ACG 4101 Ch. 3 Questions and Answers
Describe the purpose of the balance sheet. - answer The purpose of the balance sheet,
also known as the statement of financial position, is to present the financial position of
the company on a particular date. Unlike the income statement, which is a change
statement that reports events occurring during a period of time, the balance sheet is a
statement that presents an organized array of assets, liabilities, and shareholders'
equity at a point in time. It is a freeze-frame or snapshot picture of financial position at
the end of a particular day marking the end of an accounting period.
Explain why the balance sheet does not portray the market value of the entity. - answer
The balance sheet does not portray the market value of the entity (number of common
stock shares outstanding multiplied by price per share) for a number of reasons. Most
assets are not reported at fair value, but instead are measured according to historical
cost. Also, there are certain resources, such as trained employees, an experienced
management team, and a good reputation, that are not recorded as assets at all.
Therefore, the assets of a company minus its liabilities, as shown in the balance sheet,
will not be representative of the company's market value.
Define current assets and list the typical asset categories included in this classification. -
answerCurrent assets include cash and other assets that are reasonably expected to be
converted to cash or consumed during one year, or within the normal operating cycle of
the business if the operating cycle is longer than one year. The typical asset categories
classified as current assets include:
— Cash and cash equivalents
— Short-term investments
— Accounts receivable
— Inventories
— Prepaid expenses
Define current liabilities and list the typical liability categories included in this
classification. - answerCurrent liabilities are those obligations that are expected to be
satisfied through the use of current assets or the creation of other current liabilities. So,
this classification will include all liabilities that are scheduled to be liquidated within one
year or the operating cycle, whichever is longer, except those that management intends
to refinance on a long-term basis. The typical liability categories classified as current
liabilities include:
— Accounts payable
— Short-term notes payable
— Accrued liabilities
— Current maturities of long-term debt
, Describe what is meant by an operating cycle for a typical manufacturing company. -
answerThe operating cycle for a typical manufacturing company refers to the period of
time required to convert cash to raw materials, raw materials to a finished product,
finished product to receivables, and then finally receivables back to cash.
Explain the difference(s) between investments in equity securities classified as current
assets versus those classified as noncurrent assets. - answerInvestments in equity
securities are classified as current if the company's management (1) intends to liquidate
the investment in the next year or operating cycle, whichever is longer, and (2) has the
ability to do so, that is, the investment is marketable. If either of these criteria does not
hold, the investment is classified as noncurrent.
Describe the common characteristics of assets classified as property, plant, and
equipment and identify some assets included in this classification. - answerThe
common characteristics that these assets have in common are that they are tangible,
long-lived assets used in the operations of the business. They usually are the primary
revenue-generating assets of the business. These assets include land, buildings,
equipment, machinery, furniture, and other assets used in the operations of the
business, as well as natural resources, such as mineral mines, timber tracts, and oil
wells.
Distinguish between property. plant, and equipment and intangible assets. -
answerProperty, plant, and equipment and intangible assets each represent assets that
are long-lived and are used in the operations of the business. The difference is that
property, plant, and equipment represent physical assets, while intangible assets lack
physical substance. Generally, intangible assets represent the ownership of an
exclusive right, such as a patent, copyright, or franchise.
Explain how each of the following liabilities would be classified in the balance sheet:
- A note payable of $100,000 due in five years.
- A note payable of $100,000 payable in annual installments of $20,000 each, with the
first installment due next year. - answerA note payable of $100,000 due in five years
would be classified as a long-term liability. A $100,000 note due in five annual
installments of $20,000 each would be classified as a $20,000 current liability—current
maturities of long-term debt—and an $80,000 long-term liability.
Define the terms paid-in-capital and retained earnings. - answerPaid-in capital consists
of amounts invested by shareholders in the corporation. Retained earnings equals net
income less dividends paid to shareholders from the inception of the corporation.
Disclosure notes are an integral part of the information provided in financial statements.
In what ways are the notes critical to understanding the financial statements and to
evaluating the firm's performance and financial health? - answerDisclosure notes
provide additional detail concerning specific financial statement items. Included are
such data as the fair values of financial instruments and off-balance-sheet risk
associated with financial instruments and details of pension plans, leases, debt, and
Describe the purpose of the balance sheet. - answer The purpose of the balance sheet,
also known as the statement of financial position, is to present the financial position of
the company on a particular date. Unlike the income statement, which is a change
statement that reports events occurring during a period of time, the balance sheet is a
statement that presents an organized array of assets, liabilities, and shareholders'
equity at a point in time. It is a freeze-frame or snapshot picture of financial position at
the end of a particular day marking the end of an accounting period.
Explain why the balance sheet does not portray the market value of the entity. - answer
The balance sheet does not portray the market value of the entity (number of common
stock shares outstanding multiplied by price per share) for a number of reasons. Most
assets are not reported at fair value, but instead are measured according to historical
cost. Also, there are certain resources, such as trained employees, an experienced
management team, and a good reputation, that are not recorded as assets at all.
Therefore, the assets of a company minus its liabilities, as shown in the balance sheet,
will not be representative of the company's market value.
Define current assets and list the typical asset categories included in this classification. -
answerCurrent assets include cash and other assets that are reasonably expected to be
converted to cash or consumed during one year, or within the normal operating cycle of
the business if the operating cycle is longer than one year. The typical asset categories
classified as current assets include:
— Cash and cash equivalents
— Short-term investments
— Accounts receivable
— Inventories
— Prepaid expenses
Define current liabilities and list the typical liability categories included in this
classification. - answerCurrent liabilities are those obligations that are expected to be
satisfied through the use of current assets or the creation of other current liabilities. So,
this classification will include all liabilities that are scheduled to be liquidated within one
year or the operating cycle, whichever is longer, except those that management intends
to refinance on a long-term basis. The typical liability categories classified as current
liabilities include:
— Accounts payable
— Short-term notes payable
— Accrued liabilities
— Current maturities of long-term debt
, Describe what is meant by an operating cycle for a typical manufacturing company. -
answerThe operating cycle for a typical manufacturing company refers to the period of
time required to convert cash to raw materials, raw materials to a finished product,
finished product to receivables, and then finally receivables back to cash.
Explain the difference(s) between investments in equity securities classified as current
assets versus those classified as noncurrent assets. - answerInvestments in equity
securities are classified as current if the company's management (1) intends to liquidate
the investment in the next year or operating cycle, whichever is longer, and (2) has the
ability to do so, that is, the investment is marketable. If either of these criteria does not
hold, the investment is classified as noncurrent.
Describe the common characteristics of assets classified as property, plant, and
equipment and identify some assets included in this classification. - answerThe
common characteristics that these assets have in common are that they are tangible,
long-lived assets used in the operations of the business. They usually are the primary
revenue-generating assets of the business. These assets include land, buildings,
equipment, machinery, furniture, and other assets used in the operations of the
business, as well as natural resources, such as mineral mines, timber tracts, and oil
wells.
Distinguish between property. plant, and equipment and intangible assets. -
answerProperty, plant, and equipment and intangible assets each represent assets that
are long-lived and are used in the operations of the business. The difference is that
property, plant, and equipment represent physical assets, while intangible assets lack
physical substance. Generally, intangible assets represent the ownership of an
exclusive right, such as a patent, copyright, or franchise.
Explain how each of the following liabilities would be classified in the balance sheet:
- A note payable of $100,000 due in five years.
- A note payable of $100,000 payable in annual installments of $20,000 each, with the
first installment due next year. - answerA note payable of $100,000 due in five years
would be classified as a long-term liability. A $100,000 note due in five annual
installments of $20,000 each would be classified as a $20,000 current liability—current
maturities of long-term debt—and an $80,000 long-term liability.
Define the terms paid-in-capital and retained earnings. - answerPaid-in capital consists
of amounts invested by shareholders in the corporation. Retained earnings equals net
income less dividends paid to shareholders from the inception of the corporation.
Disclosure notes are an integral part of the information provided in financial statements.
In what ways are the notes critical to understanding the financial statements and to
evaluating the firm's performance and financial health? - answerDisclosure notes
provide additional detail concerning specific financial statement items. Included are
such data as the fair values of financial instruments and off-balance-sheet risk
associated with financial instruments and details of pension plans, leases, debt, and
