Balance Sheet

Self Test

Self Test

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

1.  The definition of an asset is

a.  possible future economic benefit as a result of a past transaction that is owned or controlled
b.  probable future economic benefit as a result of a past transaction that is owned or controlled
c.  resources that are projected to give future benefit
d.  the use of a future economic resource

Answer
B.   The technical definition of an asset is a probable future economic benefit as a result of a past transaction that is owned or controlled.  A company can not record assets for projected events. An asset must give a probable future benefit.  Projected future economic resources are not recorded.
2.  The definition of a liability is

a.  possible future use of an economic benefit as a result of a past transaction
b.  probable future use of an economic benefit as a result of a past transaction
c.  resources that are projected to be obtained in the future to be used to pay future obligations
d.  a future economic resource

Answer
B.  The technical definition of a liability is a probable future use of an economic benefit as a result of a past transaction.  A transaction has to have occurred that obligates the company to give up an asset to repay the obligation.  
3.  Assets are listed on the balance sheet in the order of

a.  largest amount to smallest
b.  liquidity
c.  date of when they were acquired
d.  importance

Answer
B.  Assets are listed on the balance sheet in the order of liquidity.  Liquidity means how quickly the asset will turn to cash or be used up or how quickly a liability will be repaid with cash.
4.  Which of the following is an asset?

a.  prepaid expenses
b.  accrued expenses
c.  accounts payable
d.  retained earnings

Answer
A.   Prepaid expenses are payments for services that are made before the service is provided to the company.  The company obtains the future benefit of getting the service in the future. Accrued expenses and accounts payable are liabilities.  Retained earnings is part of owner’s equity – owners get the profits and losses.
5.  Buying land with a notes payable would

a.  decrease assets
b.  increase liabilities
c.  increase expenses
d.  have a negative effect on retained earnings

Answer
B.  This transaction increases assets (land) and increases the company’s obligation to pay (liability).  There is no expense involved and owner’s equity is not affected.
6.  Which of the following is not considered a usual balance sheet category?

a.  current assets
b.  current liabilities
c.  intangible liabilities
d.  intangible assets

Answer
C.   Intangibles are things owned that do not have physical substance.  Things owned are assets. Intangible liabilities do not exist. Current indicates it will be received or paid within one year.
7.  Which of the following is a limitation to the balance sheet?

a.  it is listed in the order of liquidity
b.  it reports assets at historical cost
c.  it subtotals categories
d.  different companies use different formats for the balance sheet

Answer
B.  The balance sheet reports assets at historical cost which is not a representation of what the asset is worth.  This limits the usefulness of the balance sheet, however, assets are reported at historical cost because this is a reliable value.  There is only one required format for the balance sheet under GAAP. Listing in the order of liquidity is helpful for determining if the company will have enough cash to pay current liabilities.

Subtotaling categories is helpful.

8.  Which of the following is a current asset?

a.  land
b.  patent
c.  supplies
d.  accounts payable

Answer
C.  Supplies is a current asset.  It is used to generate revenues and is normally used up in less than one year.  Land and patent are also assets; however, they are long term and held for more than one year.  Accounts payable is a liability owed to suppliers.
9.  Which of the following is not usually a current liability?

a.  salaries payable
b.  notes payable
c.  bonds payable
d.  taxes payable

Answer
C.  Bonds payable is borrowing from investors, which has a normal payback of more than one year.  Notes payable can be current or long term depending on when the note is repaid. Salaries are paid within 1 month.  Taxes are usually paid within 3 months.
10.  The operating cycle is completed when

a.  the fiscal year ends
b.  cash is collected for inventory sold
c.  payment is made for goods purchased
d.  the calendar year ends

Answer
B.  The operating cycle is the time it takes a company to make inventory, sell the inventory and collect from the customer (or the time it takes the company to provide the service and collect from the customer).  The fiscal year and calendar year do not determine the operating cycle since the operating cycle is part of ongoing business. Payment for goods purchased is only part of the operating cycle.  Current is defined as one year or the operating cycle; whichever is longer. 
11.  Current liabilities are always paid

a.  within 2 years or less
b.  within 30 days or less
c.  within 1 year or less
d.  at the time of purchase

Answer
C.  Current means one year or less.  Accounts payable is an example of a current liability that is normally paid within 30 days.   Payments at the time of purchase is not a liability.
12.  All of the following are current assets except

a.  supplies
b.  notes receivable to be collected in 2 years
c.  inventory
d.  investments held for 6 months

Answer
B.  Current means one year or less.  Notes receivable collected in two years is long term.  Supplies are normally used up very quickly and then purchased again to be used up quickly.  Inventory is normally sold to the customer within 6 months or less.
13.  Machinery is listed under which category on the balance sheet?

a.  current assets
b.  long term assets
c.  property, plant, and equipment
d.  intangible assets

Answer
C.  Property, plant, and equipment are long term assets that have physical substance that are used to produce revenues.  Machinery has physical substance and is used for more than 1 year to produce revenues. Intangible assets do not have physical substance.  There is no separate category (subtotal) called long term assets. Long term assets consist of long term liquid assets, property, plant, and equipment and intangible assets.
14.  Accumulated depreciation is listed under which category on the balance sheet?

a.  current liability
b.  equity
c.  property, plant, equipment
d.  intangible asset

Answer
C.  Accumulated depreciation is the total expense for all prior years the plant/equipment has been used to produce revenues.   It is subtracted from P/P/E and is a contra asset.
15.  Total investment by stockholders is equal to

a.  cash plus retained earnings
b.  common stock plus additional paid in capital
c.  common stock less dividends paid
d.  total stockholders equity

Answer
B.  When investors pay the company cash to obtain ownership (common stock) it is reported in two accounts.  Common stock is the legal capital required to be retained by the company and is recorded at par value. The difference in cash received by the company and the common stock par value is reported as additional paid in capital.  

Retained earnings are generated by company operations and are not received from stockholders.

16. Which of the following is not disclosed in the footnotes?

a. material errors made by the accountants
b. material subsequent events
c. the cost of purchasing one piece of equipment
d. significant accounting policies

Answer
C. The total cost of equipment may be disclosed in the footnotes; however, the cost of purchasing one piece of equipment is not material enough to impact the user’s decision and would not be disclosed in the footnotes. All other items listed are required to be disclosed in the footnotes.
17. A material subsequent event

a. occurs before year end
b. is any event that occurs after year end
c. occurs before the financial statements are issued and after year end
d. occurs after the financial statements are issued and before year end

Answer
C. An event that is material that occurs before the financial statements are issued and after year end is considered a subsequent event that must be disclosed.
18. The difference between fraud and an irregularity is

a. the amount of the transaction
b. the intent when recording the transaction
c. the accounts impacted by the transaction
d. the time period the transaction occurs

Answer
B. Fraud may have been done intentionally and an irregularity is a mistake that was made unintentionally.
19. Who is responsible for the financial statements?

a. management
b. auditors
c. shareholders
d. chief financial officer

Answer
A. The company’s management team is responsible for the financial statements.
20. An audit opinion that states the company’s accounting is not in accordance with generally accepted accounting principles is

a. qualified
b. unqualified
c. explanatory
d. none of the above

Answer
A. A qualified opinion states that the company did not follow generally accepted accounting principles. An unqualified opinion states that the company did follow GAAP.