Accrual Basis Balance Sheet

Medium Practice Test

Introduction to Accounting

Accrual Basis Balance Sheet

Key Things To Know

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Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Which of the following must be recorded when a receivable is recorded?

a. a revenue
b. a payable
c. unearned revenue
d. prepaid expense

Answer
A. A receivable indicates that revenue has been earned and the company has not yet been paid for providing the goods or services. A revenue must also be recorded when a receivable is recorded.
2. Which of the following must be recorded when unearned revenue is decreased?

a. a revenue
b. a payable
c. an accrued liability
d. prepaid expense

Answer
A. Unearned revenue only decreases when goods or services that were paid for are provided to the customer. Providing goods or services to customers is revenue.
3. How are “goods provided to the customer” reported on the income statement?

a. sales and cost of goods sold
b. unearned revenue and cost of goods sold
c. Inventory expense and cost of sales
d. only less inventory and more cash or accounts receivable

Answer
A. Sales and cost of goods sold is reported on the income statement; sales for the value provided to customers (revenue) and cost of goods sold for the inventory that is used up (expense). Less inventory and more asset is reported on the balance sheet. Inventory expense is not a name that is used on the income statement. Unearned revenue has not yet been provided to customers.
4. Accumulated depreciation is reported on the balance sheet because

a. the long-term asset must be reported at historical cost
b. the long-term asset is worth a different amount than the original cost
c. the fair market value of the long-term asset has decreased
d. the fair market value of the long-term asset has increased

Answer
A. The account “accumulated depreciation” is used because the long-term asset must be reported at historical cost. Accumulated depreciation represents the cumulative estimated cost of using the asset. This account has nothing to do with reporting assets at fair market value. The net amount reported for the long-term asset represents the amount that has not yet been expensed and will be expensed in future periods; it is not what the asset is worth.
5. The amount of accounts receivable reported on the balance sheet will decrease when

a. the company pays what is owed
b. the customer pays what is owed
c. the company provides the goods or services
d. the revenue is earned by the company

Answer
B. Accounts receivable occurs when goods and services are provided to the customer and the customer is expected to pay in a future period. Accounts receivable decreases in the period the customer pays the company.
6. The amount of unearned revenue reported on the balance sheet will decrease when

a. the company pays what is owed
b. the customer pays what is owed
c. the company provides the goods or services to customers
d. an asset is exchanged for cash

Answer
C. Unearned revenue occurs when the customer pays the company before the goods or services are provided to the customer. The company owes the customer. When the goods or services are provided to the customer, the customer is no longer owed, and the unearned revenue decreases and becomes revenue (because the goods or services are provided.)
7. Which of the following is possible to occur in one transaction?

a. increase revenue and decrease expense
b. decrease revenue and decrease expense
c. increase a liability and increase revenue
d. increase an asset and increase a revenue

Answer
D. Revenue is earned in exchange for an asset. Revenues and expenses do not occur in the same transaction because one is “provided to the company” and one is “provided by the company” and the two cannot occur at the same time.
8. Accrued expenses increase when the company

a. provides goods and services to customers and the company pays in a future period
b. provides goods and services to customers and the company pays in a prior period
c. is provided services and the company pays in a future period
d. is provided services and the company pays in a prior period

Answer
C. Accrued expense means the expense has been incurred and not yet paid. Expenses are incurred when the company is provided a service. The liability “accrued expenses” occurs when the company will pay for the service that has been provided to the company in a future period.
9. An asset with lost probable future economic benefit is reported

a. as a liability on the balance sheet
b. as a revenue on the income statement
c. as a different asset on the balance sheet
d. as an expense on the income statement

Answer
D. Assets used up (that lose probable future economic benefit) are reported as an expense on the income statement.
10. Where are dividends declared and paid to stockholder’s reported or included on the financial statements?

a. an expense on the income statement
b. a revenue on the income statement
c. an asset on the balance sheet
d. owner’s equity on the balance sheet

Answer
D. Dividends paid to stockholder’s are never reported as an expense on the income statement. Owners do not provided service to the company in order for the company to produce revenues as part of operating the business. Dividends are a return of cash to owners (a return on their investment); a decrease to retained earnings which decreases total owner’s equity.
11. Prepare an income statement in proper format using the following information:

 

Accounts Receivable 32,000   Goodwill 16,000
Building 142,000   Accrued Expenses 9,000
Cash 15,000   Short-term Notes Payable 25,000
Salary Expense 22,000   Cost of Goods Sold 52,000
Accounts Payable 57,000   Long-term Investments 25,000
Equipment 76,000   Common Stock 1,000
Supplies 1,000   Interest Income 2,000
Prepaid Expenses 12,000   Inventory 82,000
Sales 123,000   Dividends paid 25,000
Accumulated Deprec. 32,000   Rent Income 1,200
Rent expense 8,000   Depreciation Expense 3,000
Answer
Single-step income statement:
 
Sales 123,000
Interest income 2,000
Rent income     1,200
     Total Revenues 126,200
 
Cost of goods sold (52,000)
Salary expense (22,000)
Rent expense (  8,000)
Depreciation Expense (  3,000)
     Total Expenses (85,000)
 
Net Income 41,200
 
 
Multi-step income statement
 
Sales 123,000
Cost of goods sold (52,000)
     Gross Profit 71,000
Operating Expenses:
     Salary expense (22,000)
     Rent expense (  8,000)
     Depreciation Expense (  3,000)
Operating Income 38,000
     Other Revenues/Expense:
Interest income 2,000
Rent income      1,200
     Net Income 41,200

Important to notice:

Prepaid expense is an asset: paid ahead gives future benefit
Accrued expense is a liability; accrued means incurred but not paid for (owed)

Accumulated depreciation is the total of all years’ depreciation expense and is reported
on the balance sheet with the property plant and equipment.
It is not the same as depreciation expense because depreciation expense is for this year only.

Goodwill is an asset – it brings future benefit

Dividends paid is not reported on the income statement.
It does not meet the definition of an expense because no service was provided to the company.
It is simply a return of cash to the investors. It is part of retained earnings reported on the balance sheet.

12. The following items were taken from the accounting records of a company as of December 31st.

Building 209,000   Accrued Expenses 9,000
Cash 35,000   Short term notes payable 135,000
Computer Equipment 26,000   Common Stock 200,000
Retained Earnings ??   Bonds Payable 75,000
Prepaid Expenses 12,000   Accumulated depreciation 72,000
Sales 123,000   Dividends paid 10,000
Depreciation Expense 18,000   Unearned Revenue 8,000
Accounts Payable 47,000   Long-term Notes Receivable 35,000
Interest Payable 1,000   Long Term Debt 100,000
Cost of Goods Sold 75,000   Goodwill 125,000
Long term Investments 80,000   Treasury Stock 15,000
Inventory 56,000   Short Term Investments 50,000
Accounts Receivable 42,000   Trademark, net 6,000

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 the same amount as total assets. 2nd: subtract total liabilities from total liabilities and owner’s equity to get total owner’s equity. 3rd: subtract treasury stock and common stock from total owner’s equity to get retained earnings.

Subtotals and totals are very important.

Revenues and expenses do not go on the balance sheet. Dividends paid is not separately reported on the balance sheet. Dividends is included in retained earnings.

13. During the first month of business the company had the following transactions:

1) issued stock to investors for $100,000
2) purchased inventory on account for $35,000
3) sold inventory that cost $29,000 to customers on account for $45,000
4) workers are paid the first of the following month and will be paid $10,000
5) received the utility bill for $225
6) loaned a customer $10,000 to be repaid in 2 years
7) paid $30,000 for the inventory purchased on account
8) purchased computer equipment for $2,000 cash: the cost of using computers for the month was $56.

Prepare a balance sheet in proper format as of January 31st.

Answer
Cash 58,000   Accounts Payable 5,225
Accounts Receivable 45,000   Salaries Payable 10,000
Inventory    6,000       Total Current Liabilities 15,225
    Total Current Assets 109,000      
 
L/T Notes Receivable 10,000      
 
P/P/E:     Common Stock 100,000
Computer Equipment 2,000   Retained Earnings     5,719
– Accumulated Depreciation      (56)       Total S.Eq. 105,719
    Net PPE 1,944      
 
Total Assets 120,944   Total Liab. + O.Eq. 120,944

Cash – $100,000 (1) -10,000 (6) – 30,000 (7) – 2,000 (8) = $58,000
Accounts Receivable (3)
Inventory 35,000 (2) – 29,000 (3) = $6,000
Long Term Notes Receivable (6)
Computer Equipment (8) Accumulated depreciation = all months expense which is only the current month so far.
Accounts Payable $35,000 (2) + $225 (5) – $30,000 (7) = $5,225
Salaries Payable (4), not yet paid so you owe
Common Stock (1)

Retained Earnings = Sales – CGS – Salary expense – Utility expense – Deprec. Exp.
(45,000–29,000–10,000–225–56=5,719

This is the first month of operations and retained earnings = the first month’s profits

14. Answer the following questions using the balance sheet of Microsoft, Inc for the year ended 20X1.

a. How much do customers owe the company to date (that is expected to be collected)?
b. How much have customers paid the company before receiving goods or services from the company?
c. How much has Microsoft paid for services that have not yet been provided?
d. How much value has been provided to customers during 20X1?
e. How much has been repaid on long-term debt during 20X1?
f. How much does Microsoft owe for goods or services that have been provided (excluding employees)?
g. What is the amount of property, plant, and equipment that will be reported as an expense in future periods?
h. How much does Microsoft owe related to employees to date?

BALANCE SHEETS

 

(In millions)

  

 

 

 

 

 

June 30,

  

20X1

 

 

20XX

 

Assets

  

 

 

 

 

 

 

 

Current assets:

  

 

 

 

 

 

 

 

Cash and cash equivalents

  

$

     9,610

  

 

$

5,505

  

Short-term investments 

  

 

43,162

  

 

 

31,283

  

 

Total cash, cash equivalents, and short-term investments

  

 

52,772

  

 

 

36,788

  

Accounts receivable, net of allowance for doubtful accounts of $333 and $375

  

 

14,987

  

 

 

13,014

  

Inventories

  

 

1,372

  

 

 

740

  

Deferred income taxes

  

 

2,467

  

 

 

2,184

  

Other

  

 

3,320

  

 

 

2,950

  

 

Total current assets

  

 

74,918

  

 

 

55,676

  

Property and equipment, net of accumulated depreciation of $9,829 and $8,629

  

 

8,162

  

 

 

7,630

  

Equity and other investments

  

 

10,865

  

 

 

7,754

  

Goodwill

  

 

12,581

  

 

 

12,394

  

Intangible assets, net

  

 

744

  

 

 

1,158

  

Other long-term assets

  

 

1,434

  

 

 

1,501

  

 

Total assets

  

$

108,704

  

 

$

   86,113

  

 

  

 

Liabilities and stockholders’ equity

  

 

 

 

 

 

 

 

Current liabilities:

  

 

 

 

 

 

 

 

Accounts payable

  

$

4,197

  

 

$

4,025

  

Short-term debt

  

 

0

  

 

 

1,000

  

Accrued compensation

  

 

3,575

  

 

 

3,283

  

Income taxes

  

 

580

  

 

 

1,074

  

Short-term unearned revenue

  

 

15,722

  

 

 

13,652

  

Securities lending payable

  

 

1,208

  

 

 

182

  

Other

  

 

3,492

  

 

 

2,931

  

 

Total current liabilities

  

 

28,774

  

 

 

26,147

  

Long-term debt

  

 

11,921

  

 

 

4,939

  

Long-term unearned revenue

  

 

1,398

  

 

 

1,178

  

Deferred income taxes

  

 

1,456

  

 

 

229

  

Other long-term liabilities

  

 

8,072

  

 

 

7,445

  

 

Total liabilities

  

 

51,621

  

 

 

39,938

  

 

Commitments and contingencies

  

 

 

 

 

 

 

 

Stockholders’ equity:

  

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 8,376 and 8,668

  

 

63,415

  

 

 

62,856

  

Retained deficit, including accumulated other comprehensive income of $1,863 and $1,055

  

 

(6,332

) 

 

 

(16,681

) 

 

Total stockholders’ equity

  

 

57,083

  

 

 

46,175

  

 

Total liabilities and stockholders’ equity

  

$

108,704

  

 

$

86,113

  

 

  

 

Answer
a. Accounts Receivable 14,987

b. Short-term unearned revenue 15,722
Long-term unearned revenue 1,398

c. Not specified on the balance sheet: No prepaid line item

d. This cannot be determined using the balance sheet.
The amounts on the balance sheet are cumulative and do not show the changes that occurred during the period.
Value provided to customers is sales and will be reported on the income statement.
e. This cannot be determined using the balance sheet.
The amounts on the balance sheet are cumulative and do not show the changes that occurred during the period.
Cash paid to reduce long-term liabilities is reported on the cash flow statement in the financing section.

 

f. Accounts Payable $4,197

g. Property & Equipment, net $8,162

h. Accrued Compensation $3,575

15. Answer the following questions using the balance sheet of Intel Corporation.

a. How much do customers owe the company to date (that is expected to be collected)?
b. How much have customers paid the company before receiving goods or services from the company?
c. How much has Intel paid for services that have not yet been provided?
d. What is the cost of inventory that has been provided to customers during 20X0?
e. How much was paid to suppliers during 20X0?
f. How much does Intel owe for goods and services that have been provided (other than to employees)?
g. What is the value of physical items used long-term to produce revenues that will be expensed in future periods?
h. How much does Intel owe related to employees to date?

 

INTEL CORPORATION
CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

December 25,
2010 and December 26, 2009

 

 

 

 

 

 

(In Millions,
Except Par Value)

 

20X0

 

 

20XX

 

Assets

 

 

 

 

 

 

 

 

current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,498

 

 

$

3,987

 

Short-term investments

 

 

11,294

 

 

 

5,285

 

Trading assets

 

 

5,093

 

 

 

4,648

 

Accounts receivable, net of allowance for doubtful accounts of $28 ($19 in 2009)

 

 

2,867

 

 

 

2,273

 

Inventories

 

 

3,757

 

 

 

2,935

 

Deferred tax assets

 

 

1,488

 

 

 

1,216

 

Other current assets

 

 

1,614

 

 

 

813

 

 

 

 

 

 

 

 

 

Total current assets

 

 

31,611

 

 

 

21,157

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

17,899

 

 

 

17,225

 

Marketable equity securities

 

 

1,008

 

 

 

773

 

Other long-term investments

 

 

3,026

 

 

 

4,179

 

Goodwill

 

 

4,531

 

 

 

4,421

 

Other long-term assets

 

 

5,111

 

 

 

5,340

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

63,186

 

 

$

53,095

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Short-term debt

 

$

38

 

 

$

172

 

Accounts payable

 

 

2,290

 

 

 

1,883

 

Accrued compensation and benefits

 

 

2,888

 

 

 

2,448

 

Accrued advertising

 

 

1,007

 

 

 

773

 

Deferred income on shipments to distributors

 

 

622

 

 

 

593

 

Other accrued liabilities

 

 

2,482

 

 

 

1,722

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

9,327

 

 

 

7,591

 

 

 

 

 

 

 

 

 

 

Long-term income taxes payable

 

 

190

 

 

 

193

 

Long-term debt

 

 

2,077

 

 

 

2,049

 

Long-term deferred tax liabilities

 

 

926

 

 

 

555

 

Other long-term liabilities

 

 

1,236

 

 

 

1,003

 

Commitments and contingencies (Notes 23 and 29)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Deferred stock, $0.001 par value, 50 shares authorized; none issued

 

 

—

 

 

 

—

 

Common stock, $0.001 par value, 10,000 shares authorized; 5,581 issued and 5,511outstanding (5,523 issued and outstanding in 2009) and capital in excess of par value

 

 

16,178

 

 

 

14,993

 

Accumulated other comprehensive income (loss)

 

 

333

 

 

 

393

 

Retained earnings

 

 

32,919

 

 

 

26,318

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

49,430

 

 

 

41,704

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

63,186

 

 

$

53,095

 

 

 

 

 

Answer
a. Accounts Receivable, net $2,867

b. Deferred income on shipments to distributors $622

c. Prepaid expense is not specifically stated on the balance sheet.
Prepaid expenses are included in other current assets.

d. This cannot be determined by using the balance sheet.
The amounts on the balance sheet are cumulative and do not report the changes that occurred during the period.

The cost of inventory provided is cost of goods sold and is reported on the income statement.

e. The amount paid to suppliers will only be reported on the direct method cash flow statement in the operating section.

f.

Accounts Payable $2,290
Accrued Advertising $1,007
Other Accrued Liabilities $2,482
          Total Owed: $5,779

g. Property, Plant & Equipment, net $17,899

h. Accrued Compensation and Benefits $2,888