Question 1

The stockholders' equity section of the balance sheet includes redeemable preferred stock.

Accepted Answer

Redeemable preferred stock is typically classified as a liability or mezzanine equity, not stockholders' equity, because it has a mandatory redemption feature.

Question 2

The principal financial statements are the balance sheet,income statement,and statement of cash flows.

Accepted Answer

This is true. The three principal financial statements are the balance sheet, income statement, and statement of cash flows.

Question 3

Which of the following would not be considered a subsequent event to financial statements?

Accepted Answer

Subsequent events to financial statements typically include significant events that can affect the financial position or performance of a company, such as bankruptcy of a major customer, major purchases, incurring substantial debt, or issuing substantial stock. Hiring employees for a new store, while an operational decision, does not directly impact the financial statements in the same way and is generally not considered a significant subsequent event requiring disclosure.

Question 4

Corporations do not use a standard title for owners' equity.

Accepted Answer

Corporations have various titles for owners' equity such as shareholders' equity, stockholders' equity, or simply equity. There is no standard title that is universally used by all corporations.

Question 5

Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

Accepted Answer

This statement accurately defines assets according to the International Financial Reporting Standards (IFRS).

Question 6

Deferred taxes are caused by using different accounting methods for tax and financial reporting purposes.

Accepted Answer

Deferred taxes arise due to temporary differences in accounting methods used for tax purposes and financial reporting purposes. This creates timing differences that result in deferred tax assets or liabilities on companies' balance sheets.

Question 7

Generally accepted accounting principles and the Internal Revenue Code of tax law require that the same depreciation method be used for both the financial statements and the federal tax return.

Accepted Answer

Generally Accepted Accounting Principles (GAAP) and the Internal Revenue Code (IRC) often allow for different depreciation methods for financial reporting and tax purposes, respectively. For financial statements, companies may use methods that match the expense with the revenue it generates, while for tax purposes, they might choose methods that accelerate depreciation to defer taxes.

Question 8

All intangibles are amortized over their useful lives or their legal lives,whichever is shorter.

Accepted Answer

Not all intangibles are amortized; for example, goodwill and trademarks with indefinite lives are not amortized but are instead tested annually for impairment.

Question 9

The financial statements of legally separate entities may be issued to show the financial position and income as they would appear if the companies were one legal entity.Such statements reflect a legal,rather than an economic,concept of the entity.

Accepted Answer

The financial statements that combine the financial position and income of legally separate entities as if they were one entity reflect an economic, rather than a legal, concept of the entity. This approach is used in consolidated financial statements and aims to present the economic substance over the legal form.

Question 10

The purpose of a balance sheet is to show the financial condition of an accounting entity for a period of time.

Accepted Answer

A balance sheet shows the financial condition of an accounting entity at a specific point in time, not over a period of time.

Question 11

Noncontrolling interest reflects the ownership of noncontrolling shareholders in the equity of consolidated subsidiaries that are less than wholly owned.

Accepted Answer

Noncontrolling interest, also known as minority interest, represents the portion of equity in a consolidated subsidiary that is not owned by the parent company. It reflects the ownership of noncontrolling shareholders in the subsidiary that is less than 100%. Therefore, the statement is true.

Question 12

A sole proprietorship form of business has only one owner.

Accepted Answer

A sole proprietorship is a type of business entity that is owned and run by a single individual, making it a business form with only one owner.

Question 13

When preferred stock has a preference as to dividends,the current year's preferred dividend must be paid before a dividend can be paid to common stockholders.

Accepted Answer

When preferred stock has a preference as to dividends, it means that the preferred stockholders have the right to receive their dividend before any dividend can be paid to common stockholders. Therefore, the current year's preferred dividend must be paid first.

Question 14

When a firm repurchases its own stock and retires it,the stock is called treasury stock.

Accepted Answer

When a firm repurchases its own stock and retires it, the stock is not called treasury stock. Treasury stock refers to shares that have been repurchased by the company and are held in the company's treasury. Retired shares are permanently canceled and cannot be reissued, whereas treasury shares can be reissued or sold by the company in the future.

Question 15

Long-term investments,usually stocks and bonds of other companies,are often held to maintain a business relationship or exercise control.

Accepted Answer

Long-term investments can help maintain a business relationship with another company or provide an opportunity to vote and exercise control over the company's decisions.

Question 16

Current assets are listed on the balance sheet in order of liquidity.

Accepted Answer

This is a true statement. Current assets are listed on the balance sheet in order of liquidity, meaning the assets that can be quickly and easily converted into cash will appear at the top of the list. Examples of current assets include cash, accounts receivable, and inventory.

Question 17

If dividends are not declared by the board of directors in a particular year,a holder of cumulative preferred stock will never be paid that dividend.

Accepted Answer

Holders of cumulative preferred stock are entitled to receive unpaid dividends from previous years before any dividends are paid to common stockholders. These dividends accumulate until they are paid.

Question 18

A quasi-reorganization is an accounting procedure equivalent to an accounting fresh start.

Accepted Answer

A quasi-reorganization is an accounting procedure that allows a company to reorganize its financial statements as if it had just started a new business. It helps to remove old liabilities, write off accumulated losses, and restructure the company's financial statements. It is equivalent to a fresh start accounting, which allows a company to start over with a clean slate.

Question 19

Preferred stock usually has voting rights.

Accepted Answer

Preferred stock typically does not have voting rights, which is one of the main differences from common stock.

Question 20

Warranty obligations are estimated in order to recognize the obligation at the balance sheet date and to charge the expense to the period of the sale.

Accepted Answer

This statement is true. When a company sells a product with a warranty, it incurs an obligation to provide repairs or replacements if the product fails during the warranty period. To account for this obligation, the company estimates the expected cost of fulfilling warranty claims and records the estimated expense as a liability on its balance sheet. The expense is also charged to the period in which the sale was made as an offsetting entry to revenue.

Quiz 3: Balance Sheet