The peaks and valleys of the business cycle tend to be smoothed out using which inventory method?
Answer(s): B
When prices are moving either upward or downward, the cost of goods sold (under LIFO) will show costs closer to the price level at the time the goods were sold. Therefore the LIFO method tends to show a smaller net income during inflationary times and a larger net income during deflationary times than other methods of inventory valuation.
Which of the following investments in debt securities would not normally be classified as long-term?
Only held-to-maturity and available-for-sale securities are potential non-current investments. Trading securities are always considered to be current in nature, whereas held-to-maturity and available-for- sale securities may be classified as long-term should their maturity, or management's intent dictate.
Which of the following best describes an income statement?
Answer(s): E
An income statement measures a company's financial performance between balance sheet dates and, hence, reflects a period of time. It lists revenues, expenses, gains, and losses of a company over a time period.
Which of the following factors would affect the authenticity of a firm's receivables?
Current industry practices will provide clues as to the collectibility of receivables; e.g., a rapidly deteriorating industry could cause a large percentage of receivables to be uncollectible. A firm could extend credit very liberally, in which case the quality of the receivables would be suspect. Additionally, a liberal policy for returns and allowances might cause the value reported on a firm's balance sheet to be overstated.
Which of the following best describes an balance sheet?
Answer(s): D
A balance sheet provides a detailed listing of a company's assets, liabilities, and equity at a point in time. This provides a glimpse at a company's financial condition.
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