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Unformatted text preview: CHAPTER 3 QUESTIONS 1. Three elements, as defined by the FASB, are contained in a balance sheet: assets, liabilities, and equity . These elements mea- sure the worth of an enterprise at a given point in time. The balance sheet thus re- ports what resources an enterprise has and who has claim against those resources. Two other elements, investments by own- ers and distribution to owners, are related to the equity element. Information concern- ing the change in equity is often contained in a separate statement that supplements the balance sheet. 2. In order to meet the definition of an asset, an item need not be associated with certain future benefit. To acknowledge the uncer- tainty inherent in business, the definition of an asset stipulates that the future benefit need be only probable. 3. Some liabilities, such as accounts payable and long-term debt, are denominated in precise monetary terms. However, the amounts of many liabilities must be estim- ated based on expectations about future events. 4. The difference between current assets and current liabilities, referred to as working capital, is a commonly used measure of the liquidity of an enterprise. It helps to determ- ine whether the company will be able to meet its current debt with available assets and still continue normal operations. 5. a. Assets are classified as current if (1) the asset will be realized in cash during the normal operating cycle of the business or 1 year, whichever is longer, or (2) the asset will be sold or consumed within a normal operating cycle or 1 year, whichever is longer. b. Liabilities are classified as current if li- quidation of the liability is expected to require (1) the use of current assets or (2) the creation of other current liabilities. 6. a. Cash is classified as noncurrent when it is a part of a fund that will be used to discharge noncurrent obligations. Such funds include bond retirement funds, pension funds, and preferred stock re- demption funds. Cash to be used for the acquisition of land, buildings, and equipment or cash received on long- term deposits from customers would also be reported as noncurrent. b. Receivables not reportable as current assets include those arising from un- usual transactions, such as the sale of land, buildings, and equipment or ad- vances to affiliates or employees that would not be collectible within 12 months. 7. If a short-term loan is expected to be refin- anced or paid back with the proceeds of a replacement loan, the existing short-term loan is not classified as current. This is true as long as the intent of the company is to refinance the loan on a long-term basis and the companys intent is evidenced by an actual refinancing after the balance sheet date or by the existence of an explicit refin- ancing agreement....
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