Exam 2 Chaps 5-9

Question 1

What does liquidity mean?

Answer 1

“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.”

How quickly will my assets convert to cash

Question 2

Solvency means?

Answer 2

The ability of a company to pay its debs as they mature.

Question 3

Financial Flexibility means?

Answer 3

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.

Question 4

What are the three major limitations of the balance according to the text?

Answer 4

1) Most assets and liabilities are reported as HISTORICAL COST. Doesn’t always represent appreciated assets fairly.
2) Judgments and estimates. (Bad debts, useful lives, returns, etc)
3) Omits many items that are of financial value. ( Knowledge and skill of employees, intangibles)

Question 5

Why classify the balance sheet into similar items that arrive at significant subtotals?

Answer 5

It lets the use assess amounts, timing, and uncertainty of future cash flows. Easier to evaluate liquidity, financial flexibility, profitability, and risk.

Question 6

What is the general order of sub classifications of Assets on the balance sheet?

Answer 6

Current Assets
Long-term investments
Property, plant, equip
Intangible assets
Other assets

Question 7

What is a current asset?

Answer 7

Cash and other assets that are expected to be converted to cash, sold, or consumed either in one year or in one operating cycle (whichever is longer)

Question 8

Current assets are presented in the balance sheet in their order of liquidity. T of F

Answer 8

T

Question 9

What is the basis of valuation for the following current assets:

1) Cash/cash equivalents
2) Short term investments
3) Receivables
4) Inventories
5) Prepaid expenses

Answer 9

1) Cash/cash equivalents
- Fair value
2) Short term investments
- Generally fair value
3) Receivables
- Estimated amount collectible
4) Inventories
- lower of cost or market
5) Prepaid expenses
- cost

Question 10

What is a cash-equivalent?

Answer 10

short term highly liquid investments that will mature within THREE MONTHS OR LESS.

Question 11

A company must disclose any restrictions or commitments related to the availability of cash. T or F

Answer 11

T

Question 12

Short term investments. Companies group short term investments in debt and equity securities into how many separate portfolios for reporting?

Answer 12

3. Held to maturity, trading, and available for sale

Question 13

Short term investments. A company should report trading securities (either debt or equity) as current assets. T or F

Answer 13

T

Question 14

Short term investments. All trading and available for sale securities are reported at historical cost. T or F

Answer 14

F. Fair value!

Question 15

Inventories. What info must the company state in the inventory notes?

Answer 15

Company must state the basis of valuation, (lower of c or m), and the cost flow assumption (fifo/lifo)

Question 16

All prepaid expenses are always classified as current assets. T or F

Answer 16

False, only if they are to be recognized in a year/cycle.

Question 17

Many long term investments are readily marketable, but are not considered a current asset, why?

Answer 17

Because of the intent of the management. Has to have intent to sell/get rid of in the next year/cycle.

Question 18

Four normally seen long - term investments?

Answer 18

1) Investments in securities, such as bonds, common stock or long-term notes
2) Investments in intangible 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. INCLUDES CASH SURRENDER VALUE OF LIFE INSURANCE.
4) Investments in non consolidated subsidiaries or affiliated companies.

Question 19

Is land every depreciated?

Answer 19

NO!

Question 20

What disclosures should be made in regards to property, plant, equipment?

Answer 20

Basis used to value ppe, any liens against the properties, and accumulated depreciation.

Question 21

The excess of total current assets over total current liabilities is referred to as _____?

Answer 21

Working capital. The net amount of a company’s liquid resources.

Question 22

Companies classify long-term liabilities that mature within the current cycle as current liabilities if payment of the obligation required the use of current assets. T or F.

Answer 22

T. If the debt is to be retired without using current assets, it would not be considered a current liability because the it would not be an accurate representation of liquidity.

Question 23

What the general three types of long-term liabilities?

Answer 23

1) Obligations arising from specific financing situations, such as issuance of bonds, long-term lease obligations, long term notes payable
2) Obligations arising from ordinary operations. Pension obligations, and deferred income tax liabilities.
3) Obligations that depend on the occurrence or non occurrence of one or more future events to confirm the amount payable, the payee, or the date payable, such as service or product warranties and other contingencies.

Question 24

What are the 6 parts of the owners equity section of the balance sheet?

Answer 24

1) Capital stock
2) Additional paid in capital
3) Retained earnings
4) Accumulated/other comprehensive income
5) treasury stock
6) Non controlling interest

Question 25

Do you add or subtract treasury stock from the equity section?

Answer 25

Subtract

Question 26

What value does the cash flow statement offer?

Answer 26

Helps users evaluate liquidity, solvency, and financial flexibility.

Question 27

What three sections of inflows and outflows make up the statement of cash flows? (In order that they appear on the statement?

Answer 27

Operating - involve the cash effects of transactions that enter into the determination of net income

Investing - Include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, equip

Financing - Involve liability and owner’s equity items. They include a) obtaining resources from owners and providing them with a return on their investment, and b) borrowing money from creditors and repaying the amounts borrowed.

Question 28

When preparing the statement of cash flows, there are non cash activities that need to be either backed out or added to net income to bring net income from an accrual basis to a cash basis. What four main non-cash activities are usually factored into this according to the text?

Answer 28

1) Issuance of common stock to purchase assets.
2) Conversion of bonds into common stock.
3) Issuance of debt to purchase assets.
4) Exchanges of long-lived assets.

Question 29

Significant financing and investing activities that do not affect cash are still to be reported in the body of the statement of cash flows. T or F

Answer 29

F. Put on separate schedule or at bottom of statement.

Question 30

For each of the following, determine if you would add it to net income, or subtract it when switching from accrual to cash.

1) Depreciation expense
2) Amortization of intangibles
3) Gain on sale of plant assets
4) Increase in accounts receivable
5) Decrease in inventory
6) Decrease in accounts payable.

Answer 30

1) Add
2) Add
3) subtract
4) subtract
5) Add
6) Subtract

Question 31

The current cash debt coverage ratio is often used to assess liquidity. What is the ratio?

Answer 31

Net cash provided by operating activities/average current liabilities. Tells if inflows from ops can pay it’s current liabilities in a given year.

Question 32

The cash debt coverage ratio is used to assess financial flexibility. What is the ratio?

Answer 32

net cash provided by operating activities/ average total liabilities.

Question 33

What’s the formula to calculate free cash flow?

Answer 33

net cash provided by op activities-capital expenditures-dividends. Tells the amount of “free” cash to take on opportunities/problems

Question 34

What the three levels of fair value measurements?

Answer 34

1) based on observable inputs, such as market price for identical assets/liab.
2) based on market based inputs other than those included in level 1, such as those based on market prices for similar assets/ liab.
3) Totally subjective by companies own data or assumption

Question 35

Which of the following would be considered cash?

1) postdated check
2) postage stamps on hand
3) travel advances

Answer 35

None of the above. postdated check is a receivable, postage stamps are office supplies. travel advances either prepaid expense or receivable.

Question 36

Is a money market account usually treated as cash if you can write checks from it?

Answer 36

Yes

Question 37

If the bank requires a company to keep a minimum balance in their account to secure future dealings, does the company need to report these amounts separate from the other cash?

Answer 37

Yes, either in current assets or long term depending on the situation at the bank.

Question 38

When can you offset a bank overdraft and not report it as a current liability?

Answer 38

When available cash is present in another account in the same bank on which the overdraft occurred. Offsetting in this case is required.