Ch 4 Balance Sheet and Statement of Cash Flows

Question 1

the specific principles, bases, conventions, rules and practices applied by a company in preparing and presenting financial information

Answer 1

accounting policies

Question 2

measures liquidity of receivables:

net sales/ average net accounts receivable

Answer 2

accounts receivable turnover

Question 3

the aggregate amount of the other comprehensive income items, such as unrealized gains and losses on certain investments

Answer 3

accumulated other comprehensive income

Question 4

measures of how effectively the company uses its assets

Answer 4

activity ratios

Question 5

the excess of amounts paid in over the par or stated value

Answer 5

additional paid-in capital

Question 6

increases either an asset, liability, or owners’ equity account

Answer 6

adjunct account

Question 7

measures how efficiently assets are used to generate sales:

net sales/ average total assets

Answer 7

asset turnover

Question 8

debt securities not classified as held-to-maturity or trading securities

Answer 8

available-for-sale investments

Question 9

sometimes referred to as the ‘statement of financial position’, reports the assets, liabilities, and stockholders’ equity of a business enterprise at a specific date

Answer 9

balance sheet

Question 10

measures the amount each share would receive if the company were liquidated at the amounts reported on the balance sheet:

common stockholders’ equity/ outstanding shares

Answer 10

book value per share

Question 11

the total par or stated value of the shares issued

companies must disclose the par value per share and the authorized, issued, and outstanding share amounts for common and preferred stock

Answer 11

capital stock

Question 12

provides information on financial flexibility; indicates a company’s ability to repay its liabilities from net cash provided by operating activities without having to liquidate the assets employed in its operations:

net cash provided by operating activities/ average total liabilities

Answer 12

cash debt coverage

Question 13

an existing situation involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur

Answer 13

contingency

Question 14

on a balance sheet, reduces either an asset, liability, or owners’ equity account

Answer 14

contra account

Question 15

measures of the degree of protection for long-term creditors and investors

Answer 15

coverage ratios

Question 16

cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer

Answer 16

current assets

Question 17

indicates whether the company can pay off its current liabilities from its operations in a given year:

net cash provided by operating activities/ average current liabilities

Answer 17

current cash debt coverage

Question 18

the obligations that a company reasonably expects to settle, or pay off, either through the use of current assets or the creation of other ______________

Answer 18

current liabilities

Question 19

measures short-term debt-paying ability:

current assets/ current liabilities

Answer 19

current ratio

Question 20

measures the percentage of total assets provided by creditors:

total liabilities/ total assets

Answer 20

debt to assets ratio

Question 21

measures net income earned on each share of common stock:

(net income - preferred dividends) / weighted- average common shares outstanding

Answer 21

earnings per share

Question 22

measures the “ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities”

Answer 22

financial flexibility

Question 23

cash, ownership interest, or a contractual right to receive or obligation to deliver cash or another financial instrument

Answer 23

financial instruments

Question 24

involves liability and owners’ or stockholders’ equity items

they include:
1. obtaining resources from owners and providing them with a return on their investment
2. borrowing money from creditors and repaying the amounts borrowed

Answer 24

financing activities

Question 25

the amount of discretionary cash flow a company has:

net cash provided by operating activities - capital expenditures - cash dividends

Answer 25

free cash flow

Question 26

debt securities that a company intends to hold until maturity (reported as current or non current assets depending on the time left until maturity)

Answer 26

held-to-maturity investments

Question 27

lack physical substance and are not financial instruments (patents, copyrights, franchises, goodwill, trademarks, trade names, customer lists)

Answer 27

intangible assets

Question 28

measures liquidity of inventory:

COGS/ average inventory

Answer 28

inventory turnover

Question 29

includes making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment

Answer 29

investing activities

Question 30

describes “the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid”

“nearness to cash” of assets and liabilities

Answer 30

liquidity

Question 31

measures of the company’s short-term ability to pay its maturing obligations

Answer 31

liquidity ratios

Question 32

often referred to simply as investments, normally consist of 4 types:

1. investments in debt and equity securities
2. investments in tangible fixed assets not currently used in operations, such as land held for speculation
3. investments set aside in special funds, such as a sinking fund, pension fund, or plant expansion fund; this includes the cash surrender value of life insurance
4. investments in nonconsolidated subsidiaries or affiliated companies

Answer 32

long-term investments

Question 33

obligations that a company does not reasonably expect to settle within the normal operating cycle; expects to be paid beyond that time

Answer 33

long-term liabilities

Question 34

involves the cash effects of transactions that enter into the determination of net income

Answer 34

operating activities

Question 35

one of the most difficult sections to prepare and understand due to the complexity of the capital stock agreements and the various restrictions on stockholders’ equity imposed by state corporation laws, liability agreements, and boards of directors

Answer 35

owners’ (stockholders’) equity

Question 36

measures percentage of earnings distributed in the form of per share cash dividends:

cash dividends/ net income

Answer 36

payout ratio

Question 37

measures the ratio of the market price per share to earnings:

market price per share/ earnings per share

Answer 37

price-earnings ratio

Question 38

measures of the degree of success or failure of a given company or division for a given period of time

Answer 38

profitability ratios

Question 39

measures net income generated by each dollar of sales:

net income/ net sales

Answer 39

profit margins on sales

Question 40

tangible long-lived assets used in the regular operations of the business

Answer 40

property, plant, and equipment

Question 41

measures immediate short-term liquidity:

(cash + short-term investments + NET accounts receivable) / current liabilities

Answer 41

quick (acid-test) ratio

Question 42

expresses the relationship among pieces of selected financial statement data, in a percentage, a rate, or a simple proportion

Answer 42

ratio analysis

Question 43

the most common form of the balance sheet

Answer 43

report form

Question 44

a word used to describe the appropriation of retained earnings

Answer 44

reserve

Question 45

the corporation’s accumulated, undistributed earnings that may be divided into 2 parts:

1. unappropriated: the amount usually available for dividend distribution
2. restricted: the amount restricted by bond indentures or other loan agreements

Answer 45

retained earnings

Question 46

measures overall profitability of assets:

net income/ average total assets

Answer 46

return on assets

Question 47

measures profitability of owners’ investment:

(net income - preferred dividends) / average common stockholders’ equity

Answer 47

return on common stockholders’ equity

Question 48

refers to the ability of a company to pay its debts as they mature

Answer 48

solvency

Question 49

provides relevant information about the cash receipts and cash payments of an enterprise during a period

Answer 49

statement of cash flows

Question 50

measures ability to meet interest payments as they come due:

(net income + interest expense + income tax expense) / interest expense

Answer 50

times interest earned

Question 51

debt securities bought and held primarily for sale in the near future to generate a return

Answer 51

trading investments

Question 52

generally, the cost of shares repurchased by the company; the amount is a reduction of stockholders’ equity

Answer 52

treasury stock

Question 53

total current assets - total current liabilities

Answer 53

working capital

Question 54

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Answer 54

assets

Question 55

probable future sacrifices or economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

Answer 55

liabilities

Question 56

residual interest in the assets of an entity that remains after deducting its liabilities

in a business enterprise, the ______ is the ownership interest

Answer 56

equity

Question 57

assets, liabilities, stockholders’ equity

Answer 57

elements of a balance sheet

Question 58

capital stock, additional paid-in capital, retained earnings, accumulated other comprehensive income, treasury stock

Answer 58

elements of owners’ equity