CHAPTER 4
BALANCE SHEET AND STATEMENT OF CASH FLOWS
IFRS questions are available at the end of this chapter.
TRUE FALSE—Conceptual
1. Liquidity refers to the ability of an entity to pay its debts as they mature.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
2. The balance sheet omits many items that are of financial value to the business but cannot
be recorded objectively.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
3. Financial flexibility measures the ability of an enterprise to take effective actions to alter the
amounts and timing of cash flows.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
4. A company excludes from the current assets section, the amount of cash restricted for
purposes other than payment of current obligations or use in current operations.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
5. An example of a cash equivalent is an investment in a corporate bond, due in 19 months.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
6. Land held for speculation is reported in the property, plant, and equipment section of the
balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
7. Financial flexibility is a company’s ability to respond and adapt to financial adversity and
unexpected needs and opportunities.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
8. A company’s operating cycle is the average time between when it acquires materials and
supplies and when it collects cash for sales of products or services.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
9. Inventory is reported on the balance sheet at fair value.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
10. Trading securities are investments in debt and equity instruments bought and held
primarily for sale in the short run to generate a return.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA FN: Reporting AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,4- 2 Test Bank for Intermediate Accounting, Eighteenth Edition
11. Accumulated other comprehensive income is reported in the investments section of the
balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA FN: Reporting AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
12. Financial statement readers often assess liquidity by using the current cash debt coverage.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
13. The primary purpose of a statement of cash flows is to report the cash effects of operations
during a period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: ReportingAICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
14. The statement of cash flows reports only the cash effects of operations and financing
transactions.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
15. Collection of a loan is reported as an investing activity in the statement of cash flows.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: ReportingAICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
16. Companies determine cash provided by operating activities by converting net income on an
accrual basis to a cash basis.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
17. Significant financing and investing activities that do not affect cash are not reported in the
statement of cash flows or any other place.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
18. Free cash flow is net income less capital expenditures and dividends.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Analysis, IFRS: None
19. The first step in preparing a statement of cash flows is to determine the increase or
decrease
in cash during the period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
20. The current cash debt coverage is a liquidity measure that indicates whether a company
can pay off its current liabilities from its operations.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
21. Companies frequently describe the terms of all long-term liability agreements in the notes
to
the financial statements.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
22. Because of the historical cost principle, fair values may not be disclosed in the balance
sheet.
, Balance Sheet and Statement of Cash Flows 4-3
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
23. Companies have the option of disclosing information about the nature of their operations
and the use of estimates in preparing financial statements.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
24. Companies may use parenthetical explanations, notes, cross-references, and supporting
schedules to disclose pertinent information.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Preparation, IFRS: None
25. On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners’
equity account.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Preparation, IFRS: None
26. Typical loss contingencies include environmental issues, company litigation against another
party, and government investigations.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Preparation, IFRS: None
27. Companies generally include a “Summary of Significant Accounting Policies” as the first
note to the financial statements.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
28. In the fair value hierarchy, a Level 3 measure is based on market-based inputs other than
those included in Level 1, such as those based on market prices for similar but not identical
assets or liabilities.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
29. Activity ratios measure the degree of protection for long-term creditors and investors.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: ReportingAICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
30. Ratio analysis expresses the relationship between selected financial statement items in a
percentage, rate, or simple proportion.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
31. The current ratio measures immediate short-term liquidity.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
MULTIPLE CHOICE—Conceptual
32. Which of the following is a limitation of the balance sheet?
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 answer choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
, 4- 4 Test Bank for Intermediate Accounting, Eighteenth Edition
33. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
34. Balance sheet 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
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
35. Balance sheet 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.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
36. 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
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
37. The balance sheet 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.
Ans: C, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
38. One criticism not normally aimed at a balance sheet 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.
Ans: B, LO: 1, Bloom: C, Moderate: Difficult, Min: 3, AACSB: Reflective, AICPA BC: Crit. Think, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
& Control: Financial Statement Preparation, IFRS: None
BALANCE SHEET AND STATEMENT OF CASH FLOWS
IFRS questions are available at the end of this chapter.
TRUE FALSE—Conceptual
1. Liquidity refers to the ability of an entity to pay its debts as they mature.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
2. The balance sheet omits many items that are of financial value to the business but cannot
be recorded objectively.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
3. Financial flexibility measures the ability of an enterprise to take effective actions to alter the
amounts and timing of cash flows.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
4. A company excludes from the current assets section, the amount of cash restricted for
purposes other than payment of current obligations or use in current operations.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
5. An example of a cash equivalent is an investment in a corporate bond, due in 19 months.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
6. Land held for speculation is reported in the property, plant, and equipment section of the
balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
7. Financial flexibility is a company’s ability to respond and adapt to financial adversity and
unexpected needs and opportunities.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
8. A company’s operating cycle is the average time between when it acquires materials and
supplies and when it collects cash for sales of products or services.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
9. Inventory is reported on the balance sheet at fair value.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
10. Trading securities are investments in debt and equity instruments bought and held
primarily for sale in the short run to generate a return.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA FN: Reporting AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,4- 2 Test Bank for Intermediate Accounting, Eighteenth Edition
11. Accumulated other comprehensive income is reported in the investments section of the
balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA FN: Reporting AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
12. Financial statement readers often assess liquidity by using the current cash debt coverage.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
13. The primary purpose of a statement of cash flows is to report the cash effects of operations
during a period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: ReportingAICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
14. The statement of cash flows reports only the cash effects of operations and financing
transactions.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
15. Collection of a loan is reported as an investing activity in the statement of cash flows.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: ReportingAICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
16. Companies determine cash provided by operating activities by converting net income on an
accrual basis to a cash basis.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
17. Significant financing and investing activities that do not affect cash are not reported in the
statement of cash flows or any other place.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
18. Free cash flow is net income less capital expenditures and dividends.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Analysis, IFRS: None
19. The first step in preparing a statement of cash flows is to determine the increase or
decrease
in cash during the period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
20. The current cash debt coverage is a liquidity measure that indicates whether a company
can pay off its current liabilities from its operations.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
21. Companies frequently describe the terms of all long-term liability agreements in the notes
to
the financial statements.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
22. Because of the historical cost principle, fair values may not be disclosed in the balance
sheet.
, Balance Sheet and Statement of Cash Flows 4-3
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
23. Companies have the option of disclosing information about the nature of their operations
and the use of estimates in preparing financial statements.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
24. Companies may use parenthetical explanations, notes, cross-references, and supporting
schedules to disclose pertinent information.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Preparation, IFRS: None
25. On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners’
equity account.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Preparation, IFRS: None
26. Typical loss contingencies include environmental issues, company litigation against another
party, and government investigations.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Preparation, IFRS: None
27. Companies generally include a “Summary of Significant Accounting Policies” as the first
note to the financial statements.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
28. In the fair value hierarchy, a Level 3 measure is based on market-based inputs other than
those included in Level 1, such as those based on market prices for similar but not identical
assets or liabilities.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
29. Activity ratios measure the degree of protection for long-term creditors and investors.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: ReportingAICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
30. Ratio analysis expresses the relationship between selected financial statement items in a
percentage, rate, or simple proportion.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
31. The current ratio measures immediate short-term liquidity.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation & Control: Financial Statement Analysis, IFRS: None
MULTIPLE CHOICE—Conceptual
32. Which of the following is a limitation of the balance sheet?
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 answer choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
, 4- 4 Test Bank for Intermediate Accounting, Eighteenth Edition
33. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
34. Balance sheet 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
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
35. Balance sheet 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.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
36. 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
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
37. The balance sheet 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.
Ans: C, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
38. One criticism not normally aimed at a balance sheet 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.
Ans: B, LO: 1, Bloom: C, Moderate: Difficult, Min: 3, AACSB: Reflective, AICPA BC: Crit. Think, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
& Control: Financial Statement Preparation, IFRS: None
