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Chapter 5: Question 9Q (page 237)
How does separating current assets from property, plant, and equipment in the balance sheet help analysts?
Classification of assets helps the analyst by simplifying the process ofratio analysis and financial statement analysis.
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(Classification of Balance Sheet Accounts) Presented below are the captions of Faulk Company’s balance sheet.
(a) Current assets | (f) Current liabilities |
(b) Investments | (g) Noncurrent liabilities |
(c) Property, plant, and equipment | (h) Capital stock |
(d) Intangible assets | (i) Additional paid-in capital |
(e) Other assets | (j) Retained earnings |
Instructions
Indicate by letter where each of the following items would be classified.
1. Preferred stock | 11. Cash surrender value of life insurance |
2. Goodwill | 12. Note payable |
3. Salaries and wages payable | 13. Supplies |
4. Account payable | 14. Common stock |
5. Building | 15. Land |
6. Equity investment (trading) | 16. Bond sinking fund |
7. Current maturity of long-term debt | 17. Inventory |
8. Premium on bond payable | 18. Prepaid insurance |
9. Allowance for doubtful accounts | 19. Bond payable |
10. Accounts receivable | 20. Income tax payable |
Grant Wood Corporation’s balance sheet at the end of 2016 included the following items.
Current assets (\(Cash 82,000) | \)235,000 | Current liabilities | \(150,000 |
Land | 30,000 | Bond payable | 100,000 |
Building | 120,000 | Common stock | 180,000 |
Equipment | 90,000 | Retained earnings | 44,000 |
Accumulated depreciation – Building | (30,000) | ||
Accumulated depreciation – Equipment | (11,000) | ||
Patents | 40,000 | ||
Total | \)474,000 | Total | \(474,000 |
The following information is available for 2017.
1. Net income was \)55,000.
2. Equipment (cost \(20,000 and accumulated depreciation \)8,000) was sold for \(10,000.
3. Depreciation expense was \)4,000 on the building and \(9,000 on equipment.
4. Patent amortization was \)2,500.
5. Current assets other than cash increased by \(29,000. Current liabilities increased by \)13,000.
6. An addition to the building was completed at a cost of \(27,000.
7. A long-term investment in stock was purchased for \)16,000.
8. Bonds payable of \(50,000 were issued.
9. Cash dividends of \)30,000 were declared and paid.
10. Treasury stock was purchased at a cost of $11,000.
Instructions
(Show only totals for current assets and current liabilities.)
(a) Prepare a statement of cash flows for 2017.
(b) Prepare a balance sheet at December 31, 2017.
How does information from the balance sheet help users of the financial statements?
What is the relationship between current assets and current liabilities?
The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer
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