Chapter 3

Question 1

Balance sheet

Answer 1

Reports the company’s financial position at a point in time

Question 2

Operating cycle

Answer 2

The period from cash is used for acquiring inventory to that inventory is sold

Question 3

How are assets listed in the Balance sheet?

Answer 3

From most liquid to least liquid

Question 4

Cash equivalents

Answer 4

Investment that maturity date is 3 months or less.

Question 5

Short-term investment

Answer 5

Mature within a year

Question 6

Management intent

Answer 6

Management can designate investment to be either short term or long term depending on their judgement

Question 7

Intangible assets

Answer 7

No physical substance but give future value.

Question 8

What are other names for shareholders equity?

Answer 8

Net assets and Book value

Question 9

Solvency

Answer 9

Ability to pay long-term debts

Question 10

Financial flexibility

Answer 10

Ability to alter cash flows to address unexpected economical event

Question 11

Horizontal analysis

Answer 11

Dividing current years value with the previous year to get a percentage

Question 12

Vertical analysis

Answer 12

Dividing the subtotals with its total to get a percentage

Question 13

Current ratio

Answer 13

Current assets÷ Current liabilities

Question 14

Quick ratio

Answer 14

Quick assets ÷ Current liabilities

Question 15

Quick assets

Answer 15

Exclude inventory, prepaid expense, and deferred tax assets

Question 16

Debt-to-equity ratio

Answer 16

Total liabilities ÷ Total owners equity

Question 17

Interest coverage

Answer 17

Earning before interest and tax÷ interest expense

Question 18

Earnings before interest and taxes

Answer 18

Net income+ interest expense+ tax expense

Question 19

Market capitalization

Answer 19

Stock price × shares outstanding

Question 20

Disclosure notes

Answer 20

Provide more detail and context.
Summary of significant accoutning policies
Details on material accounts

Question 21

Subsequent event disclosure

Answer 21

After fiscal year end but before financial statements are issued any event that occurs and is relevant is stated

Question 22

Disclosure of noteworthy events

Answer 22

Includes:

• Related party transactions
• Errors and fraud
• Illegal acts

Question 23

Best outcome for auditors report

Answer 23

Unqualified

Question 24

Management discussion and analysis

Answer 24

Ussually before financial statements. Provides managements’ views and opinions on operations, expectations, liquidity and capital resources