QUESTION: 1617

In a classified balance sheet the following is always true:

Current assets include only items that will be converted into cash within 1 year.
Assets and liabilities are broken down as current and non-current.
Current assets divided by current liabilities will equal working capital.
All of these answers are true.

Answer(s): B

Explanation:

A classified balance sheet always breaks down current and non-current assets and liabilities. Items defined as current assets are those that will be converted to cash or used in operations within one year or the operating cycle, whichever is longer. Current liabilities are obligations due during the same period. Current assets minus current liabilities is equal to working capital.

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QUESTION: 1618

Which of the following is a valuable investigation tool for analysis of the collectibility of a firm's receivables?

All of these answers.
Determining patterns of receivables for peers as a percent of sales.
An examination of any customer concentrations.
An analysis of the adequacy of allowances for trade discounts, and returns and allowances.
An aging schedule.

Answer(s): A

Explanation:

Each of the above mentioned tools are valuable in assessing the collectibility of a firm's accounts receivables.
An aging schedule will pinpoint which customers are not paying within terms. An analyst should investigate if a firm is understating allowances for discounts, returns and allowances, as this would overstate receivables. If too much of a firm's sales are made to one or more firm's that are experiencing financial distress, receivables are at risk.

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QUESTION: 1619

Which of the following is/are true under GAAP?

Inventories can only be "written down" but not "written up."
II. Marketable securities are carried at acquisition cost.
III. For income tax purposes, LIFO is preferable to FIFO during inflation.
II only
I, II & III
III only
I & III

Answer(s): C

Explanation:

(I) is not true since after a write-down, inventories can be written back up to the original cost if the prices of goods increase sufficiently. (II) is also not true since marketable securities are carried at current market value.
Finally, when prices are rising, the COGS under LIFO is higher than that under FIFO, leading to lower tax payments.

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QUESTION: 1620

Which of the following is/are FALSE?

Over the life of the firm, income and cash flow are the same.
II. Cash accounting follows the Matching Principle of matching cash flows to appropriate periods.
III. Accrual accounting matches revenues with the associated costs.
IV. Accrual accounting allocates many cash flows to time periods other than those in which they occur.
II only
I, III & IV
III & IV
I, II, III & IV

Answer(s): A

Explanation:

Unlike Accrual accounting, Cash accounting recognizes revenues and expenses when cash flows occur, not necessarily when the earnings process is complete or goods and services consumed.

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QUESTION: 1617

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QUESTION: 1620

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