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31. Bao CORP. sells 1-year memberships to its Wine Club for $180. Wine Club members each received a bottle of white wine and a bottle of red wine, selected by the club director, four times each year at the beginning or each quarter. To properly account for sales of Wine Club memberships, Bao will record: A. an asset for prepaid sales. B. a liability for accrued expenses. C. a liability for unearned revenue.

Ans: C. Sales revenue for which the product or service has yet to be delivered gives rise to a liability account, unearned revenue. This liability will be reduced as the product or service is actually delivered.

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32. Time-series analysis of a firm’s common-size balance sheets reveals the following data: 2010 2011 2012 Current assets 20% 22% 25% Inventory 8% 9% 11% Short-term debt 10% 11% 12% Long-term debt 24% 21% 18% Based only on the data provided, an analyst can conclude that the firm’s: A. debt ratio is decreasing. B. quick ratio is decreasing. C. inventory/ sales ratio is increasing.

Ans: A. The debt ratio is total debt to total assets. Because common-size balance sheet data are stated as percentages of total assets, the debt ratio can be determined from the data given. 2010: 10%+24%=34% 2011: 11%+21%=32% 2012: 12%+18%=30%. B and C are incorrect. The debt ratio is decreasing over the period shown. Neither the inventory/ sales ratio nor the quick ratio can be determined from the data given because the data do not include sales or current liabilities.

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33. For which of the following investments in securities is a firm most likely to report unrealized gains or losses on its income statement? A. Preferred stock, which the firm classifies as available-for-sale. B. Five-year bonds, which the firm purchased in a private placement. C. Listed call options, which the firm intends to exercise at expiration.

Ans: C. Options are derivatives, which are reported at fair value on the balance sheet with unrealized gains and losses recognized on the income statement. Available-for-sale securities are marked on the balance sheet, but unrealized gains and losses are reported in owners’ equity as other comprehensive income. Bonds purchased in a private placement cannot be resold to the public and therefore are likely to be classified as held-to-maturity, in which case the firm does not recognize unrealized gains or losses.

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34. If a company presents its balance sheet in a format that includes subtotals for current assets, current liabilities, noncurrent assets, and noncurrent liabilities, the balance sheet is most likely presented: A. in a report format. B. in an account format. C. as a classified balance sheet.

Ans: C. A classified balance sheet has accounts grouped by type and presents subtotals for these groups of assets.