Question 1

A liability is normally classified as a current liability if it is to be paid within the coming year.

Accepted Answer

Current liabilities are those that are due within the coming year or operating cycle, whichever is longer.

Question 2

Profitability means having enough funds on hand to pay debts when they fall due.

Accepted Answer

Profitability refers to the ability to generate profits or income that exceed expenses, not just having enough funds to pay debts as they come due.

Question 3

Long-term investments appear in the property, plant, and equipment section of the statement of financial position.

Accepted Answer

Long-term investments are typically listed in a separate section of the statement of financial position (balance sheet) from property, plant, and equipment, as they represent different types of assets.

Question 4

Listing assets and liabilities in reverse order of liquidity is not permitted in Canada.

Accepted Answer

In Canada, the generally accepted accounting principles (GAAP) require assets and liabilities to be listed in order of liquidity, with the most liquid items listed first. Liabilities that are due within one year are also typically listed before those due in later years. Therefore, listing assets and liabilities in reverse order of liquidity is not permitted in Canada.

Question 5

Solvency ratios measure the short-term ability of the company to pay its maturing obligations.

Accepted Answer

Solvency ratios actually measure the long-term ability of the company to meet its financial obligations. Short-term ability to pay maturing obligations is measured by liquidity ratios.

Question 6

Calculating financial ratios can give clues to underlying conditions that may not be noticed by examining each financial statement item separately.

Accepted Answer

Financial ratios allow for comparisons between different aspects of a company's financial statements, revealing patterns and relationships that may not be apparent when looking at individual line items.

Question 7

Mortgages and pension liabilities are examples of non-current liabilities.

Accepted Answer

Mortgages and pension liabilities are both examples of long-term obligations that are due beyond one year, which is why they are considered non-current liabilities in financial accounting.

Question 8

The statement of financial position is normally presented as follows, when ordered in order of liquidity: Current assets, current liabilities, non-current assets, non-current liabilities, and shareholders' equity.

Accepted Answer

The statement of financial position is typically ordered as: non-current assets, current assets, current liabilities, non-current liabilities, and shareholders' equity, reflecting the liquidity and maturity of assets and liabilities.

Question 9

A single ratio by itself is not very meaningful.

Accepted Answer

A single ratio does not provide enough context or comparison to interpret its significance. It is more informative when compared to another ratio or benchmark.

Question 10

From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

Accepted Answer

From a creditor's point of view, the higher the total debt to total assets ratio, the higher the risk that the company may be unable to pay its obligations.

Question 11

Solvency ratios measure the entity's ability to survive over a long period.

Accepted Answer

Solvency ratios assess the ability of an entity to meet its long term obligations and remain financially stable over an extended period.

Question 12

Special rights and privileges that provide a future economic benefit to the company are classified as intangible assets.

Accepted Answer

Intangible assets include items such as patents, trademarks, copyrights, and other rights that provide future economic benefits to the company.

Question 13

Analysis of financial statements is enhanced with the use of comparative data.

Accepted Answer

Comparative data provide a point of reference to evaluate financial performance over time and against industry averages or competitors.

Question 14

The most liquid resource is inventory.

Accepted Answer

The most liquid resource is cash or cash equivalents, as they can easily be used to pay for goods and services. Inventory may take time to sell and convert into cash, making it less liquid.

Question 15

The debt to total assets ratio measures the percentage of assets financed by creditors rather than shareholders.

Accepted Answer

This is correct. The debt to total assets ratio is a financial ratio that calculates the percentage of total assets that are financed by debt, which is essentially from creditors like banks and bondholders, rather than shareholder funds.

Question 16

The investment classification on the statement of financial position normally includes investments that are intended to be held for a short period of time (less than one year).

Accepted Answer

The investment classification on the statement of financial position normally includes investments that are intended to be held for a long period of time (more than one year). Short-term investments are typically classified separately as current assets.

Question 17

The main difference between intangible assets and property, plant, and equipment is the length of the asset's life.

Accepted Answer

The answer of The main difference between intangible assets and...

Question 18

The statement of financial position is normally presented as follows, when ordered in order of reverse liquidity: Non-current assets, current assets, shareholders' equity, non-current liabilities, and current liabilities.

Accepted Answer

The statement of financial position is normally presented in order of reverse liquidity, with non-current assets listed first, followed by current assets, shareholders' equity, non-current liabilities, and current liabilities.

Question 19

Intracompany comparisons are based on comparisons with competitors in the same industry.

Accepted Answer

Intracompany comparisons are based on comparing a company's financial data over different periods or divisions within the same company. Comparisons with competitors in the same industry are called inter-company comparisons.

Question 20

Liquidity ratios are concerned with the frequency and amounts of dividend payments.

Accepted Answer

Liquidity ratios measure a company's ability to meet short-term obligations and do not directly relate to dividend payments. Dividend payout ratios, on the other hand, are used to measure the amount of earnings a company distributes to its shareholders in the form of dividends.

Quiz 2: A Further Look at Financial Statements