Fin 461 Exam 2 – Walker – Chapter 2 –
Questions and Answers
What does the balance sheet summarize for a business enterprise? - -Financial position at
a point in time
-What is the balancing equation for the balancing equation for the balance sheet? - -
Assets=Liabilities + Stockholders' Equity
-What is a common size balance sheet? - -A statement that expresses each account on the
balance sheet as a percentage of total assets.
-Which of the following assets would be classified as current assets on the balance sheet? -
-Cash equivalents, inventory, prepaid expenses.
-What items should be calculated when analyzing the accounts receivable and allowances
for doubtful accounts? - -The growth rate of sales, accounts receivable and the allowance
for doubtful accounts, as well as the percentage of the allowance relative to the total or
gross accounts receivable.
-What type of firm generally has the highest proportion of inventory to total assets? - -
Retailers
-What is the method of valuing inventory important? - -The inventory valuation method
chosen determines the value of inventory on the balance sheet and the costs of goods sold
expense on the income statement, two items having considerable impact on the financial
position of the company.
-What are three major cost flow assumptions used by U.S. companies in valuing inventory?
- -FIFO, LIFO, average cost
-Assuming a period of inflation, which statement is true? - -The FIFO method understates
the cost of goods sold on the income statement.
-Why would a company switch to the LIFO method of inventory valuation? - -LIFO
produces the largest cost of goods sold expense in a period of inflation and thereby lowers
taxable income and taxes.
-Where can one most typically find the cost flow assumptions used for inventory valuation
for a specific company? - -In the notes to the financial statement
-What type of firm generally has the highest proportion of fixed assets to total assets? - -
Manufacturers.
Questions and Answers
What does the balance sheet summarize for a business enterprise? - -Financial position at
a point in time
-What is the balancing equation for the balancing equation for the balance sheet? - -
Assets=Liabilities + Stockholders' Equity
-What is a common size balance sheet? - -A statement that expresses each account on the
balance sheet as a percentage of total assets.
-Which of the following assets would be classified as current assets on the balance sheet? -
-Cash equivalents, inventory, prepaid expenses.
-What items should be calculated when analyzing the accounts receivable and allowances
for doubtful accounts? - -The growth rate of sales, accounts receivable and the allowance
for doubtful accounts, as well as the percentage of the allowance relative to the total or
gross accounts receivable.
-What type of firm generally has the highest proportion of inventory to total assets? - -
Retailers
-What is the method of valuing inventory important? - -The inventory valuation method
chosen determines the value of inventory on the balance sheet and the costs of goods sold
expense on the income statement, two items having considerable impact on the financial
position of the company.
-What are three major cost flow assumptions used by U.S. companies in valuing inventory?
- -FIFO, LIFO, average cost
-Assuming a period of inflation, which statement is true? - -The FIFO method understates
the cost of goods sold on the income statement.
-Why would a company switch to the LIFO method of inventory valuation? - -LIFO
produces the largest cost of goods sold expense in a period of inflation and thereby lowers
taxable income and taxes.
-Where can one most typically find the cost flow assumptions used for inventory valuation
for a specific company? - -In the notes to the financial statement
-What type of firm generally has the highest proportion of fixed assets to total assets? - -
Manufacturers.
