Critical Thinking

Critical Thinking Questions and Exercises

1. What does it mean when an asset is referred to as a current asset?

2. Explain what is included in the cash and cash equivalents amount reported on the balance sheet.

3. What does it mean that the Allowance for Bad Debts account is a contra asset?

4. Discuss the four principal alternative cost flow assumptions and explain their respective effects on the income statement and balance sheet when price levels are changing.

5. How does the impact of changing costs (inflation/deflation) influence the selection of a cost flow assumption?

6. What does it mean when an asset is referred to as a noncurrent asset?

7. What does it mean to state that balance sheet values do not represent current fair values of noncurrent assets?

8. What does it mean to prefer expensing repair and maintenance expenditures rather than capitalizing on them?

9. Describe the difference between an operating lease and a financing lease.

10. What does it mean when goodwill results from the acquisition of another firm?