Chapter 4--The Balance Sheet and the Statement of Changes in

Stockholders' Equity
Student: ___________________________________________________________________________
1. If the owners' equity at the end of the accounting period is greater than the owners' equity at the beginning of
the accounting period, the firm's
A. capital has increased
B. working capital has increased
C. cash has increased
. capital has been maintained

!. All of the following items would appear on the balance sheet except
A. an in"estment in another company's bonds
B. an in"estment in marketable securities
C. a reali#ed gain on the sale of a patent
. the premium related to a bond liability that is still two years from maturity

$. %he ease with which an asset can be con"erted into cash is termed
A. financial fle&ibility
B. liquidity
C. operating capability
. capital maintenance

'. %he quantity of goods or ser"ices produced in a gi"en period or the physical capacity of the operating assets
used to produce goods or ser"ices are measures of
A. financial fle&ibility
B. liquidity
C. operating capability
. capital maintenance

(. )hich statement is false*
A. %he balance sheet of an entity purports to show the true "alue of the entity.
B. %he balance sheet should show a company's liquidity.
C. %he balance sheet reflects the financial capital of a company.
. %he balance sheet summari#es the financial position of an entity at a point in time.

+. %o be recogni#ed in the financial statements, an item must meet the definition of an element and be
A. measurable, understandable, and rele"ant
B. reliable, measurable, and reali#ed
C. reali#ed, rele"ant, and reliable
. rele"ant, measurable, and reliable

,. %he ability of a company to adapt its resources to create change and react to change is called
A. financial fle&ibility
B. liquidity
C. operating capability
. resource structure

-. )hich of the following characteristics must an economic resource ha"e in order to be classified as an asset*
A. acquired as a result of a past transaction
B. future ser"ice potential
C. under the control of the business entity
. all of these
.. none of these

/. )hich is not a characteristic of an asset*
A. %he resource must be useful only in the entity's acti"ities and ha"e been acquired by purchase, production, or
stockholder in"estment.
B. %he entity must be able to obtain the future benefit and control others' access to it.
C. %he transaction or e"ent gi"ing rise to the entity's right to or control o"er the benefit must ha"e already
occurred.
. %he resource must singly, or in combination with other resources, ha"e the capacity to contribute directly, or
indirectly, to the entity's future net cash inflows.

10. )hich statement is not true*
A. %o be a liability, the transaction or e"ent obligating the entity must already ha"e occurred.
B. %he net worth of an entity is equal to its assets.
C. %he specific identity of the 1creditor1 need not be known with certainty for a liability to e&ist.
. 2tockholders' equity may not e&ist apart from the corporate assets and liabilities.

11. 3robable future sacrifices of economic benefits arising from past transactions or e"ents are
A. liabilities
B. re"enues
C. assets
. retained earnings

1!. )hich of the following is not a characteristic of a liability*
A. It in"ol"es a responsibility to another company.
B. %he company has little or no discretion to a"oid the future sacrifice.
C. %he sacrifice contributes directly or indirectly to the company's future cash inflows.
. %he transaction obligating the company has already occurred.

1$. %he residual interest in a company's assets is represented by its
A. net assets
B. stockholders' equity
C. ownership interest
. all of these

1'. )hich of the following assets is most likely reported at its historical cost on the balance sheet*
A. short4term in"estments
B. merchandise in"entory
C. net accounts recei"able
. prepaid insurance

1(. Assume an asset is measured by the amount of cash 5or its equi"alent6 into which it is e&pected to be
con"erted in an orderly transaction between market participants on the date of measurement. )hich
measurement alternati"e is in use in this case*
A. fair "alue
B. historical cost
C. present "alue
. reliable "alue

1+. %he "aluation method primarily used in the balance sheets of business entities is
A. current e&it "alue
B. historical cost
C. present "alue
. net reali#able "alue

1,. %he e&pected e&it "alue is also referred to as the
A. fair "alue
B. present "alue
C. input "alue
. current market "alue

1-. %he amount of cash 5or equi"alent6 that currently would be required to replace the ser"ice capacity of the
asset is called the asset's
A. historical cost
B. current cost
C. current e&it "alue
. present "alue

1/. %he measurement of an asset's "alue that considers the discounted future cash inflows 5and outflows6
relating to the asset is called the
A. net reali#able "alue
B. current cost
C. historical "alue
. present "alue

!0. 7AA3 disclosures for fair "alue measurements now require that fair "alue measurements using 8e"el $
inputs include all of the following except
A. the "aluation technique used to measure the fair "alue
B. a reconciliation of the 8e"el $ "alues to each of the corresponding 8e"el 1 and 8e"el ! "alues that were not
chosen
C. a reconciliation of the changes in fair "alue during the period
. a related discussion

!1. )hich of the following statements is not true regarding the hierarchy of fair "alue measurements now
pro"ided in 7AA3*
A. %he hierarchy clarified the inputs a company is to use to measure fair "alue.
B. %he "aluation method selected must be consistent with the market approach, the income approach, or the cost
approach.
C. %he three le"els of inputs pro"ide defined priorities for sources of a"ailable inputs for "aluation.
. %he hierarchy eliminates all sub9ecti"ity and estimation from the "aluation process.

!!. )hich of the following is not a limitation of the balance sheet*
A. In periods of inflation, lack of disclosure makes it impossible to determine which amounts reported show
purchasing power of the assets and liabilities.
B. It fails to include all of a company's economic resources and obligations.
C. :any of the amounts reported are based on estimates, which are sub9ect to change.
. ;aluing assets and liabilities using historical costs does not help in assessing a company's future cash flows.

!$. %he balance sheet account that is usually reported at its fair market "alue is
A. short4term marketable securities
B. land
C. current liabilities
. in"entory

!'. Current assets are cash or other assets that are reasonably e&pected to be con"erted into cash, sold, or
consumed within one year or a normal operating cycle. An operating cycle is defined as the company's ability
to
A. spend cash to payoff the company's liabilities
B. spend cash to acquire in"entory, which is sold and returned to cash
C. spend cash to acquire in"entory, which is sold to customers in the normal course of business
. spend cash in the generation of ser"ices, which can result in an increase in re"enue and net income from
operations

!(. 2elected information from a company's balance sheet follows<
8ong4term debt = '0
>etained earnings $0
Current assets 1(0
3roperty, plant, and equipment +0
Common stock 1$0
Current liabilities (0
)orking capital amounts to
A. =1(0
B. =1$0
C. =1!0
. =100

!+. )hich statement is not true*
A. ?ot all obligations that become due and will be paid within the ne&t accounting period are classified as
current liabilities.
B. %he components of working capital are disclosed on the balance sheet.
C. An increasing current ratio could result from decreasing liquidity.
. An operating cycle is the a"erage time taken by a company to con"ert recei"ables back into cash.

!,. Current liabilities would include all of the following except
A. wages payable
B. obligations under capital lease contracts
C. current portion of long4term debt
. unearned rent re"enue

!-. Cash equi"alents are securities that
A. management intends to con"ert into cash within one year
B. ha"e maturity dates of at least si& months
C. management intends to con"ert into cash within the normal operating cycle
. ha"e maturity dates of three months or less

!/. )hich of the following formulas represents working capital*
A. Current Assets 4 Current 8iabilities
B. 8iquid Assets 4 8iquid 8iabilities
C. Current Assets @ Current 8iabilities
. 8iquid Assets @ 8iquid 8iabilities

$0. Current liabilities are defined as
A. obligations that will be paid by refinancing through issuing new long4term liabilities
B. obligations that will be paid by using e&isting resources properly classified as current assets
C. obligations that will be paid out of a fund classified as a long4term in"estment
. obligations that will be paid by using e&isting resources, regardless of their classification

$1. )hich of the following liabilities is properly classified as a current liability*
A. currently maturing bonds payable that will be paid out of a fund accumulated for that purpose
B. short4term notes payable being refinanced with long4term notes
C. obligations that will be paid outside the operating cycle
. obligations for goods and ser"ices that ha"e entered the operating cycle

$!. A leased asset under capital lease is disclosed on the balance sheet at its
A. present "alue
B. historical cost
C. current cost
. net reali#able "alue

$$. )hich is classified as a long4term in"estment*
A. bond issue costs
B. cash surrender "alue of life insurance
C. capital lease
. three4year prepaid insurance policy

$'. Austification for ha"ing both intangible assets and other assets listed on a balance sheet include
A. that intangible assets ha"e no physical e&istence and other assets are deferred charges
B. that ha"ing more items listed on the balance sheet impro"es the users' understanding of the company
C. that the intangible assets are more important than the tangible assets
. that the other asset classification is important because goodwill cannot be amorti#ed, so it needs to be
recorded on the balance sheet

$(. %he BA2B has suggested guidelines for de"eloping homogenous classes of assets and liabilities. Bor assets,
this can be accomplished by following guidelines that include
A. reporting assets according to their use outside the acti"ities of the corporation
B. reporting all assets the same regardless of the implications on a company's financial fle&ibility
C. reporting the "aluation of assets at their net reali#able "alue
. reporting assets at their fair "alue

$+. )hich of the following would typically be recorded as an intangible asset*
A. computer software costs
B. bond issue costs
C. idle fi&ed assets
. prepaid pension costs

$,. Cbligations that are not e&pected to require the use of current assets or the creation of other current
liabilities within one year or the normal operating cycle, if longer than a year, are called
A. other liabilities
B. current liabilities
C. long4term liabilities
. contingent liabilities

$-. )hich of the following is least likely to be included in long4term liabilities*
A. obligations for future pension payments
B. capital leases payable
C. liabilities on options to sell stock
. unearned re"enues

$/. )hich of the following is typically recorded at its present "alue*
A. long4term in"estments
B. long4term liabilities
C. intangible assets
. contingent liabilities

'0. )hich is a component of stockholders' equity*
A. sinking funds
B. deferred charges
C. accumulated other comprehensi"e income
. reali#ed capital

'1. A deficit occurs when a company's
A. retained earnings are less than it's common stock
B. di"idends distributed are greater than comprehensi"e income
C. di"idends and cumulati"e losses are greater than cumulati"e net income
. retained earnings are less than assets minus liabilities

'!. Cn the balance sheet, treasury stock is classified as a5n6
A. long4term in"estment account
B. contra stockholders' equity account
C. capital stock account
. other asset account

'$. )hich statement is true*
A. 2tock must ha"e either a par or stated "alue.
B. If nominal, par "alue does not need to be disclosed on the balance sheet.
C. In most states, stock may be issued at more or less than par "alue.
. 3ar "alue does not suggest current fair "alue.

''. 2tate law may require that capital stock ha"e which of the following "alues*
A. stated "alue
B. market "alue
C. no4par "alue
. present "alue

'(. )hich of the following would not be classified as contributed capital*
A. additional paid4in capital
B. unreali#ed capital
C. common stock
. preferred stock

'+. )hich of the following account titles would not be included in contributed capital*
A. %reasury 2tock
B. Common 2tock42tated ;alue
C. onated Capital
. 3remium on 3referred 2tock

',. Changes in the separate stockholders' equity accounts can be disclosed in all of the following ways, except
A. a financial statement
B. a note to the financial statements
C. a parenthetical remark
. a supporting schedule

'-. In preparing a statement of changes in stockholders' equity, the company includes land gi"en to a
stockholder as a di"idend. %his transaction is included in the statement because it represents
A. an in"estment by an owner that increases equity.
B. an in"estment by an owner that decreases equity.
C. a distribution to an owner that increases equity.
. a distribution to an owner that decreases equity.

'/. A reader of a set of financial statements would e&pect to be able to find in the statement of changes in
stockholders' equity
A. increases in total assets
B. increases in total liabilities
C. increases to net income
. increases from comprehensi"e income

(0. )hich of the following is not included in comprehensi"e income*
A. net income
B. unreali#ed gains in the fair market "alue of equipment
C. foreign currency translation ad9ustments
. certain pension plan gains 5losses6 and prior ser"ice cost ad9ustments

(1. All of the following are e&amples of subsequent e"ents that would be disclosed in the footnotes to the
financial statements except
A. fire or flood loss
B. a litigation settlement
C. a bond issuance after the balance sheet date
. the inability to collect a ma9or customer's accounts recei"able

(!. According to APB Opinion No. 22, the initial note to the financial statements should describe
A. the calculation of comprehensi"e income
B. the significant concentrations of credit risk
C. the significant accounting policies
. the ob9ecti"es of holding deri"ati"es and the strategies for achie"ing them

($. A reader might find information about gain contingencies in an annual report by e&amining
A. a contingent account recei"able
B. an accrued re"enue
C. a deferred re"enue
. footnote disclosures

('. 7AA3 requires that all deri"ati"e financial instruments be reported at their
A. historical cost
B. fair "alue
C. present "alue
. par "alue

((. Acti"ities between affiliated entities such as subsidiaries must be disclosed in the financial statements of a
corporation as
A. segment analysis
B. significant relationships
C. related4party transactions
. contingent acti"ities

(+. Dnder international accounting standards, liabilities and owners' equity on the balance sheet usually appear
in which order*
A. capital, noncurrent liabilities, and current liabilities
B. current liabilities, noncurrent liabilities, and capital
C. capital, current liabilities, and noncurrent liabilities
. noncurrent liabilities, current liabilities, and capital

(,. %he rationale for disclosing material subsequent e"ents include all of the following except
A. these e"ents may affect the users predictions about future cash flows
B. without the disclosures the financial information may be misleading
C. such disclosures will help con"ict management of hiding significant economic transactions
. reporting such e"ents is consistent with the concept of full disclosure

(-. Certain differences e&ist between IB>2 and D.2. 7AA3 financial statement reporting. %hese include that
A. IB>2 presents a different ordering of the liabilities and owners' equity sections
B. IB>2 allows the upward re"aluation of property, plant, and equipment
C. IB>2 does not require a statement of cash flows
. IB>2 permits the presentation of either a classified or nonclassified balance sheet

(/. %he integrated disclosures required by the 2.C for all regulated companies include all of the following
except
A. di"idends on common stock
B. management's discussion
C. common stock market prices
. book "alue of common shares

+0. %he 2.C established integrated disclosures to
A. establish full disclosure
B. demonstrate its legal authority to establish 7AA3
C. satisfy the form 104E disclosure requirements
. control :anagement's iscussion and Analysis

+1. If the balance sheet lists liabilities and stockholders' equity sequentially under the assets, the format being
used is the
A. account form
B. report form
C. working capital form
. financial position form

+!. According to a recent issue of Accounting Trends and Techniques, the most frequently used balance sheet
format is the
A. financial position form
B. report form
C. account form
. combined form

+$. 8isted below are ten terms describing the purposes of the balance sheet. Bollowing the list is a series of
descripti"e phrases.
a. financial position f. operating capability
b. resource structure g. net assets
c. financial structure h. financial capital
d. liquidity i. physical capital
e. financial fle&ibility 9. recognition
FFFF 1. 3rocess of recording and reporting an element in the financial statements.

FFFF !. .conomic resources less economic obligations.

FFFF $. Ability of a company to use its financial resources to adapt to change.

FFFF '. .conomic resources, economic obligations, equity, and their relationship to each other at a point in time.

FFFF (. Amount of time until an asset is con"erted into cash or a liability is paid.

FFFF +. A quantitati"e measure of the physical producti"e capacity of an entity.

FFFF ,. :a9or classes and amounts of assets.

FFFF -. Ability of a company to maintain a gi"en physical le"el of operations.

FFFF /. :a9or classes and amounts of liabilities and equity.

FFFF 10. :onetary "alue of the net assets.
Required:
:atch each term with its descripti"e statement by placing the appropriate letter in the space pro"ided.





+'. Indi"idual assets are measured using one of fi"e alternati"e methods. %hese methods are listed below,
followed by a series of descripti"e statements.
a. historical cost
b. current cost
c. e&it "alue
d. net reali#able "alue
e. present "alue
FFFF 1. %he amount of cash into which an asset is e&pected to be con"erted, less any e&pected con"ersion costs.

FFFF !. %he amount of cash that would be required to obtain the same asset on the date of the balance sheet.

FFFF $. %he net amount of discounted e&pected cash flows relating to the asset.

FFFF '. %he amount of cash that could be obtained on the balance sheet date if the asset were sold in its present condition in an
orderly liquidation.

FFFF (. %he amount of cash paid for the asset when it was originally acquired.
Required:
:atch each measurement alternati"e with its descripti"e statement by placing the appropriate letter in the space pro"ided.





+(. 8isted below are the fi"e alternati"es identified by the BA2B for measuring balance sheet elements.
Bollowing the list is a series of balance sheet elements.
a. historical cost
b. current cost
c. e&it "alue
d. net reali#able "alue
e. present "alue
FFFF 1. >ecei"ables net of allowance for doubtful accounts

FFFF !. 3repaid e&penses

FFFF $. In"estment securities a"ailable for sale

FFFF '. 3atents

FFFF (. >aw materials in"entory ad9usted downward to lower of cost or market

FFFF +. Capital lease obligations

FFFF ,. Binancial instruments

FFFF -. 3roperty, plant, and equipment

FFFF /. Bonds payable

FFFF 10. %rading securities
Required:
:atch each measurement alternati"e to its balance sheet element by placing the appropriate letter in the space pro"ided.





++. %he following data were taken from the Ctay, Inc. balance sheet<
Accounts payable = 1(0
In"entory !(0
>etained earnings '0
Accumulated depreciation $00
Cash (00
2erial bonds payable 5=!00 matures each year6 -00
3repaid insurance !00
Allowance for doubtful accounts !0
Capital stock ''0
3roperty, plant, and equipment 1,000
Accounts recei"able 5gross6 110
Accrued salaries $10
Required:
Compute working capital.





+,. %he following information has been pro"ided for Genon Corp.<
3repaid insurance = !00
Accrued salaries 1,0
3etty cash *
In"estment in trading securities 1,!00
%otal current assets ',(+0
Cash +00
In"entory, at sales "alue 5cost H =1,(006 !,100
Dnearned rent /'0
Allowance for bad debts 1(0
Cffice supplies 110
Accounts recei"able -00
Required:
a. 3repare the current asset section of Genon's balance sheet.
b. Calculate Genon's net working capital.






+-. 8isted below 5in random order6 are all of the ecember $1, !010 balance sheet accounts of the :cCain
Company.
8and =10,(00
2inking fund for bond retirement !,'00
iscount on bonds payable /00
.quipment 1',000
3referred stock, =100 par (,000
Accumulated depreciation, buildings (,(00
In"estment in bonds held to maturity ',000
Accrued wages 1,/(0
Additional paid4in capital on common stock $,(00
Buildings 1,,(00
Bonds payable 5due !01$6 1$,000
Cffice supplies ,(0
>etained earnings 1',1(0
In"entory 10,000
Accounts recei"able ,,+(0
Accounts payable (,+(0
3repaid insurance /00
Common stock, =10 par +,,(0
Allowance for doubtful accounts !(0
Interest payable 1,(00
Cash ',(00
%reasury stock 5at cost6 1,1(0
i"idends payable ,(0
Additional paid4in capital on preferred stock 1,000
?otes payable 5due 1I1I1$6 -,000
Income ta&es payable 5current6 $,000
Accumulated depreciation, equipment ',!(0
Required:
3repare a properly classified balance sheet for the :cCain Company on ecember $1, !010.





+/. %he balance sheet contains the ma9or sections 5a4k6 listed below. A listing of balance sheet accounts 5141!6
follows.
a. Current assets g. 8ong4term liabilities
b. 8ong4term in"estments h. Cther liabilities
c. 3roperty, plant, and equipment i. Contributed capital
d. Intangible assets 9. >etained earnings
e. Cther assets k. Accumulated other comprehensi"e
f. Current liabilities income
FFFF 1. 7oods in process

FFFF !. %rademarks

FFFF $. 2ales re"enue

FFFF '. Cash surrender "alue of life insurance policy

FFFF (. Additional paid4in capital on common stock

FFFF +. eferred ta& assets

FFFF ,. Dnreali#ed decrease in "alue in a"ailable for sale securities

FFFF -. Allowance for uncollectible accounts recei"able

FFFF /. Interest payable

FFFF 10. 2inking fund for preferred stock retirement

FFFF 11. iscount on bonds payable 5due in 10 years6

FFFF 1!. 8eased machinery under a capital lease
Required:
Dsing the letters 5a4k6, indicate in which section of the balance sheet each of the accounts 5141!6 would be classified. 3ut parentheses around the
letter used if it represents a contra account. If the account does not appear on the balance sheet, place an 1J1 in the space pro"ided.





,0. Below is an alphabetical listing of the accounts of )alters, Inc. as of ecember $1, !010.
Accounts payable
Accounts recei"able
Accumulated depreciation< buildings and equipment
Additional paid4in capital on common stock
Allowance for doubtful accounts
Bonds payable 5due !01'6
Buildings and equipment
Cash
Common stock, =( par
iscount on bonds payable
i"idends payable
In"entory
In"estment in securities a"ailable for sale
8and
?otes payable 5due !0116
Cffice supplies
3atents
3repaid insurance
>etained earnings
2alaries payable
%a&es payable
%reasury stock
Dnearned rent
Required:
3repare a properly classified balance sheet 5without amounts6 for )alters, Inc. on ecember $1, !010.





,1. %he balance sheet contains the ma9or sections 5a496 listed below. A listing of balance sheet accounts 514106
follows.
a. Current assets f. Current liabilities
b. 8ong4term in"estments g. 8ong4term liabilities
c. 3roperty, plant, and equipment h. Contributed capital
d. Intangible assets i. >etained earnings
e. Cther assets 9. Accumulated other comprehensi"e income
FFFF 1. Dne&pired insurance

FFFF !. Idle machinery

FFFF $. Dnreali#ed gain on a"ailable for sale securities

FFFF '. 8and

FFFF (. Bund to retire preferred stock

FFFF +. Additional paid4in capital on common stock

FFFF ,. eferred income ta& payable4?oncurrent

FFFF -. Cbligation for future pension payments

FFFF /. %rademark

FFFF 10. Dnearned ticket sales
Required:
Dsing the letters 5a496, indicate in which section of the balance sheet the accounts 514106 would most likely be classified.





,!. A corporation's balance sheet is usually di"ided into three sections with "arious subclassifications reported
within each group in an informati"e manner. 8isted below are some typical subclassifications.
Contributed capital Cther assets
Current assets Cther liabilities
Current liabilities 3roperty, plant, K equipment
Intangible assets >etained earnings
8ong4term in"estments Accumulated other comprehensi"e income
8ong4term liabilities
Required:
Identify each of the three balance sheet sections and list the subclassifications within each section in the appropriate order.





,$. %he following information has been pro"ided by 2lick Company<
Dnearned rent = (00
>etained earnings 5unrestricted6 '1,000
onated capital -,000
Common stock, =( par (0,000
3remium on bonds payable -00
Bonds payable -,000
Additional paid4in capital on common stock !(,000
%reasury stock, at cost /,000
>etained earnings restricted for plant e&pansion ,,000
2inking fund for bond retirement 1,!(0
Required:
3repare the stockholders' equity section of the balance sheet for 2lick.





,'. Cn Aanuary 1, !010, :artine# Corporation had the following stockholders' equity account balances<
Accumulated other comprehensi"e income = $0,000
Additional paid4in capital on common stock -0,000
Common stock, =( par 5$0,000 shares authori#ed6 (0,000
>etained earnings 1'0,000
uring !010, the following e"ents occurred in the order listed and were properly recorded<
L %he company issued $,000 shares of common stock at =!0 per share.
L %he company earned net income of =!+,$00.
L %he company paid a =1.!0 per share di"idend on its common stock.
L %he company e&perienced an unreali#ed decrease in the "alue of its in"estment in a"ailable4for4sale securities of =$,000.
Required:
3repare a statement of changes in stockholders' equity for !010.





,(. A list of statements follows<
a. A balance sheet summari#es the FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF of a company.

b. 7AA3 defines the FFFFFFFFFFFFFFFFFFFF of a corporate balance sheet.

c. %emporary in"estments in marketable securities are classified as FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF and securities
a"ailable for sale.

d. FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF is the amount of stockholders' equity that a corporation may not distribute as
di"idends.

e. Dnreali#ed increase in the "alue of a"ailable4for4sale securities is an e&ample of FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF
FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF.

f. APB Opinion No. 22 recommends that the first footnote to the financial statements describe a company's FFFFFFFFFFFFFFFFFFFF
FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF.

g. A5n6 FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF is one that occurs between the balance sheet date and the date the annual
report is issued.
Required:
Bill in the words necessary to complete the statements.





,+. A client of your accounting firm is impressed with the precision and detail in the financial statements that
you ha"e 9ust prepared for his company. Mowe"er, he wants to know if there are any limitations to the
information contained in them.
Required:
escribe four limitations of the balance sheet.





,,. A friend of the family has 9ust recei"ed her first set of financial statements from her accountant. )hen she
finds out that you are an accounting ma9or, she asks you the following question< 1)hy aren't my employees
listed as an asset on my company's balance sheet*1
Required:
)rite an e&planation describing the characteristics that an economic resource must possess in order to be
considered an asset. Include in your discussion the primary reason why 1human resources1 are not recogni#ed as
assets.





,-. )ith all of the turmoil in the financial markets in !00-, one of your friends has emailed you because she has
been wondering about the financial disclosure requirements for the banks and brokerage firms affected by the
market turbulence. .&plain to your friend the general accounting requirements for financial instruments.





,/. A friend comes to you with a set of financial statements that he thinks contains an error. %he footnotes
contain a note on a bond issue sold after the end of the reporting period. Nour friend is sure this is an error
because the transaction occurred after the cutoff date for the financial statements.
Required:
.&plain to your friend why certain items that occur after the end of an accounting period are included in the
financial statements and the manner in which they can be disclosed.





Chapter '44%he Balance 2heet and the 2tatement of Changes in
2tockholders' .quity Eey

1. If the owners' equity at the end of the accounting period is greater than the owners' equity at the beginning of
the accounting period, the firm's
! capital has increased
B. working capital has increased
C. cash has increased
. capital has been maintained

!. All of the following items would appear on the balance sheet except
A. an in"estment in another company's bonds
B. an in"estment in marketable securities
C! a reali#ed gain on the sale of a patent
. the premium related to a bond liability that is still two years from maturity

$. %he ease with which an asset can be con"erted into cash is termed
A. financial fle&ibility
B! liquidity
C. operating capability
. capital maintenance

'. %he quantity of goods or ser"ices produced in a gi"en period or the physical capacity of the operating assets
used to produce goods or ser"ices are measures of
A. financial fle&ibility
B. liquidity
C! operating capability
. capital maintenance

(. )hich statement is false*
! %he balance sheet of an entity purports to show the true "alue of the entity.
B. %he balance sheet should show a company's liquidity.
C. %he balance sheet reflects the financial capital of a company.
. %he balance sheet summari#es the financial position of an entity at a point in time.

+. %o be recogni#ed in the financial statements, an item must meet the definition of an element and be
A. measurable, understandable, and rele"ant
B. reliable, measurable, and reali#ed
C. reali#ed, rele"ant, and reliable
"! rele"ant, measurable, and reliable

,. %he ability of a company to adapt its resources to create change and react to change is called
! financial fle&ibility
B. liquidity
C. operating capability
. resource structure

-. )hich of the following characteristics must an economic resource ha"e in order to be classified as an asset*
A. acquired as a result of a past transaction
B. future ser"ice potential
C. under the control of the business entity
"! all of these
.. none of these

/. )hich is not a characteristic of an asset*
! %he resource must be useful only in the entity's acti"ities and ha"e been acquired by purchase, production, or
stockholder in"estment.
B. %he entity must be able to obtain the future benefit and control others' access to it.
C. %he transaction or e"ent gi"ing rise to the entity's right to or control o"er the benefit must ha"e already
occurred.
. %he resource must singly, or in combination with other resources, ha"e the capacity to contribute directly, or
indirectly, to the entity's future net cash inflows.

10. )hich statement is not true*
A. %o be a liability, the transaction or e"ent obligating the entity must already ha"e occurred.
B! %he net worth of an entity is equal to its assets.
C. %he specific identity of the 1creditor1 need not be known with certainty for a liability to e&ist.
. 2tockholders' equity may not e&ist apart from the corporate assets and liabilities.

11. 3robable future sacrifices of economic benefits arising from past transactions or e"ents are
! liabilities
B. re"enues
C. assets
. retained earnings

1!. )hich of the following is not a characteristic of a liability*
A. It in"ol"es a responsibility to another company.
B. %he company has little or no discretion to a"oid the future sacrifice.
C! %he sacrifice contributes directly or indirectly to the company's future cash inflows.
. %he transaction obligating the company has already occurred.

1$. %he residual interest in a company's assets is represented by its
A. net assets
B. stockholders' equity
C. ownership interest
"! all of these

1'. )hich of the following assets is most likely reported at its historical cost on the balance sheet*
A. short4term in"estments
B. merchandise in"entory
C. net accounts recei"able
"! prepaid insurance

1(. Assume an asset is measured by the amount of cash 5or its equi"alent6 into which it is e&pected to be
con"erted in an orderly transaction between market participants on the date of measurement. )hich
measurement alternati"e is in use in this case*
! fair "alue
B. historical cost
C. present "alue
. reliable "alue

1+. %he "aluation method primarily used in the balance sheets of business entities is
A. current e&it "alue
B! historical cost
C. present "alue
. net reali#able "alue

1,. %he e&pected e&it "alue is also referred to as the
! fair "alue
B. present "alue
C. input "alue
. current market "alue

1-. %he amount of cash 5or equi"alent6 that currently would be required to replace the ser"ice capacity of the
asset is called the asset's
A. historical cost
B! current cost
C. current e&it "alue
. present "alue

1/. %he measurement of an asset's "alue that considers the discounted future cash inflows 5and outflows6
relating to the asset is called the
A. net reali#able "alue
B. current cost
C. historical "alue
"! present "alue

!0. 7AA3 disclosures for fair "alue measurements now require that fair "alue measurements using 8e"el $
inputs include all of the following except
A. the "aluation technique used to measure the fair "alue
B! a reconciliation of the 8e"el $ "alues to each of the corresponding 8e"el 1 and 8e"el ! "alues that were not
chosen
C. a reconciliation of the changes in fair "alue during the period
. a related discussion

!1. )hich of the following statements is not true regarding the hierarchy of fair "alue measurements now
pro"ided in 7AA3*
A. %he hierarchy clarified the inputs a company is to use to measure fair "alue.
B. %he "aluation method selected must be consistent with the market approach, the income approach, or the cost
approach.
C. %he three le"els of inputs pro"ide defined priorities for sources of a"ailable inputs for "aluation.
"! %he hierarchy eliminates all sub9ecti"ity and estimation from the "aluation process.

!!. )hich of the following is not a limitation of the balance sheet*
! In periods of inflation, lack of disclosure makes it impossible to determine which amounts reported show
purchasing power of the assets and liabilities.
B. It fails to include all of a company's economic resources and obligations.
C. :any of the amounts reported are based on estimates, which are sub9ect to change.
. ;aluing assets and liabilities using historical costs does not help in assessing a company's future cash flows.

!$. %he balance sheet account that is usually reported at its fair market "alue is
! short4term marketable securities
B. land
C. current liabilities
. in"entory

!'. Current assets are cash or other assets that are reasonably e&pected to be con"erted into cash, sold, or
consumed within one year or a normal operating cycle. An operating cycle is defined as the company's ability
to
A. spend cash to payoff the company's liabilities
B! spend cash to acquire in"entory, which is sold and returned to cash
C. spend cash to acquire in"entory, which is sold to customers in the normal course of business
. spend cash in the generation of ser"ices, which can result in an increase in re"enue and net income from
operations

!(. 2elected information from a company's balance sheet follows<
8ong4term debt = '0
>etained earnings $0
Current assets 1(0
3roperty, plant, and equipment +0
Common stock 1$0
Current liabilities (0
)orking capital amounts to
A. =1(0
B. =1$0
C. =1!0
"! =100

!+. )hich statement is not true*
A. ?ot all obligations that become due and will be paid within the ne&t accounting period are classified as
current liabilities.
B. %he components of working capital are disclosed on the balance sheet.
C. An increasing current ratio could result from decreasing liquidity.
"! An operating cycle is the a"erage time taken by a company to con"ert recei"ables back into cash.

!,. Current liabilities would include all of the following except
A. wages payable
B! obligations under capital lease contracts
C. current portion of long4term debt
. unearned rent re"enue

!-. Cash equi"alents are securities that
A. management intends to con"ert into cash within one year
B. ha"e maturity dates of at least si& months
C. management intends to con"ert into cash within the normal operating cycle
"! ha"e maturity dates of three months or less

!/. )hich of the following formulas represents working capital*
! Current Assets 4 Current 8iabilities
B. 8iquid Assets 4 8iquid 8iabilities
C. Current Assets @ Current 8iabilities
. 8iquid Assets @ 8iquid 8iabilities

$0. Current liabilities are defined as
A. obligations that will be paid by refinancing through issuing new long4term liabilities
B! obligations that will be paid by using e&isting resources properly classified as current assets
C. obligations that will be paid out of a fund classified as a long4term in"estment
. obligations that will be paid by using e&isting resources, regardless of their classification

$1. )hich of the following liabilities is properly classified as a current liability*
A. currently maturing bonds payable that will be paid out of a fund accumulated for that purpose
B. short4term notes payable being refinanced with long4term notes
C. obligations that will be paid outside the operating cycle
"! obligations for goods and ser"ices that ha"e entered the operating cycle

$!. A leased asset under capital lease is disclosed on the balance sheet at its
! present "alue
B. historical cost
C. current cost
. net reali#able "alue

$$. )hich is classified as a long4term in"estment*
A. bond issue costs
B! cash surrender "alue of life insurance
C. capital lease
. three4year prepaid insurance policy

$'. Austification for ha"ing both intangible assets and other assets listed on a balance sheet include
! that intangible assets ha"e no physical e&istence and other assets are deferred charges
B. that ha"ing more items listed on the balance sheet impro"es the users' understanding of the company
C. that the intangible assets are more important than the tangible assets
. that the other asset classification is important because goodwill cannot be amorti#ed, so it needs to be
recorded on the balance sheet

$(. %he BA2B has suggested guidelines for de"eloping homogenous classes of assets and liabilities. Bor assets,
this can be accomplished by following guidelines that include
A. reporting assets according to their use outside the acti"ities of the corporation
B. reporting all assets the same regardless of the implications on a company's financial fle&ibility
C. reporting the "aluation of assets at their net reali#able "alue
"! reporting assets at their fair "alue

$+. )hich of the following would typically be recorded as an intangible asset*
! computer software costs
B. bond issue costs
C. idle fi&ed assets
. prepaid pension costs

$,. Cbligations that are not e&pected to require the use of current assets or the creation of other current
liabilities within one year or the normal operating cycle, if longer than a year, are called
A. other liabilities
B. current liabilities
C! long4term liabilities
. contingent liabilities

$-. )hich of the following is least likely to be included in long4term liabilities*
A. obligations for future pension payments
B. capital leases payable
C. liabilities on options to sell stock
"! unearned re"enues

$/. )hich of the following is typically recorded at its present "alue*
A. long4term in"estments
B! long4term liabilities
C. intangible assets
. contingent liabilities

'0. )hich is a component of stockholders' equity*
A. sinking funds
B. deferred charges
C! accumulated other comprehensi"e income
. reali#ed capital

'1. A deficit occurs when a company's
A. retained earnings are less than it's common stock
B. di"idends distributed are greater than comprehensi"e income
C! di"idends and cumulati"e losses are greater than cumulati"e net income
. retained earnings are less than assets minus liabilities

'!. Cn the balance sheet, treasury stock is classified as a5n6
A. long4term in"estment account
B! contra stockholders' equity account
C. capital stock account
. other asset account

'$. )hich statement is true*
A. 2tock must ha"e either a par or stated "alue.
B. If nominal, par "alue does not need to be disclosed on the balance sheet.
C. In most states, stock may be issued at more or less than par "alue.
"! 3ar "alue does not suggest current fair "alue.

''. 2tate law may require that capital stock ha"e which of the following "alues*
! stated "alue
B. market "alue
C. no4par "alue
. present "alue

'(. )hich of the following would not be classified as contributed capital*
A. additional paid4in capital
B! unreali#ed capital
C. common stock
. preferred stock

'+. )hich of the following account titles would not be included in contributed capital*
! %reasury 2tock
B. Common 2tock42tated ;alue
C. onated Capital
. 3remium on 3referred 2tock

',. Changes in the separate stockholders' equity accounts can be disclosed in all of the following ways, except
A. a financial statement
B. a note to the financial statements
C! a parenthetical remark
. a supporting schedule

'-. In preparing a statement of changes in stockholders' equity, the company includes land gi"en to a
stockholder as a di"idend. %his transaction is included in the statement because it represents
A. an in"estment by an owner that increases equity.
B. an in"estment by an owner that decreases equity.
C. a distribution to an owner that increases equity.
"! a distribution to an owner that decreases equity.

'/. A reader of a set of financial statements would e&pect to be able to find in the statement of changes in
stockholders' equity
A. increases in total assets
B. increases in total liabilities
C. increases to net income
"! increases from comprehensi"e income

(0. )hich of the following is not included in comprehensi"e income*
A. net income
B! unreali#ed gains in the fair market "alue of equipment
C. foreign currency translation ad9ustments
. certain pension plan gains 5losses6 and prior ser"ice cost ad9ustments

(1. All of the following are e&amples of subsequent e"ents that would be disclosed in the footnotes to the
financial statements except
A. fire or flood loss
B. a litigation settlement
C. a bond issuance after the balance sheet date
"! the inability to collect a ma9or customer's accounts recei"able

(!. According to APB Opinion No. 22, the initial note to the financial statements should describe
A. the calculation of comprehensi"e income
B. the significant concentrations of credit risk
C! the significant accounting policies
. the ob9ecti"es of holding deri"ati"es and the strategies for achie"ing them

($. A reader might find information about gain contingencies in an annual report by e&amining
A. a contingent account recei"able
B. an accrued re"enue
C. a deferred re"enue
"! footnote disclosures

('. 7AA3 requires that all deri"ati"e financial instruments be reported at their
A. historical cost
B! fair "alue
C. present "alue
. par "alue

((. Acti"ities between affiliated entities such as subsidiaries must be disclosed in the financial statements of a
corporation as
A. segment analysis
B. significant relationships
C! related4party transactions
. contingent acti"ities

(+. Dnder international accounting standards, liabilities and owners' equity on the balance sheet usually appear
in which order*
! capital, noncurrent liabilities, and current liabilities
B. current liabilities, noncurrent liabilities, and capital
C. capital, current liabilities, and noncurrent liabilities
. noncurrent liabilities, current liabilities, and capital

(,. %he rationale for disclosing material subsequent e"ents include all of the following except
A. these e"ents may affect the users predictions about future cash flows
B. without the disclosures the financial information may be misleading
C! such disclosures will help con"ict management of hiding significant economic transactions
. reporting such e"ents is consistent with the concept of full disclosure

(-. Certain differences e&ist between IB>2 and D.2. 7AA3 financial statement reporting. %hese include that
A. IB>2 presents a different ordering of the liabilities and owners' equity sections
B. IB>2 allows the upward re"aluation of property, plant, and equipment
C! IB>2 does not require a statement of cash flows
. IB>2 permits the presentation of either a classified or nonclassified balance sheet

(/. %he integrated disclosures required by the 2.C for all regulated companies include all of the following
except
A. di"idends on common stock
B. management's discussion
C. common stock market prices
"! book "alue of common shares

+0. %he 2.C established integrated disclosures to
A. establish full disclosure
B. demonstrate its legal authority to establish 7AA3
C! satisfy the form 104E disclosure requirements
. control :anagement's iscussion and Analysis

+1. If the balance sheet lists liabilities and stockholders' equity sequentially under the assets, the format being
used is the
A. account form
B! report form
C. working capital form
. financial position form

+!. According to a recent issue of Accounting Trends and Techniques, the most frequently used balance sheet
format is the
A. financial position form
B! report form
C. account form
. combined form

+$. 8isted below are ten terms describing the purposes of the balance sheet. Bollowing the list is a series of
descripti"e phrases.
a. financial position f. operating capability
b. resource structure g. net assets
c. financial structure h. financial capital
d. liquidity i. physical capital
e. financial fle&ibility 9. recognition
FFFF 1. 3rocess of recording and reporting an element in the financial statements.

FFFF !. .conomic resources less economic obligations.

FFFF $. Ability of a company to use its financial resources to adapt to change.

FFFF '. .conomic resources, economic obligations, equity, and their relationship to each other at a point in time.

FFFF (. Amount of time until an asset is con"erted into cash or a liability is paid.

FFFF +. A quantitati"e measure of the physical producti"e capacity of an entity.

FFFF ,. :a9or classes and amounts of assets.

FFFF -. Ability of a company to maintain a gi"en physical le"el of operations.

FFFF /. :a9or classes and amounts of liabilities and equity.

FFFF 10. :onetary "alue of the net assets.
Required:
:atch each term with its descripti"e statement by placing the appropriate letter in the space pro"ided.
1. 9 +. i
!. g ,. b
$. e -. f
'. a /. c
(. d 10. h

+'. Indi"idual assets are measured using one of fi"e alternati"e methods. %hese methods are listed below,
followed by a series of descripti"e statements.
a. historical cost
b. current cost
c. e&it "alue
d. net reali#able "alue
e. present "alue
FFFF 1. %he amount of cash into which an asset is e&pected to be con"erted, less any e&pected con"ersion costs.

FFFF !. %he amount of cash that would be required to obtain the same asset on the date of the balance sheet.

FFFF $. %he net amount of discounted e&pected cash flows relating to the asset.

FFFF '. %he amount of cash that could be obtained on the balance sheet date if the asset were sold in its present condition in an
orderly liquidation.

FFFF (. %he amount of cash paid for the asset when it was originally acquired.
Required:
:atch each measurement alternati"e with its descripti"e statement by placing the appropriate letter in the space pro"ided.
1. d
!. b
$. e
'. c
(. a

+(. 8isted below are the fi"e alternati"es identified by the BA2B for measuring balance sheet elements.
Bollowing the list is a series of balance sheet elements.
a. historical cost
b. current cost
c. e&it "alue
d. net reali#able "alue
e. present "alue
FFFF 1. >ecei"ables net of allowance for doubtful accounts

FFFF !. 3repaid e&penses

FFFF $. In"estment securities a"ailable for sale

FFFF '. 3atents

FFFF (. >aw materials in"entory ad9usted downward to lower of cost or market

FFFF +. Capital lease obligations

FFFF ,. Binancial instruments

FFFF -. 3roperty, plant, and equipment

FFFF /. Bonds payable

FFFF 10. %rading securities
Required:
:atch each measurement alternati"e to its balance sheet element by placing the appropriate letter in the space pro"ided.
1. d +. e
!. a ,. c
$. c -. a
'. a /. a
(. b 10. c

++. %he following data were taken from the Ctay, Inc. balance sheet<
Accounts payable = 1(0
In"entory !(0
>etained earnings '0
Accumulated depreciation $00
Cash (00
2erial bonds payable 5=!00 matures each year6 -00
3repaid insurance !00
Allowance for doubtful accounts !0
Capital stock ''0
3roperty, plant, and equipment 1,000
Accounts recei"able 5gross6 110
Accrued salaries $10
Required:
Compute working capital.
=$-0 5=(00 O =110 4 =!0 O =!(0 O =!00 4 =1(0 4 $10 4 =!006

+,. %he following information has been pro"ided for Genon Corp.<
3repaid insurance = !00
Accrued salaries 1,0
3etty cash *
In"estment in trading securities 1,!00
%otal current assets ',(+0
Cash +00
In"entory, at sales "alue 5cost H =1,(006 !,100
Dnearned rent /'0
Allowance for bad debts 1(0
Cffice supplies 110
Accounts recei"able -00
Required:
a. 3repare the current asset section of Genon's balance sheet.
b. Calculate Genon's net working capital.

a. Current
assets<

Cash = +00
3etty
cash
$00
%otal cash = /00
In"estm
ent in
trading
securiti
es
1,!00
Accoun
ts
recei"a
ble
=-00
8ess<
Allowa
nce for
bad
debts
51(06 +(0
In"ento
ry
1,(00
Cffice
supplie
s
110
3repaid
insuran
ce
!00
%otal current assets =',(+0

?ote< 3etty cash works out to be =$00.

b. =',(+0 4 =1,0 4 =/'0 H =$,'(0

+-. 8isted below 5in random order6 are all of the ecember $1, !010 balance sheet accounts of the :cCain
Company.
8and =10,(00
2inking fund for bond retirement !,'00
iscount on bonds payable /00
.quipment 1',000
3referred stock, =100 par (,000
Accumulated depreciation, buildings (,(00
In"estment in bonds held to maturity ',000
Accrued wages 1,/(0
Additional paid4in capital on common stock $,(00
Buildings 1,,(00
Bonds payable 5due !01$6 1$,000
Cffice supplies ,(0
>etained earnings 1',1(0
In"entory 10,000
Accounts recei"able ,,+(0
Accounts payable (,+(0
3repaid insurance /00
Common stock, =10 par +,,(0
Allowance for doubtful accounts !(0
Interest payable 1,(00
Cash ',(00
%reasury stock 5at cost6 1,1(0
i"idends payable ,(0
Additional paid4in capital on preferred stock 1,000
?otes payable 5due 1I1I1$6 -,000
Income ta&es payable 5current6 $,000
Accumulated depreciation, equipment ',!(0
Required:
3repare a properly classified balance sheet for the :cCain Company on ecember $1, !010.
:CCAI? CC:3A?N
Balance 2heet
ecember $1, !010
ssets
Current
Assets

Cash = ',(00
Accoun
ts
recei"a
ble
= ,,+(0
8ess<
Allowa
nce for
doubtfu
l
account
s
!(0 ,,'00
In"ento
ry
10,000
3repaid
items

Insura
nce
/00
Cffic
e
suppli
es
,(0
%otal current assets =!$,((0
8ong4
%erm
In"estment
s

In"estm
ent in
bonds
held to
maturit
y
= ',000
2inking
fund for
bond
retirem
ent
!,'00
%otal
long4
term
in"est
ments
+,'00

3roperty,
3lant, and
.quipment

8and =10,(00
Buildin
gs
=1,,(00
8ess<
Accum
ulated
depreci
ation
(,(00 1!,000
.quipm
ent
=1',000
8ess<
Accum
ulated
depreci
ation
',!(0 /,,(0
%otal
prope
rty,
plant,
and
equip
ment
$!,!(0
%otal
Assets
=+!,!00
#ia$ilities
Current
8iabiliti
es

Acco
unts
payab
le
= (,+(0
Accru
ed
wages
1,/(0
Inco
me
ta&es
payab
le
$,000
Intere
st
payab
le
1,(00
i"id
ends
payab
le
,(0
%otal current liabilities =1!,-(0
8ong4
%erm
8iabiliti
es

?otes
payab
le
5due
1I1I1
$6
= -,000
Bond
s
payab
le
5due
!01$6
=1$,000
8ess<
Dnam
orti#e
d
bond
disco
unt
/00 1!,100
%otal long4term liabilities !0,100
%otal
8iabiliti
es
=$!,/(0
Stockh
olders'
Equity

Contrib
uted
Capital

3refer
red
stock,
=100
par
= (,000
Com
mon
stock,
=10
par
+,,(0
Addit
ional
paid4
in
capita
l on
prefer
red
stock
1,000
Addit
ional
paid4
in
capita
l on
comm
on
stock
$,(00
%otal contributed capital =1+,!(0
>etaine
d
.arning
s
1',1(0
%otal
contri
buted
capita
l and
retain
ed


earnin
gs
=$0,'00
8ess<
%reasur
y stock
5at cost6
51,1(0 6
%otal
2tockho
lders'
.quity
=!/,!(0
%otal
8iabiliti
es and
2tockho
lders'
.quity
=+!,!00

+/. %he balance sheet contains the ma9or sections 5a4k6 listed below. A listing of balance sheet accounts 5141!6
follows.
a. Current assets g. 8ong4term liabilities
b. 8ong4term in"estments h. Cther liabilities
c. 3roperty, plant, and equipment i. Contributed capital
d. Intangible assets 9. >etained earnings
e. Cther assets k. Accumulated other comprehensi"e
f. Current liabilities income
FFFF 1. 7oods in process

FFFF !. %rademarks

FFFF $. 2ales re"enue

FFFF '. Cash surrender "alue of life insurance policy

FFFF (. Additional paid4in capital on common stock

FFFF +. eferred ta& assets

FFFF ,. Dnreali#ed decrease in "alue in a"ailable for sale securities

FFFF -. Allowance for uncollectible accounts recei"able

FFFF /. Interest payable

FFFF 10. 2inking fund for preferred stock retirement

FFFF 11. iscount on bonds payable 5due in 10 years6

FFFF 1!. 8eased machinery under a capital lease
Required:
Dsing the letters 5a4k6, indicate in which section of the balance sheet each of the accounts 5141!6 would be classified. 3ut parentheses around the
letter used if it represents a contra account. If the account does not appear on the balance sheet, place an 1J1 in the space pro"ided.
1. a ,. k
!. d -. a
$. J /. f
'. b 10. b
(. i 11. g
+. e or a 1!. c

,0. Below is an alphabetical listing of the accounts of )alters, Inc. as of ecember $1, !010.
Accounts payable
Accounts recei"able
Accumulated depreciation< buildings and equipment
Additional paid4in capital on common stock
Allowance for doubtful accounts
Bonds payable 5due !01'6
Buildings and equipment
Cash
Common stock, =( par
iscount on bonds payable
i"idends payable
In"entory
In"estment in securities a"ailable for sale
8and
?otes payable 5due !0116
Cffice supplies
3atents
3repaid insurance
>etained earnings
2alaries payable
%a&es payable
%reasury stock
Dnearned rent
Required:
3repare a properly classified balance sheet 5without amounts6 for )alters, Inc. on ecember $1, !010.
)A8%.>2, I?C.
Balance 2heet
ecember $1, !010

ssets
Current Assets
Cash
In"estment in securities a"ailable for sale
Accounts recei"able
8ess< Allowance for doubtful accounts
In"entory
3repaid items
Insurance
Cffice supplies
%otal current assets
3roperty, 3lant, and .quipment
8and
Buildings and equipment
8ess< Accumulated depreciation
%otal property, plant, and equipment
Intangible Assets
3atents
%otal Assets
#ia$ilities
Current 8iabilities
?otes payable 5due in !0116
Accounts payable
2alaries payable
%a&es payable
i"idends payable
Dnearned rent
%otal current liabilities
8ong4%erm 8iabilities
Bonds payable 5due in !01'6
8ess< Dnamorti#ed bond discount
%otal long4term liabilities
%otal liabilities
Stockholders' Equity
Contributed Capital
Common stock, =( par
Additional paid4in capital on common stock
%otal contributed capital
>etained .arnings
%otal contributed capital and retained earnings
8ess< %reasury stock 5at cost6
%otal 2tockholders' .quity
%otal 8iabilities and 2tockholders' .quity

,1. %he balance sheet contains the ma9or sections 5a496 listed below. A listing of balance sheet accounts 514106
follows.
a. Current assets f. Current liabilities
b. 8ong4term in"estments g. 8ong4term liabilities
c. 3roperty, plant, and equipment h. Contributed capital
d. Intangible assets i. >etained earnings
e. Cther assets 9. Accumulated other comprehensi"e income
FFFF 1. Dne&pired insurance

FFFF !. Idle machinery

FFFF $. Dnreali#ed gain on a"ailable for sale securities

FFFF '. 8and

FFFF (. Bund to retire preferred stock

FFFF +. Additional paid4in capital on common stock

FFFF ,. eferred income ta& payable4?oncurrent

FFFF -. Cbligation for future pension payments

FFFF /. %rademark

FFFF 10. Dnearned ticket sales
Required:
Dsing the letters 5a496, indicate in which section of the balance sheet the accounts 514106 would most likely be classified.
1. a +. h
!. e ,. g
$. 9 -. g
'. c /. d
(. b 10. f

,!. A corporation's balance sheet is usually di"ided into three sections with "arious subclassifications reported
within each group in an informati"e manner. 8isted below are some typical subclassifications.
Contributed capital Cther assets
Current assets Cther liabilities
Current liabilities 3roperty, plant, K equipment
Intangible assets >etained earnings
8ong4term in"estments Accumulated other comprehensi"e income
8ong4term liabilities
Required:
Identify each of the three balance sheet sections and list the subclassifications within each section in the appropriate order.
Assets 8iabilities 2tockholders' .quity
Current assets Current liabilities Contributed capital
8ong4term in"estments 8ong4term liabilities >etained earnings
3roperty, plant, K equipment Cther liabilities Accumulated other
Intangible assets comprehensi"e income
Cther assets

,$. %he following information has been pro"ided by 2lick Company<
Dnearned rent = (00
>etained earnings 5unrestricted6 '1,000
onated capital -,000
Common stock, =( par (0,000
3remium on bonds payable -00
Bonds payable -,000
Additional paid4in capital on common stock !(,000
%reasury stock, at cost /,000
>etained earnings restricted for plant e&pansion ,,000
2inking fund for bond retirement 1,!(0
Required:
3repare the stockholders' equity section of the balance sheet for 2lick.
28ICE CC:3A?N
Balance 2heet
ecember $1, !0JJ

Stockhold
ers'
Equity

Contribute
d Capital

Commo
n stock,
=( par
=(0,000
Additio
nal
paid4in
capital
on
commo
n stock
!(,000
%otal contributed capital =,(,000
onated
capital
-,000
>etained
.arnings

Dnrestr
icted
='1,000
>estrict
ed for
plant
e&pansi
on
,,000
%otal retained earnings '-,000
%otal
contribute
d capital
and
retained
earnings
=1$1,000
8ess<
%reasury
stock, at
cost
5/,000 6
%otal
2tockhold
ers' .quity
=1!!,000

,'. Cn Aanuary 1, !010, :artine# Corporation had the following stockholders' equity account balances<
Accumulated other comprehensi"e income = $0,000
Additional paid4in capital on common stock -0,000
Common stock, =( par 5$0,000 shares authori#ed6 (0,000
>etained earnings 1'0,000
uring !010, the following e"ents occurred in the order listed and were properly recorded<
L %he company issued $,000 shares of common stock at =!0 per share.
L %he company earned net income of =!+,$00.
L %he company paid a =1.!0 per share di"idend on its common stock.
L %he company e&perienced an unreali#ed decrease in the "alue of its in"estment in a"ailable4for4sale securities of =$,000.
Required:
3repare a statement of changes in stockholders' equity for !010.
:A>%I?.G CC>3C>A%IC?
2tatement of Changes in 2tockholders' .quity
Bor Near .nded ecember $1, !010

Accumulated
Additional Cther
Common 3aid4In Capital >etained Comprehen4
2tock, =( par Cn Common .arnings si"e Income %otal
Balance,
Aanuary 1, !010 =(0,000 = -0,000 =1'0,000 =$0,000 =$00,000
?et income !+,$00 !+,$00
Cash di"idends paid 51(,+006 51(,+006
Common stock
issued 1(,000 '(,000 +0,000
Dnreali#ed decr. in "alue
AB22 5$,000 6 5$,000 6
Balance, ec
$1, !010 =+(,000 =1!(,000 =1(0,,00 =!,,000 =$+,,,00

,(. A list of statements follows<
a. A balance sheet summari#es the FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF of a company.

b. 7AA3 defines the FFFFFFFFFFFFFFFFFFFF of a corporate balance sheet.

c. %emporary in"estments in marketable securities are classified as FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF and securities
a"ailable for sale.

d. FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF is the amount of stockholders' equity that a corporation may not distribute as
di"idends.

e. Dnreali#ed increase in the "alue of a"ailable4for4sale securities is an e&ample of FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF
FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF.

f. APB Opinion No. 22 recommends that the first footnote to the financial statements describe a company's FFFFFFFFFFFFFFFFFFFF
FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF.

g. A5n6 FFFFFFFFFFFFFFFFFFFF FFFFFFFFFFFFFFFFFFFF is one that occurs between the balance sheet date and the date the annual
report is issued.
Required:
Bill in the words necessary to complete the statements.
a. financial position
b. elements
c. trading securities
d. 8egal capital
e. accumulated other comprehensi"e income
f. significant accounting policies
g. subsequent e"ent

,+. A client of your accounting firm is impressed with the precision and detail in the financial statements that
you ha"e 9ust prepared for his company. Mowe"er, he wants to know if there are any limitations to the
information contained in them.
Required:
escribe four limitations of the balance sheet.
8imitations of the balance sheet include the following< 516 it contains historical costs to "alue assets and
liabilities, which do not help users assess the likely amounts of future cash flows relating to these itemsP 5!6 it
doesn't include all of a company's economic resources or obligations 5e.g., human resources and possible legal
obligations6P 5$6 it reports many amounts that are based on estimates, which are sub9ect to changeP and 5'6
during periods of inflation, the balance sheet does not reflect the purchasing power of its assets and liabilities.

,,. A friend of the family has 9ust recei"ed her first set of financial statements from her accountant. )hen she
finds out that you are an accounting ma9or, she asks you the following question< 1)hy aren't my employees
listed as an asset on my company's balance sheet*1
Required:
)rite an e&planation describing the characteristics that an economic resource must possess in order to be
considered an asset. Include in your discussion the primary reason why 1human resources1 are not recogni#ed as
assets.
%o be considered an asset, an economic resource must be able to contribute directly or indirectly to a company's
net cash inflowsP the company must be able to obtain the item's future benefits and control others' access to itP
and the transaction or e"ent gi"ing rise to the company's right to, or control o"er, the benefits must ha"e
occurred. )hile 1human resources1 may meet these criteria, they are e&cluded from assets primarily because of
the difficulty of reliably measuring their benefits.

,-. )ith all of the turmoil in the financial markets in !00-, one of your friends has emailed you because she has
been wondering about the financial disclosure requirements for the banks and brokerage firms affected by the
market turbulence. .&plain to your friend the general accounting requirements for financial instruments.
7enerally, the BA2B requires the disclosure of the fair "alues and risks associated with financial instruments
held by companies in the financial sector 5both assets and liabilities6 whether or not the instruments must be
reported on the balance sheet. 2ignificant concentrations of credit risk must also be disclosed.
7AA3 also requires that all deri"ati"e financial instruments be reported on the balance sheet as assets or
liabilities at fair "alue. Bootnote description of the ob9ecti"es for holding the instruments, as well as strategies
for achie"ing those ob9ecti"es, must be pro"ided.

,/. A friend comes to you with a set of financial statements that he thinks contains an error. %he footnotes
contain a note on a bond issue sold after the end of the reporting period. Nour friend is sure this is an error
because the transaction occurred after the cutoff date for the financial statements.
Required:
.&plain to your friend why certain items that occur after the end of an accounting period are included in the
financial statements and the manner in which they can be disclosed.
2ignificant transactions or e"ents that occur between the balance sheet date and the date of issuance of the
annual report, which if not disclosed would cause the report to be misleading, are known as subsequent e"ents.
If the e"ent pro"ides additional e"idence concerning conditions that e&isted on the balance sheet date and
significantly affects estimates used in the preparation of the report, an ad9ustment is made. If the e"ent pro"ides
e"idence concerning conditions that did not e&ist on the report date, the information is disclosed in a note, a pro
forma statement, or an e&planatory paragraph in the auditor's report.