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Exam 3: The Balance Sheet and Notes to the Financial Statements

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Question 1

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Martin Corporation was organized on January 3, 2012. Martin was authorized to issue 50,000 shares of common stock with a par value of $10 per share. On January 4, Martin issued 30,000 shares of common stock at $25 per share. On July 15, Martin issued an additional 10,000 shares at $20 per share. Martin reported income of $33,000 during 2012. In addition, Martin declared a dividend of $.50 per share on December 31, 2012. See Martin Corporation information above. The amount reported on Martin Corporation's December 31, 2012, balance sheet as stockholders' equity was

A) $400,000.
B) $550,000.
C) $950,000.
D) $963,000.

E) All of the above
F) None of the above

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Question 2

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Which of the following is not true regarding reserves that appear in the equity section of the balance sheet of foreign companies?

A) Reserves represent cash set aside to fund capital projects.
B) Reserves are different categories found in the equity section of the balance sheet.
C) The balances in reserve accounts can affect an entity's legal ability to pay cash dividends.
D) An extensive description of each reserve shown on the balance sheet is provided.

E) B) and C)
F) All of the above

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Question 3

Multiple Choice

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Which of the following would not be classified as a current liability on a classified balance sheet?

Information from Blain Company's balance sheet is as follows: Current assets: What is Blain's current ratio?

Unearned rent would normally appear on the balance sheet as a

Which of the following generally is considered a limitation of the balance sheet?

Baggins Company prepared a draft of its 2011 balance sheet. The draft statement reported total assets of $437,500. Included in this total assets figure were the following items: At which amount should Baggins' total assets be correctly reported in the December 31, 2011, balance sheet?

Maryk Electronics Inc. reported the following items on its December 31, 2011, trial balance: The amount that should be recorded on Maryk's balance sheet as total liabilities is

A contingent liability should be recorded when

The term "deficit" refers to

Trimble and Co., CPAs, has just been retained by the Peterson Company to audit Peterson's financial statement for the last fiscal year. Peterson Company shows substantial amounts of inventory on its balance sheet. Karen Page has just joined the staff of Trimble and Co. and has been assigned to assist in the audit of Peterson's inventory. Required: Identify the major issues regarding the inventory of Peterson Company that Karen needs to consider in determining if Peterson has properly accounted for and reported its inventory.

Certain assets currently are omitted from the balance sheet. For example, the value of the human resources of the firm are not reported. Nevertheless, investors and others might greatly benefit from a knowledge of the extent to which human assets have increased or decreased during a given period. Values certainly may be attributed to individuals or groups based on their ability to render future economic services. A major issue is the method that should be employed in measuring human assets. Identify some possible ways of measuring human resources.

Seahawk Company's adjusted trial balance at December 31, 2012, includes the following account balances: What amount should Seahawk report as total owners' equity in its December 31, 2012, balance sheet?

Neptune Corporation's trial balance contained the following account balances at December 31, 2011: On Neptune's December 31, 2011, balance sheet, the current assets total should be

The balance sheet provides information concerning liquidity, financial flexibility, and information for calculating various financial ratios. The balance sheet serves as a major indicator of an enterprise's ability to survive. Nevertheless, the analysis of the balance sheet should be approached with a clear understanding of the limitations of the statement. What are the major limitations of the balance sheet that should be recognized in analyzing the statement?

How should a contingent liability be reported in the financial statements when it is "reasonably possible" the company will have to pay the liability at a future date?

In relation to a set of 2012 basic financial statements, a subsequent event is one that

Barney Co.'s current ratio is 2:1. Which of the following transactions would normally increase Barney's current ratio?

You have just joined the public accounting firm of Jensen, Barnes, and Summers upon graduating from State University. You are assigned to the audit of the Hansen Company, a manufacturer of electronic musical instruments. Part of your responsibility on the audit will be the examination of the property, plant, and equipment of the client. Required: Use your knowledge of financial statements plus your experience in your principles of accounting course to develop a list of questions regarding property, plant, and equipment you feel you should answer as an independent auditor in order to ensure that the statements provide relevant and reliable information to the users of Hansen Company's financial statements.

Knowledgeable users of financial statements recognize that the numbers reported in a company's financial statements depend on the accounting policies used to generate the numbers. Various choices of accounting policies exist, such as LIFO vs. FIFO for inventory costing and straight-line vs. double-declining balance for depreciation. APB Opinion No. 22 requires that a company disclose the accounting policies used to ensure that statement users have the information they need to make sound decisions. What problems arise from the large variety of accounting choices available?