Accrual Basis Balance Sheet
Easy Practice Test
Introduction to Accounting
Accrual Basis Balance Sheet
Easy Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. accounts payable
b. accounts receivable
c. prepaid receivable
d. incurred receivable
Answer
a. customers prepay the company
b. the company prepays customers
c. the company prepays for services to be provided in a later period
d. the company prepays for services that were provided in a previous period
Answer
a. balance sheet
b. income statement
c. statement of cash flows
d. statement of stockholder’s equity
Answer
a. the cumulative cost of using long-term physical assets since the purchase
b. the cost of using long-term physical assets for the current period only
c. the cost of using supplies and all assets that are used up in the current period
d. the cost of using intangible assets for the current period only
Answer
a. sales, cost of goods sold, and gain on sale of assets
b. sales, accounts receivable, accounts payable and inventory
c. cost of goods sold, inventory, cash, and gain on sale of assets
d. accounts receivable, sales, inventory and cost of goods sold
Answer
Gains and losses are not recorded for primary day to day business and selling goods to customers is part of day to day business.
a. unearned revenue
b. prepaid expense
c. accounts payable
d. nothing
Answer
a. unearned revenue
b. prepaid expense
c. accounts payable
d. nothing
Answer
a. paid for goods
b. paid for goods that have not yet been provided
c. is expected to pay for the goods
d. will defer payment until a future period
Answer
a. pay in the next period
b. not an expense until the service is provided
c. provided by the company
d. not yet paid by the company
Answer
a. unearned revenue
b. accrued expenses
c. accrued liabilities
d. prepaid expenses
Answer
balance sheet as of December 31st.
CA Current asset
CL Current liability
LTA Long term asset
LTL Long term liability
SE Stockholder’s Equity
N Not reported
________a. customers owe the company
________b. company owes suppliers
________c. company purchases it own common stock
________d. services provided to customers
________e. assets that will be used up in day to day business
________ f. the right to use technological innovations
________ g. amounts owed for various operating expenses
________ h. ownership by investors
________ i. amounts owed to investors to be paid in 10 years
________ j. total cumulative cost of using long term assets
________ k. cost of goods provided to customers
________ l. customer paid for services before the company provides
Answer
CL b. accounts payable
SE c. treasury stock
N d. sales
CA e. supplies
LTA f. patents
CL g. accrued expenses
SE h. common stock
LTL i. bonds payable
LTA j. accumulated depreciation
N k. cost of goods sold
CL l. unearned revenues
| Accounts Payable | 27,000 | Long-term Notes Receivable | 15,000 | |
| Accounts Receivable | 22,000 | Patent, net | 36,000 | |
| Building | 201,000 | Accrued Expenses | 6,000 | |
| Dividends Paid | 8,000 | Marketing Expense | 15,000 | |
| Cash | 15,000 | Long Term Debt | 120,000 | |
| Equipment | 76,000 | Common Stock | 50,000 | |
| Interest Income | 2,000 | Rent Expense | 11,000 | |
| Retained Earnings | ?? | Inventory | 26,000 | |
| Salary Expense | 32,000 | Restructuring Expense | 25,000 | |
| Prepaid Expenses | 8,000 | Accumulated depreciation | 42,000 | |
| Long term Investments | 100,000 | Treasury Stock | 5,000 |
Prepare a balance sheet in proper format for the company as of December 31st
Answer
To find retained earnings: 1st: make total liabilities and owner’s equity equal to total assets. 2nd: Subtract total liabilities from total liabilities and owner’s equity to get total owner’s equity. 3rd: Subtract common stock from total owner’s equity to get the retained earnings amount.
Subtotals and totals are very important.
_______1. Borrow money from the bank
_______2. Pay cash for inventory to sell to the customers
_______3. Issue common stock to investors
_______4. Purchase a truck for company use, agree to a note payable
_______5. Pay employees who worked this week
_______6. Receive the utility bill – it will be paid later
_______7. Sell goods to a customer on account
_______8. Pay for insurance for the next 6 months
_______9. Use cash to make an investment to be held long term
______10. Purchase the company’s own stock from investors
Answer
NA 2. Pay cash for inventory to sell to the customers; cash down and inventory up for the same amount
I 3. Issue common stock to investors; cash increased
I 4. Purchase a truck for company use, agree to a note payable; truck increases and a liability will also increase
D 5. Pay employees who worked this week; cash down, expense incurred
NA 6. Receive the utility bill that will be paid later; no effect on asset until paid
I 7. Sell goods to a customer on account; inventory decreases and accounts receivable increases more than the inventory cost (sell for more).
NA 8. Pay for insurance for the next 6 months; cash decreases and prepaid insurance increases the same amount
NA 9. Use cash to make an investment to be held long-term; traded one asset for another – cash for investment
D 10. Purchase the company’s own stock from investor; cash decreases and treasury stock and owner’s equity decreases
14. Prepare a multi-step income statement using the following information:
| 1) The cost of inventory sold to customer | $220,000 |
| 2) Advertising expenses | $ 25,000 |
| 3) Administrative salary expenses | $ 80,000 |
| 4) Issued common stock | $ 75,000 |
| 5) Interest income | $ 10,000 |
| 6) Insurance expense | $ 4,000 |
| 7) Research and development costs | $ 22,000 |
| 8) Dividends paid | $ 15,000 |
| 9) Tax expense | 35% |
| 10) Rent expense | $ 12,000 |
| 11) Loss from closing 1 out of 6 shops | $ 8,000 |
| 12) Accrued expenses | $ 11,000 |
| 13) Sales price of goods provided to customers | $450,000 |
| 14) Loss on the sale of a building | $ 26,000 |
Answer
| Sales | $450,000 |
| – Cost of goods sold |
( 220,000) |
| = Gross profit | 230,000 |
| – Operating expenses: | |
| Advertising expense | 25,000 |
| Insurance expense | 4,000 |
| Administrative salary expense | 80,000 |
| Rent expense | 12,000 |
| Research & Development expense | 22,000 |
| Restructuring expense |
8,000 |
| = Income from operations | 79,000 |
| – + Other revenues and expenses | |
| Loss on sale of a building | (26,000) |
| Interest income |
10,000 |
| =Income before tax | 63,000 |
| – income tax expense |
(22,050) |
| = Net Income | 40,950 |
Important to Note:
Issuing common stock is an increase in cash and an increase in owner’s equity.
Dividends paid is a direct reduction to retained earnings reported on the balance sheet.
It is not an expense and is not reported on the income statement.
Accrued expense is a liability that is reported only on the balance sheet.
Closing 1 of 6 shops is not selling a major part of the business. The company continues in this business and is closing one shop to change operations to make the company more profitable.
| Accounts Payable | 14 | Loss on Sale of Land | 9 | |
| Notes Receivable (3 year) | 8 | Common Stock | 10 | |
| Treasury Stock | 5 | Retained Earnings | ?? | |
| Goodwill | 6 | Patents | 7 | |
| Salary Expense | 12 | Income Tax Expense | 8 | |
| Buildings | 125 | Accrued Expenses | 15 | |
| Notes payable (1 year) | 11 | Additional Paid in Capital | 23 | |
| Accumulated Depreciation | 40 | Long-term Debt | 42 | |
| Account Receivable | 26 | Bonds Payable (5 year) | 36 | |
| Depreciation Expense | 24 | Interest Receivable | 1 | |
| Cash | 35 | Income Taxes Payable | 3 | |
| Sales | 190 | Administrative Expenses | 22 | |
| Inventory | 34 | Prepaid Expenses | 2 | |
| Cost of Goods Sold | 90 | Rent Expense | 10 |
Answer
| XYZ Company Income Statement For the year Ended 12/31/XXXX |
|
| Sales | 190 |
| – Cost of goods sold | (90) |
| =Gross Profit | 100 |
| – Operating expenses: | |
| Administrative expense | (22) |
| Depreciation expense | (24) |
| Salary expense | (12) |
| Rent expense | (10) |
| Operating Income | 32 |
| Loss on sale of land | (9) |
| Income before tax | 23 |
| Income tax expense | (8) |
| Net Income | 15 |
This is not the first year of operations and retained earnings is not equal to net income.
Retained earnings is cumulative for all years and net income is for the current year only.
| Sales | $615,000 |
| Administrative expense | 28,400 |
| Cost of remodeling stores | 55,000 |
| Prepaid expense | 11,000 |
| Selling expenses | 42,000 |
| Accounts receivable | 25,000 |
| Gain on sale of land | 8,000 |
| Dividends paid | 22,000 |
| Unearned revenue | 6,000 |
| Research & development expense | 29,000 |
| Issuance of common stock | 150,000 |
| Accrued expenses | 17,000 |
| Cost of goods sold | 252,900 |
| Interest expense | 12,500 |
| Rent income | 7,000 |
| Unusual Loss | 14,000 |
Answer
| Sales | $615,000 |
| – Cost of goods sold | ( 252,900) |
| = Gross profit | 362,100 |
| – Operating expenses: | |
| Administrative expense | 28,400 |
| Selling expense | 42,000 |
| Research & Development expense | 29,000 |
| Restructuring expense | 55,000 |
| = Income from operations | 207,700 |
| – + Other revenues and expenses | |
| Gain on sale of land | 8,000 |
| Interest expense | (12,500) |
| Rent income | 7,000 |
| Unusual Loss | (14,000) |
| =Income before tax | 196,200 |
| – income tax expense (30%) | (58,860) |
| = Net income | 137,340 |