81% (17 out of 21 correct)

Responses to questions are indicated by the

symbol.

1. The balance sheet is sometimes referred to as the Statement of Financial Position.

A. True
B. False

A balance sheet reports on the financial position of a business enterprise.

2. Solvency refers to the amount of time that is expected to elapse until a liability has to be
paid.
A. True
B. False

Solvency refers to the ability to pay debts as they mature.

3. Current assets are presented in the balance sheet in their order of liquidity.
A. True
B. False

Current assets are presented in the order that they will be converted to cash or used up,
which is their order of liquidity.

4. The statement of cash flows is divided into three different activities.

A. True
B. False

The activities are: operating, investing and financing.

5. The current cash debt coverage ratio is equal to net cash provided by operating activities
average total liabilities.
A. True
B. False

It is net cash provided by operating activities average current liabilities.

6. Indicators of strong financial flexibility include a low debt coverage ratio and negative
free cash flow.
A. True
B. False

A lower debt coverage ratio and negative free cash flow are indicators of poor financial
flexibility.

7. Companies rarely use estimates in valuing items on the balance sheet.

A. True
B. False

Companies use judgments and estimates to determine many of the items reported on the
balance sheet.

8. A liability that is payable within the next year is sometimes included in long-term debt.
A. True
B. False

A liability that is payable within the next year is sometimes included in long-term debt if
the company expects to refinance the debt through another long-term issue or to retire the
debt out of non-current assets.

9. The excess of total assets over total liabilities is referred to a net working capital.

A. True
B. False

Net working capital is the excess of total current assets over total current liabilities.

10. Investing activities on the statement of cash flows include the issuance of debt and
equity securities.
A. True
B. False

The issuance of debt and equity securities is reported as a financing activity on the
statement of cash flows.

11. The use of the term reserve is discouraged in both U.S. GAAP and iGAAP.
A. True
B. False

While the use of the term reserve is discouraged in U.S. GAAP, there is no such
prohibition in iGAAP.

12. A balance sheet is useful for analyzing all of the following except:
A. financial flexibility.
B. liquidity.
C. solvency.
D. profitability.

Profitability is determined primarily by analyzing information from the income

statement.

13. Assets can be divided into how many subclassifications?

A. 5
B. 4

C. 3
D. 2

There are 5 subclassifications: current, long-term investments, PP & E, intangibles, and

other.

14. Which of the following is not one of the portfolio groupings for investments in debt and
equity securities?
A. Available-for-sale.
B. Trading.
C. Investments.
D. Held to maturity.

Investments is a subcategory of assets, not a type of portfolio.

15. Which of the following types of securities do not include equity securities?
A. Trading.
B. Held to maturity.
C. Available-for-sale.
D. None of the above include equity securities.

Held to maturity securities are only debt securities.

16. Which of the following securities are not reported in the balance sheet at their fair
value?
A. Held to maturity.
B. Trading.
C. Available-for-sale.
D. None of the above.

Held to maturity securities are reported at their amortized cost.

17. Which of the following is not an intangible asset?

A. Patents.
B. Wasting resources.
C. Goodwill.
D. Franchises.

Wasting resources are a type of property, plant & equipment asset.

18. How many different ways may pertinent information be disclosed in the financial
statements?
A. 4
B. 3
C. 2
D. 1

There are 4: parenthetical explanations, notes, cross-references and contra items, and
supporting schedules.

19. Payment of interest expense would come under which activity on the statement of cash
flows?
A. Financing.
B. Operating.
C. Investing.
D. None of the above.

Operating activities involve the cash effects of transactions that enter into the
determination of net income including interest expense.

20. Payment of a cash dividend would be reported as a cash outflow in which of the
following sections:

A. operating activities.
B. financing activities.
C. investing activities.
D. None of the above.

Cash dividends are an outflow under the financing activities section.

21. Which of the following would be added back to net income in the operating activities
section of the statement of cash flows?
A. Payment of a cash dividend.
B. Increase in inventory.
C. Increase in accounts payable.
D. Gain on sale of equipment.

Increases in current liabilities are positive adjustments to net income in the operating
activities section of the statement of cash flows.

Retake Test