QUESTION: 1577

Which of the following statements reflects the basic purposes of financial reporting?

The best indication of a firm's ability to generate favorable cash flow is information based on previous cash receipts and payments.
Financial accounting is expressly designed to measure directly the value of a business enterprise.
None of these answers.
The primary focus of financial reporting is information about an enterprise's resources.
Investments and credit decisions often are based, at least in part, on evaluations of the past performance of an enterprise.

Answer(s): E

Explanation:

Although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based, at least in part, on evaluations of past enterprise performance.

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QUESTION: 1578

Metals Inc. had the following liabilities at December 31, 1996:

Accounts payable $55,000
Unsecured notes, 8%, due 7/1/97 $400,000
Accrued expenses $35,000
Contingent liability $450,000
Deferred income tax liability $25,000
Senior bonds, 7%, due 3/31/97 $1,000,000

The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Metals Inc. Metals' legal counsel expects the suit to be settled in 1998 and has estimated that Metals will be liable for damages in the range of $450,000 to $750,000. The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in 1998. What amount should Metals report in its December 31, 1996 balance sheet for current liabilities?

None of these answers
$1,490,000
$940,000
$515,000
$1,515,000

Answer(s): B

Explanation:

A current liability is an obligation that will be liquidated within 1 year. Therefore, we need to include accounts payable, unsecured notes, accrued expenses, and the senior debt which total all together $1,490,000.

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QUESTION: 1579

The accrual basis of accounting

does not pertain to revenue recognition-only expense recognition.
recognizes the development of assets and liabilities externally.
is used only for taxes reporting purposes.
begins with the cash basis of accounting and proceeds to make the necessary adjustments.
allocates many transactions that produce cash flows to time periods other than those in which the cash flows occur.

Answer(s): E

Explanation:

Accrual accounting principles are the decision rules that state when to recognize the revenue and expense consequences of cash flows and other events.

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QUESTION: 1580

The primary purpose of the statement of cash flows is to

state the company's financial position at period-end
measure the change in the company's assets
provide information about a company's cash receipts and cash payments during the accounting period
analyze net income during the accounting period

Answer(s): C

Explanation:

Other financial statements are used to analyze revenues, expenses, assets, liabilities, and stockholders' equity.
The statement of cash flows summarizes transactions affecting cash; it is the balance sheet that states the company's financial position at a point in time.

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QUESTION: 1577

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QUESTION: 1578

Explanation:

QUESTION: 1579

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QUESTION: 1580

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