EXERCISES
Ex. 5-120—Definitions.
Provide clear, concise answers for the following.
1. What are assets?
2. What are liabilities?
3. What is equity?
4. What are current liabilities?
5. Explain what working capital is and how it is computed.
6. What are intangible assets?
7. What are current assets?
Solution 5-120
1. Assets are resources controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
2. Liabilities are present obligations of an entity arising from past events, the settlement of which is
expected to result in an outflow from an entity of resources embodying economic benefits.
3. Equity is the residual interest in the assets of an entity after deducting all its liabilities.
4. Current liabilities are obligations that are expected to be liquidated through the use of current
assets or the creation of other current liabilities.
5. Working capital is the net amount of a company’s relatively liquid resources. It is the excess of
total current assets over total current liabilities.
6. Intangible assets are economic resources or competitive advantages. They lack physical
substance and have a high degree of uncertainty about the future benefits to be received.
7. Current assets are resources (future economic benefits) expected to be converted to cash, sold, or
consumed in one year or the operating cycle, whichever is longer.
Ex. 5-121—Terminology.
In the space provided at right, write the word or phrase that is defined or indicated.
1. Obligations expected to be liquidated
through use of current assets.
1. ___________________________________
2. Statement showing financial condition at a
point in time.
2. ___________________________________
3. Probable future outflows of economic
benefits.
4. ___________________________________
4. Resources expected to be converted to
cash in one year or the operating cycle,
whichever is longer.
5. ___________________________________
5. Resources of a durable nature used in
operations.
6. ___________________________________
6. Economic rights or competitive advantages
which lack physical substance.
7. ___________________________________
7. Resources expected to provide future
economic benefits.
8. ___________________________________
8. Residual interest in the net assets of an
entity.
9. ___________________________________
Solution 5-121
1.
2.
3.
4.
Current liabilities.
Statement of financial position.
Liabilities.
Current assets.
5.
6.
7.
8.
Property, plant, and equipment.
Intangible assets.
Assets.
Equity.
Ex. 5-122—Current assets.
Define current assets without using the word "asset."
Solution 5-122
Current assets are resources (future economic benefits) expected to be converted to cash, sold, or
consumed in one year or the operating cycle, whichever is longer.
Ex. 5-123—Account classification.
a.
b.
c.
d.
e.
ASSETS
Investments
Plant and equipment
Intangibles
Other assets
Current assets
f.
g.
h.
i.
j.
k.
l.
EQUITY AND LIABILITIES
Share capital
Share premium
Accumulated comprehensive income
Retained earnings
Non-current liabilities
Current liabilities
Items excluded from statement of financial position
Using the letters above, classify the following accounts according to the preferred and ordinary
statement of financial position presentation.
___
1. Bond sinking fund
___
2. Prepaid pension cost
___
3. Restricted retained earnings
___
4. Current maturity of long-term debt
___
5. Bonds payable (due in 3 years)
___
6. Unrealized gain on available-for-sale securities
___
7. Securities owned by another company which are collateral for that company's note
___
8. Trading securities
___
9. Inventory
___ 10. Mortgage payable
___ 11. Patents
___ 12. Unearned revenue
Solution 5-123
1.
2.
3.
4.
a
d
i
k
5.
6.
7.
8.
j
h
l
e
9.
10.
11.
12.
e
j
c
k
Ex. 5-124—Valuation of Statement of Financial Position Items.
Use the code letters listed below (a – l) to indicate, for each statement of financial position item (1 –
13) listed below the usual valuation reported on the statement of financial position.
____ 1. Share capital–ordinary
____ 7. Long-term bonds payable
____ 2. Prepaid expenses
____ 8. Land (in use)
____ 3. Property, plant, and equipment
____ 9. Land (future plant site)
____ 4. Trade accounts receivable
____ 10. Patents
____ 5. Copyrights
____ 11. Trading securities
____ 6. Merchandise inventory
____ 12. Trade accounts payable
a. Par value
b. Current cost of replacement
c. Amount payable when due, less unamortized discount or plus unamortized premium
d. Amount payable when due
e. Market value at statement of financial position date
f.
Net realizable value
g. Lower of cost or net-realizable value
h. Original cost less accumulated amortization
i.
Original cost less accumulated depletion
j.
Original cost less accumulated depreciation
k. Historical cost
l.
Unexpired or unconsumed cost
Solution 5-124
1.
2.
3.
4.
a
l
j
f
5.
6.
7.
8.
h
g
c
k
9.
10.
11.
12.
k
h
e
d
Ex. 5-125—Statement of financial position classifications.
Typical statement of financial position classifications are as follows.
a. Investments
g. Share Premium
b. Plant Assets
h. Retained Earnings
c. Intangible Assets
i. Non-Current Liabilities
d. Other Assets
j. Current Liabilities
e. Current Assets
k. Notes to Financial Statements
f. Share Capital
l. Not Reported on Statement of Financial
Position
Indicate by use of the above letters how each of the following items would be classified on a statement
of financial position prepared at December 31, 2011. If a contra account, or any amount that is
negative or opposite the normal balance, put parentheses around the letter selected. A letter may be
used more than once or not at all.
___
1. Accrued salaries and wages
___
2. Rental revenues for 3 months collected
in advance
___
3. Land used as plant site
___
4. Equity securities classified as trading
____ 14. Goodwill
____ 15. 90 day notes payable
___
5. Cash
___
6. Accrued interest payable due in 30
days
___
7. Share premium–preference shares
___
8. Dividends in arrears on preference
shares
___
9. Petty cash fund
____ 16. Investment in bonds of another
company; will be held to 2015
maturity
____ 17. Land held for speculation
____ 18. Death of company president
___ 10. Ordinary shares
___ 11. Bond indenture covenants
____ 19. Current maturity of bonds payable
___ 12. Allowance for doubtful accounts
___ 13. Accumulated depreciation
____ 20. Trade accounts payable
____ 21.
Preference shares ($10 par)
____ 22.
Prepaid rent for next 12 months
____ 23. Copyright
Solution 5-125
1.
2.
3.
4.
5.
j
j
b
e
e
6.
7.
8.
9.
10.
j
g
k
e
f
11.
12.
13.
14.
15.
k
(e)
(b)
c
j
16.
17.
18.
19.
20.
a
a
l
j
j
21.
22.
23.
24.
25.
f
e
c
(c)
h
Ex. 5-126—Statement of financial position classifications.
The various classifications listed below have been used in the past by Maris Company on its
statement of financial position. It asks your professional opinion concerning the appropriate
classification of each of the items 1-14 below.
a.
b.
c.
d.
e.
Investments
Plant and Equipment
Intangible Assets
Other Assets
Current Assets
f.
g.
h.
i.
Share Capital and Share Premium
Retained Earnings
Non-Current Liabilities
Current Liabilities
Indicate by letter how each of the following items should be classified. If an item need not be reported
on the statement of financial position, use the letter "X." A letter may be used more than once or not at
all. If an item can be classified in more than one category, choose the category most favored by the
authors of your textbook.
___
1. Employees' payroll deductions.
___
2. Cash in sinking fund.
___
3. Rent revenue collected in advance.
___
4. Equipment retired from use and held for sale.
___
5. Patents.
___
6. Payroll cash fund.
___
7. Accrued revenue on temporary investments.
___
8. Advances to salespersons.
___
9. Bank overdraft.
___ 10. Salaries which company budget shows will be paid to employees within the next year.
___ 11. Work in process.
___ 12. Appropriation for bonded indebtedness.
Solution 5-126
1.
2.
3.
4.
i
a
i
a or e
5.
6.
7.
8.
c
e
e
e
9.
10.
11.
12.
i
x
e
g
Ex. 5-127—Statement of financial position classifications.
The various classifications listed below have been used in the past by Hale Company on its statement
of financial position.
a.
b.
c.
d.
Investments
Plant and Equipment
Intangible Assets
Current Assets
e.
f.
g.
h.
Share Capital and Share Premium
Retained Earnings
Non-current Liabilities
Current Liabilities
Instructions
Indicate by letter how each of the items below should be classified at December 31, 2012. If an item is
not reported on the December 31, 2012 statement of financial position, use the letter "X" for your
answer. If the item is a contra account within the particular classification, place parentheses around
the letter. A letter may be used more than once or not at all.
Sample question and answer:
(d)
Allowance for doubtful accounts.
___
1. Customers' accounts with credit balances.
___
2. Bond sinking fund.
___
3. Salaries which the company's cash budget shows will be paid to employees in 2013.
___
4. Accumulated depreciation.
___
5. Appropriation for plant expansion.
___
6. Amortization of patents for 2012.
___
7. Deferred income taxes payable.
___
8. Trading securities.
___
9. Launching of Hale’s Internet retailing division in February, 2013.
___ 10. Cash dividends declared on December 15, 2012 payable to shareholders on January 15,
2013.
Solution 5-127
1. h
2. a
3. x
4.
5.
6.
(b)
f
x
7.
8.
9.
g
d
x
10.
h
Ex. 5-128—Statement of cash flows.
For each event listed below, select the appropriate category which describes the effect of the event on
a statement of cash flows:
a. Cash provided/used by operating activities.
b. Cash provided/used by investing activities.
c. Cash provided/used by financing activities.
d. Not a cash flow.
___
1. Payment on long-term debt
___
2. Issuance of bonds at a premium
___
3. Collection of accounts receivable
___
4. Cash dividends declared
___
5. Issuance of stock to acquire land
___
6. Sale of available-for-sale securities (long-term)
___
7. Payment of employees' wages
___
8. Issuance of share capital–ordinary for cash
___
9. Payment of income taxes payable
___ 10. Purchase of equipment
___ 11. Purchase of treasury stock (ordinary)
___ 12. Sale of real estate held as a long-term investment
Solution 5-128
1. c
2. c
3. a
4.
5.
6.
d
d
b
7.
8.
9.
a
c
a
10.
11.
12.
b
c
b
Ex. 5-129—Statement of cash flows ratios.
Financial statements for Hilton Company are presented below:
Hilton Company
Statement of Financial Position
December 31, 2012
Assets
Buildings and equipment
Accumulated depreciation—
buildings and equipment
Patents
Accounts receivable
Cash
$150,000
(50,000)
20,000
35,000
40,000
$195,000
Equity & Liabilities
Share capital–ordinary
Retained earnings
Bonds payable
Accounts payable
$ 65,000
60,000
50,000
20,000
$195,000
Hilton Company
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable
Increase in accounts payable
Depreciation—buildings and equipment
Gain on sale of equipment
Amortization of patents
Net cash provided by operating activities
$50,000
$(16,000)
8,000
15,000
(6,000)
2,000
Cash flows from investing activities
Sale of equipment
Purchase of land
Purchase of buildings and equipment
Net cash used by investing activities
12,000
(25,000)
(48,000)
Cash flows from financing activities
Payment of cash dividend
Sale of bonds
Net cash provided by financing activities
(15,000)
40,000
3,000
53,000
(61,000)
Net increase in cash
Cash, January 1, 2012
Cash, December 31, 2012
25,000
17,000
23,000
$40,000
At the beginning of 2012, Accounts Payable amounted to $12,000 and Bonds Payable was $10,000.
Instructions
Calculate the following for Hilton Company:
a. Current cash debt coverage ratio
b. Cash debt coverage ratio
c. Free cash flow
Solution 5-129
Net cash provided by operating activities
a. Current cash debt coverage ratio = ——————————————————
Average current liabilities
$53,000
$53,000
= ——————————— = ———— = 3.3 : 1
($12,000 + $20,000) ÷ 2
$16,000
Net cash provided by operating activities
b. Cash debt coverage ratio = ——————————————————
Average total liabilities
$53,000
$53,000
= ——————————— = ———— = 1.2 : 1
($22,000 + $70,000) ÷ 2
$46,000
c. Free cash flow = Net cash provided by operating activities –
capital expenditures and dividends
= $53,000 – *$73,000 – $15,000 = $(35,000)
*$25,000 + $48,000