into cash.

Question 24

some liabilities can be be either short term or long term

Answer 24

like notes payable

Question 25

a company’s current assets are important in

Answer 25

assessing its short-term debt-paying ability.

Question 26

Long-term investments are

often referred to simply as

Answer 26

investments.

Question 27

Long-term investments generally include

Answer 27

(1) investments in stocks and bonds of other corporations that are held for more than one year
(2) long-term assets such as land or buildings that a company is not currently using in its operating activities
(3) long-term notes receivable.

Question 28

Property, plant, and equipment is sometimes called

Answer 28

fixed assets or plant assets.

Question 29

Depreciation

Answer 29

allocation of the cost of an asset to a number of years.

Companies do this by systematically assigning a portion of an asset’s cost as an expense each year (rather than expensing the full purchase price in the year of purchase).

The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation.

Question 30

accumulated depreciation

Answer 30

the total amount of depreciation that the company has expensed thus far in the asset’s life.

Question 31

sometimes intangible assets

are reported under a broader heading called

Answer 31

Other assets

Question 32

intangible assets

Answer 32

assets that do not have physical substance and yet often are very valuable.

such as goodwill, patents, copyrights and trademarks or trade names

Question 33

Common stock is sometimes

called

Answer 33

capital stock.

Question 34

Earnings per share helps users

Answer 34

compare a company’s performance with that of previous years. is useful for determining the investment return.

Question 35

how to calculate earnings per share (basic apprcoah)

Answer 35

divide earnings available to common stockholders by weighted-average common shares outstanding during the year

Question 36

earnings available to common stockholders

Answer 36

It is an earnings amount calculated as net income less dividends paid on another type of stock, called preferred stock (Net income − Preferred
dividends).

Question 37

comparisons of earnings per share across companies are

Answer 37

not meaningful because of the wide variations in the numbers of shares of outstanding stock among companies.

Question 38

disadvantage of current ratio

Answer 38

it does not take into account the composition of the current assets. For example, a satisfactory current ratio does not disclose whether a portion of the current assets is tied up in slow-moving inventory

Question 39

why is Debt financing more risky than equity fi nancing

Answer 39

because debt must be repaid at specifi c points in time, whether the company is performing well or not. Thus, the higher the percentage of debt financing, the riskier the company.

Question 40

The higher the percentage of total liabilities (debt) to total assets means

Answer 40

the greater the risk that the company may be unable to pay its debts as they come due.

Question 41

The debt to assets ratio helps

Answer 41

users determine if a company can meet its long-term obligations.

Question 42

a high free cash flow amount means

Answer 42

higher solvency

Question 43

free cash flow helps

Answer 43

users determine the amount of cash a company generated to expand operations, pay off debts, or
increase dividends.

Question 44

Long-Term Investments include

Answer 44

• Investments in stocks and bonds of other corporations that are held for more than one year.
• Long-term assets such as land or buildings that a company is not currently using in its operating activities.
• Long-term notes receivable.

Question 45

debt to equity ratio

Answer 45

evaluates solvency using a ratio of liabilities divided by stockholders’ equity. The higher this “debt to equity” ratio, the lower is a company’s solvency.