SOLUTIONS

1. B is correct. Assets are resources controlled by a company as a result of past events.
2. A is correct. Assets = Liabilities + Equity and, therefore, Assets − Liabilities = Equity.
3. A is correct. A classified balance sheet is one that classifies assets and liabilities as current or non-current and provides a subtotal for current assets and current liabilities. A liquidity-based balance sheet broadly presents assets and liabilities in order of liquidity.
4. B is correct. Goodwill is a long-term asset, and the others are all current assets.
5. A is correct. Current liabilities are those liabilities, including debt, due within one year. Preferred refers to a class of stock. Convertible refers to a feature of bonds (or preferred stock) allowing the holder to convert the instrument into common stock.
6. B is correct. The cash received from customers represents an asset. The obligation to provide a product in the future is a liability called “unearned income” or “unearned revenue.” As the product is delivered, revenue will be recognized and the liability will be reduced.
7. C is correct. Under IFRS, inventories are carried at historical cost, unless net realizable value of the inventory is less. Under US GAAP, inventories are carried at the lower of cost or market.
8. C is correct. Paying rent in advance will reduce cash and increase prepaid expenses, both of which are assets.
9. C is correct. Accrued liabilities are expenses that have been reported on a company's income statement but have not yet been paid.
10. A is correct. Initially, goodwill is measured as the difference between the purchase price paid for an acquisition and the fair value of the acquired, not acquiring, company's net assets (identifiable assets less liabilities).
11. C is correct. Impairment write-downs reduce equity in the denominator of the debt-to-equity ratio but do not affect debt, so the debt-to-equity ratio is expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.
12. B is correct. For financial assets classified as trading securities, unrealized gains and losses are reported on the income statement and flow to shareholders' equity as part of retained earnings.
13. C is correct. For financial assets classified as available for sale, unrealized gains and losses are not recorded on the income statement and instead are part of other comprehensive income. Accumulated other comprehensive income is a component of shareholders' equity
14. A is correct. Financial assets classified as held to maturity are measured at amortised cost. Gains and losses are recognized only when realized.
15. B is correct. The non-controlling interest in consolidated subsidiaries is shown separately as part of shareholders' equity.
16. C is correct. The item “retained earnings” is a component of shareholders' equity.
17. B is correct. Share repurchases reduce the company's cash (an asset). Shareholders' equity is reduced because there are fewer shares outstanding and treasury stock is an offset to owners' equity.
18. B is correct. Common-size analysis (as presented in the reading) provides information about composition of the balance sheet and changes over time. As a result, it can provide information about an increase or decrease in a company's financial leverage.
19. A is correct. The current ratio provides a comparison of assets that can be turned into cash relatively quickly and liabilities that must be paid within one year. The other ratios are more suited to longer-term concerns.
20. A is correct. The cash ratio determines how much of a company's near-term obligations can be settled with existing amounts of cash and marketable securities.
21. C is correct. The debt-to-equity ratio, a solvency ratio, is an indicator of financial risk.
22. B is correct. The quick ratio ([Cash + Marketable securities + Receivables] ÷ Current liabilities) is 1.44 ([= 1,884 + 486 + 2,546] ÷ 3,416). Given the placement of other financial assets between cash and receivables, it is reasonable to assume these are highly liquid and are probably marketable securities.
23. C is correct. The financial leverage ratio (Total assets ÷ Total equity) is 1.58 (= 13,374 ÷ 8,491).