Topic 1 (Chapter 5 TB)

Question 1

Liquidity refers to the ability of an enterprise to pay its debts as they mature.

Answer 1

FALSE

Question 2

The statement of financial position omits many items that are of financial value to the business but cannot be recorded objectively.

Answer 2

TRUE

Question 3

Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows.

Answer 3

TRUE

Question 4

Under IFRS the statement of financial position is often referred to as the statement of changes in equity.

Answer 4

FALSE

Question 5

Companies frequently describe the terms of all long-term liability agreements in notes to the financial statements.

Answer 5

TRUE

Question 6

An asset which is expected to be converted into cash, sold, or consumed within one year of the statement date is always reported as a current asset.

Answer 6

FALSE

Question 7

Land held for speculation is reported in the property, plant, and equipment section of the statement of financial position.

Answer 7

FALSE

Question 8

Under IFRS a company may use the term “reserve” to include items such as retained earnings, share premium, and accumulated other comprehensive income.

Answer 8

TRUE

Question 9

On the statement of financial position the non-controlling interest account is reported as a long-term investment.

Answer 9

FALSE

Question 10

The equity section of an IFRS statement of financial position includes share capital, share premium, and retained earnings in that order.

Answer 10

TRUE

Question 11

The account form and the report form of the statement of financial position are both acceptable under IFRS.

Answer 11

TRUE

Question 12

The primary purpose of a statement of cash flows is to report the cash effects of operations during a period.

Answer 12

FALSE

Question 13

The statement of cash flows reports only the cash effects of operations during a period and financing transactions.

Answer 13

FALSE

Question 14

Financial flexibility is a company’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.

Answer 14

TRUE

Question 15

Collection of a loan is reported as an investing activity in the statement of cash flows.

Answer 15

TRUE

Question 16

Under IFRS the payment of dividends may be reported as either an investing activity or a financing activity.

Answer 16

FALSE

Question 17

Companies determine cash provided by operating activities by converting net income on an accrual basis to a cash basis.

Answer 17

TRUE

Question 18

Significant financing and investing activities that do not affect cash are not reported in the statement of cash flows or any other place.

Answer 18

FALSE

Question 19

Under IFRS non-cash activities are reported as either investing or financing activities in the body of the statement of cash flows.

Answer 19

FALSE

Question 20

Financial statement readers often assess liquidity by using current cash debt coverage.

Answer 20

TRUE

Question 21

Free cash flow is net income less capital expenditures and dividends.

Answer 21

FALSE

Question 22

The IASB recommends disclosure for all significant accounting principles and methods that involve selection from among alternatives.

Answer 22

TRUE

Question 23

Companies present a “Summary of Significant Accounting Policies” generally as the first note to the financial statements.

Answer 23

TRUE

Question 24

IFRS requires that a complete set of financial statements be presented annually and that for comparative purposes, companies must include three complete sets of financial statements and related notes.

Answer 24

FALSE

Question 25

IFRS requires specific note disclosures on inventories that are disaggregated into classifications such as merchandise, production supplies, work in process, and finished goods.

Answer 25

TRUE

Question 26

Companies may use parenthetical explanations, notes, cross references, and supporting schedules to disclose pertinent information.

Answer 26

TRUE

Question 27

The accounting profession has recommended that companies use the word reserve only to describe amounts deducted from assets.

Answer 27

FALSE

Question 28

On the statement of financial position, an adjunct account reduces either an asset, a liability, or an equity account.

Answer 28

FALSE

Question 29

Under IFRS, companies may offset assets and liabilities; for example, accounts payable may be offset against cash to report net cash available for other expenses.

Answer 29

FALSE

Question 30

Under IFRS an adjunct account on the statement of financial position increases an asset, liability, or equity account.

Answer 30

TRUE

Question 31

Which of the following is a limitation of the statement of financial position?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these choices are correct.

Answer 31

a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported

Question 32

The statement of financial position is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.

Answer 32

profitability.

Question 33

Statement of financial position information is useful for all of the following except to
a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows

Answer 33

analyze cash inflows and outflows for the period

Question 34

Statement of financial position information is useful for all of the following except
a. assessing a company’s risk
b. evaluating a company’s liquidity
c. evaluating a company’s financial flexibility
d. determining free cash flows.

Answer 34

determining free cash flows.

Question 35

A limitation of the balance sheet that is not also a limitation of the income statement is
a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed
d. valuation of items at historical cost

Answer 35

valuation of items at historical cost

Question 36

The statement of financial position contributes to financial reporting by providing a basis for all of the following except
a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.

Answer 36

determining the increase in cash due to operations.

Question 37

One criticism not normally aimed at a statement of financial position prepared using current accounting and reporting standards is
a. failure to reflect current value information.
b. the extensive use of separate classifications.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded objectively.

Answer 37

the extensive use of separate classifications.

Question 38

The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as
a. solvency.
b. financial flexibility.
c. liquidity.
d. exchangeability.

Answer 38

liquidity.

Question 39

The statement of financial position
a. Omits many items that are of financial value.
b. Makes very limited use of judgments and estimates.
c. Uses fair value for most assets and liabilities.
d. All of the choices are correct regarding the statement of financial position.

Answer 39

Omits many items that are of financial value.

Question 40

The statement of financial position can help assess all of the following except
a. Solvency.
b. Financial flexibility.
c. Profitability.
d. Liquidity.

Answer 40

Profitability.

Question 41

The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total shareholders’ equity.
d. none of these choices are correct.

Answer 41

none of these choices are correct.

Question 42

The correct order to present current assets is
a. cash, accounts receivable, prepaid items, inventories.
b. inventories, receivables, prepaid items, cash.
c. cash, inventories, accounts receivable, prepaid items.
d. inventories, prepaid items, accounts receivable, cash.

Answer 42

inventories, prepaid items, accounts receivable, cash.

Question 43

The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.

Answer 43

the operating cycle or one year, whichever is longer.

Question 44

The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter.
b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer.
d. inventory back into cash, or 12 months, whichever is longer.

Answer 44

inventory back into cash, or 12 months, whichever is longer.

Question 45

The current assets section of the statement of financial position should include
a. machinery.
b. patents.
c. goodwill.
d. inventory.

Answer 45

inventory.

Question 46

Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.

Answer 46

Trade installment receivables normally collectible in 18 months.

Question 47

Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.

Answer 47

long-term investments.

Question 48

Each of the following are an intangible asset except
a. copyrights.
b. goodwill.
c. plant expansion fund.
d. trademarks.

Answer 48

plant expansion fund.

Question 49

Which of the following is not a long-term investment?
a. Investments in ordinary shares
b. Franchise
c. Land held for speculation
d. A sinking fund

Answer 49

Franchise

Question 50

A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2

Answer 50

1. trading securities at market value.
2. accounts receivable at net realizable value.

Question 51

Which item below is not a current liability?
a. Unearned revenue
b. Share dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable

Answer 51

Share dividends distributable

Question 52

Working capital is
a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these choices are correct.

Answer 52

none of these choices are correct.

Question 53

An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. short-term investments.

Answer 53

goodwill.

Question 54

Non-current liabilities include
a. obligations not expected to be liquidated within the next year or operating cycle.
b. obligations payable at some date beyond the next year or operating cycle.
c. deferred income taxes and most lease obligations.
d. All of these choices are correct.

Answer 54

a. obligations not expected to be liquidated within the next year or operating cycle.
b. obligations payable at some date beyond the next year or operating cycle.
c. deferred income taxes and most lease obligations.

Question 55

Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Non-current liabilities that mature within the operating cycle and will be paid from a sinking fund
d. None of these choices are correct.

Answer 55

a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Non-current liabilities that mature within the operating cycle and will be paid from a sinking fund

Question 56

Treasury shares should be reported as a(n)
a. current asset.
b. investment.
c. other asset.
d. reduction of equity.

Answer 56

reduction of equity.

Question 57

The shareholders’ equity section is usually divided into how many parts?
a. 6
b. 5
c. 4
d. 3

Answer 57

6

Question 58

Which of the following is not an acceptable major asset classification?
a. Current assets
b. Investments
c. Property, plant, and equipment
d. Deferred charges

Answer 58

Deferred charges

Question 59

Within the statement of financial position companies should separately report all of the following except
a. Assets and liabilities with different general liquidity characteristics.
b. Assets and liabilities that have been financed with different types of instruments.
c. Assets that differ in their expected function in the company’s central operations.
d. Liabilities that differ in their amounts, timing, and nature.

Answer 59

Assets and liabilities that have been financed with different types of instruments.

Question 60

Within the statement of financial position where should the account non-controlling interest (minority interest) be reported?
a. Non-current assets.
b. Non-current liabilities.
c. Equity.
d. Current liabilities.

Answer 60

Equity.

Question 61

On the statement of financial position all of the following are reported as investments except
a. Bonds, ordinary shares, and long-term notes.
b. Non-controlling interest.
c. Pension funds.
d. Non-consolidated subsidiaries.

Answer 61

Non-controlling interest.

Question 62

Caroline, Inc. hired a new controller in late 2015. The controller has not prepared financial statements using IFRS before and needs your assistance. In compiling a complete set of financial statements under IFRS, in what order should the following items be reported in the equity section on the statement of financial position at December 31, 2015? If an item is not reported in the equity section, omit it from your answer.
I. Share premium
II. Retained earnings
III. Investments
IV. Non-controlling interest
V. Accumulated comprehensive income
VI. Share capital

a. I, VI, IV, II, V, III
b. VI, I, II, V, IV
c. VI, I, IV, II, V
d. III, VI, I, II, IV, V

Answer 62

VI. Share capital
I. Share premium
II. Retained earnings
V. Accumulated comprehensive income
IV. Non-controlling interest

Question 63

Receivables are measured using
a. cost
b. estimated account collectible
c. lower-of-cost or net realizable value

Answer 63

lower-of-cost or net realizable value

Question 64

The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
a. retained earnings statement.
b. income statement.
c. statement of cash flows.
d. statement of financial position.

Answer 64

statement of cash flows.

Question 65

The statement of cash flows provides answers to all of the following questions except
a. where did the cash come from during the period?
b. what was the cash used for during the period?
c. what is the impact of inflation on the cash balance at the end of the year?
d. what was the change in the cash balance during the period?

Answer 65

what is the impact of inflation on the cash balance at the end of the year?

Question 66

The statement of cash flows reports all of the following except
a. the net change in cash for the period.
b. the cash effects of operations during the period.
c. the free cash flows generated during the period.
d. investing transactions.

Answer 66

the free cash flows generated during the period.

Question 67

Which of the following events will appear in the cash flows from financing activities section of the statement of cash flows?
a. Cash purchases of equipment.
b. Cash purchases of bonds issued by another company.
c. Cash received as repayment for funds loaned.
d. Cash purchase of treasury stock.

Answer 67

Cash purchase of treasury stock.

Question 68

Making and collecting loans and disposing of property, plant, and equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.

Answer 68

investing activities.

Question 69

In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n)
a. operating activity.
b. financing activity.
c. extraordinary activity.
d. investing activity.

Answer 69

financing activity.

Question 70

In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount

Answer 70

Sale of equipment at book value

Question 71

Preparing the statement of cash flows, using the indirect method, involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.
d. cash collections from customers during the period.

Answer 71

cash collections from customers during the period.

Question 72

In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.

Answer 72

investing activities.

Question 73

n a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
a. operating activities.
b. borrowing activities.
c. lending activities.
d. financing activities.

Answer 73

operating activities.

Question 74

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from
a. lending activities.
b. operating activities.
c. investing activities.
d. financing activities.

Answer 74

financing activities.

Question 75

On the statement of cash flows, which of the following items will affect both financing activities and operating activities?
a. Issuance of equity securities.
b. Collection of loans to other entities.
c. Payment of dividends.
d. Redemption of debt.

Answer 75

Redemption of debt.

Question 76

If ordinary shares were issued to acquire an CHF8,000 machine, how would the transaction appear on the statement of cash flows?
a. It would depend on whether or not the direct method or the indirect method was used.
b. It would be a positive CHF8,000 in the financing section and a negative CHF8,000 in the investing section.
c. It would be a negative CHF8,000 in the financing section and a positive CHF8,000 in the investing section.
d. It would not appear on the statement of cash flows but rather in a cash flow note.

Answer 76

It would not appear on the statement of cash flows but rather in a cash flow note.

Question 77

In preparing a statement of cash flows, cash flows from operating activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.

Answer 77

can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.

Question 78

Caroline, Inc. exchanged a tract of land it held in Mississippi for a tract of land owned by Rosalie Corporation located in Illinois. How is this transaction reported on Caroline, Inc.’s statement of cash flows?
a. As a cash inflow from investing activities and a cash outflow from financing activities.
b. As a cash inflow and a cash outflow from investing activities.
c. As a cash inflow and a cash outflow from financing activities.
d. This transaction is not reported in the body of the statement of cash flows.

Answer 78

d. This transaction is not reported in the body of the statement of cash flows.

Question 79

Cash debt coverage is computed by dividing net cash provided by operating activities by
a. average non-current liabilities.
b. average total liabilities.
c. ending non-current liabilities.
d. ending total liabilities.

Answer 79

average total liabilities.

Question 80

Current cash debt coverage is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

Answer 80

liquidity.

Question 81

A measure of a company’s financial flexibility is
a. cash debt coverage.
b. current cash debt coverage.
c. free cash flow.
d. cash debt coverage and free cash flow.

Answer 81

cash debt coverage and free cash flow.

Question 82

Free cash flow is calculated as net cash provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.

Answer 82

capital expenditures and dividends.

Question 83

One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.
c. The firm’s ability to pay its debts as they mature.
d. The firm’s ability to invest in a number of projects with different objectives and costs.

Answer 83

The firm’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.

Question 84

Net cash provided by operating activities divided by average total liabilities equals
a. current cash debt coverage.
b. cash debt coverage.
c. free cash flow.
d. the current ratio.

Answer 84

cash debt coverage.

Question 85

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
a. operating activities.
b. investing activities.
c. financing activities.
d. lending activities.

Answer 85

investing activities.

Question 86

Which of the following statement of financial position classifications would normally require the greatest amount of supplementary disclosure?
a. Current assets
b. Current liabilities
c. Plant assets
d. Long-term liabilities

Answer 86

Long-term liabilities

Question 87

The presentation of non-current liabilities in the statement of financial position should disclose
a. maturity dates.
b. interest rates.
c. conversion rights.
d. All of these choices are correct.

Answer 87

a. maturity dates.
b. interest rates.
c. conversion rights.

Question 88

A complete set of financial statements includes each of the following except
a. a statement of comprehensive income.
b. a statement of changes in equity.
c. notes.
d. All of these answers are included.

Answer 88

All of these answers are included:
a. a statement of comprehensive income.
b. a statement of changes in equity.
c. notes.

Question 89

Accounting policies include each of the following except
a. principles.
b. conventions.
c. rules.
d. All of these answers are included

Answer 89

All of these answers are included:
a. principles.
b. conventions.
c. rules.

Question 90

Caroline, Inc. hired a new controller in late 2015. The controller has not prepared financial statements using IFRS before and needs your assistance. In compiling a complete set of financial statements under IFRS, which of the following components must be included?
a. A statement of financial position at the end of the period.
b. Notes, including a summary of significant accounting policies.
c. A statement of comprehensive income for the period.
d. All of these choices are correct.

Answer 90

a. A statement of financial position at the end of the period.
b. Notes, including a summary of significant accounting policies.
c. A statement of comprehensive income for the period.

Question 91

Which of the following statements is incorrect regarding notes to the financial statements?
a. IFRS requires specific note disclosures including disaggregation of inventories into classifications such as merchandise, production supplies, work in process, and finished goods.
b. IFRS requires a maturity analysis for receivables.
c. IFRS requires that all notes be clear, simple to understand, and non-technical in nature.
d. All of the choices are correct regarding notes to the financial statements.

Answer 91

IFRS requires that all notes be clear, simple to understand, and non-technical in nature.

Question 92

Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned service revenue
c. Patents
d. Accumulated depreciation

Answer 92

Accumulated depreciation

Question 93

Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information

Answer 93

All of these are methods of disclosing pertinent information:
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items