Balance Sheet
Hard Test
Hard Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Non-monetary assets
a. are not used to produce revenues
b. become an expense to the company over time
c. have no current fair market value
d. have no physical substance
Answer
2. Current assets include all assets expected to be consumed or converted to cash
a. within one year or more
b. within one year or less
c. within the company’s operating cycle or one year whichever is less
d. within the company’s operating cycle or one year whichever is more
Answer
D. The term current means it is expected to result in a cash flow within the company’s operating cycle which can be more than one year. Current always includes at least one year.
3. Accrued expenses
a. are most always repaid in services and not cash
b. occur when payment is made after the service is received
c. occur when payment is made before the service is provided
d. will always be charged as an expense in a different period
Answer
B. Accrued means incurred but not yet paid. The expense can be incurred in this period or a prior period. They are repaid almost always with cash. (c.) is a prepaid asset. The liability and expense will occur in the same period (d.)
4. Which of the following is usually a characteristic of the balance sheet?
a. assets are listed in order of usefulness
b. the balance sheet is used to project future income
c. the balance sheet reports changes in financial position
d. the balance sheet reports economic resources
Answer
D. Economic resources are assets. Assets are reported on the balance sheet. The balance sheet is listed in the order of liquidity. It shows financial position at a given point in time and does not show the change or project future income. The income statement can be used to project future income given trends reported.
5. Which of the following statements related to the balance sheet is not true?
a. it is a primary source of information to determine a company’s liquidity
b. it is used to measure the fair market value of the company
c. it is a financial picture at a given point in time
d. it does not report all of a company’s assets
Answer
B. Balance sheet items are reported at historical cost and not at fair market value. A company typically has intangible assets that bring future benefit that are not recorded and reported such as internally generated goodwill. The balance sheet does indicate liquidity and provides information on of a given date.
6. An operating cycle is best described as
a. any 12 month period
b. the average number of days required to sell inventory and pay bills
c. the average number of days required to collect receivables
d. the average number of days required to sell inventory and collect from customers
Answer
D. An operating cycle is the time it takes a company to sell goods or provide services and collect cash from the customer. It includes both selling inventory and collecting from the customer.
7. Which of the following is a current asset?
a. notes receivable expected to be collected in 36 months
b. a cash fund established to pay for expansion in 24 months
c. trademarks used in day to day business
d. supplies
Answer
D. A current asset is one that will be used up or converted to cash in one year or less. Supplies are typically used up in less than 60 days. Trademarks are used for longer than one year. (a. & b.) are longer than one year and are long term.
8. Which of the following would not be reported as property, plant, and equipment on the balance sheet?
a. leasehold improvements associated with a building being used
b. furniture and computer equipment being used
c. land held for speculation and resale
d. a building currently used for operating activities
Answer
C. Property, plant and equipment are assets used long term to generate revenues. Land being held for speculation and resale is not being used to generate revenues.
9. When providing information related to common stock, a company must state
a. shares authorized only
b. shares issued and outstanding only
c. shares authorized, issued and outstanding
d. the amount of shares is not required to be put on the balance sheet
Answer
C. The balance sheet must provide information on common stock that states the number of shares authorized (the total amount that can be issued), the number of shares issued (previously sold to investors), and the amount of shares outstanding (held by those outside the company). The difference in issued and outstanding shares is treasury stock.
10. When a company purchases its own common stock the effect is
a. assets increase and decrease for the same amount
b. assets increase and shareholder’s equity increase
c. assets decrease and shareholder’s equity decrease
d. assets increase and liabilities increase
Answer
C. This results in treasury stock. Treasury stock is reported as a reduction in owner’s equity because it offsets the common stock to get a net amount held by outsiders. Treasury stock is not an asset because a company can not invest in itself – it is itself. Cash is used to purchase the treasury stock from the outside investor. Cash decreases and treasury stock decreases owner’s equity.
11. Investments are not reported as property, plant, equipment because
a. they can be sold at any time
b. they are not used in the operations of the business to generate revenues
c. they are recorded at original cost
d. they are depreciated
Answer
B. Property plant and equipment is used long term to generate revenues. Investments are not used in the operations of the business to generate revenue. An investment is providing your money to someone else and earning a return. P/P/E can be sold at any time if the company desires. Both P/P/E and investments are reported at original cost. Depreciation is associated only with using PPE over a period of time.
12. The balance sheet is reported at historical cost because
a. historical cost is the most reliable value that can be determined
b. fair market value is the most relevant value that can be determined
c. how much cash was originally paid is the most relevant information
d. how much an asset is worth is the most relevant information
Answer
A. Historical cost is used because it is reliable. It is easy to verify what was paid for an asset. Fair market value is more relevant, however, it is often very subjective and not reliable.
13. For each of the following accounts, indicate where the account is reported on the balance sheet.
| CA- Current Asset |
PPE- Property, Plant, Equipment |
SE- Stockholder’s Equity |
| CL- Current Liability |
LTL- Long Term Liability |
INT- Intangible Asset |
| LTLA- Long Term Liquid Asset |
N- Not reported on balance sheet |
______1. retained earnings
______2. computer equipment
______3. land
______4. amount paid above fair market value of assets purchased
______5. amounts borrowed from investors to be repaid in 10 years
______6. amounts due from customers
______7. cash received prior to providing the service
______8. expenses not yet paid
______9. amounts paid prior to receiving the service
_____10. additional paid in capital
_____11. long term debt due in 5 years
_____12. amounts owed to employees
_____13. accumulated depreciation
_____14. goods held for sale to customers
_____15. depreciation expense
_____16. portion of long term debt to be repaid in less than one year
_____17. notes payable due in 5 years
_____18. notes receivable due in 6 months
_____19. investments in the company’s own stock
_____20. land held indefinitely as a speculative investment
Answer
SE 1. retained earnings
PPE 2. computer equipment
PPE 3. land
INT 4. amount paid above fair market value of assets purchased – GOODWILL
LTL 5. amounts borrowed from investors to be repaid in 10 years – BONDS PAY
CA 6. amounts due from customers – ACCOUNTS RECEIVABLE
CL 7. cash received prior to providing the service UNEARNED REVENUE
CL 8. expenses not yet paid ACCRUED EXPENSES
CA 9. amounts paid prior to receiving the service PREPAID EXPENSE
SE 10. additional paid in capital
LTL 11. long term debt due in 5 years
CL 12. amounts owed to employees SALARIES PAYABLE
PPE 13. accumulated depreciation Contra asset to PPE
CA 14. goods held for sale to customers INVENTORY
N 15. depreciation expense
CL 16. portion of long term debt to be repaid in less than one year
LTL 17. notes payable due in 5 years
CA 18. notes receivable due in 6 months
SE 19. investments in the company’s own stock TREASURY STOCK
LTLA 20. land held indefinitely as a speculative investment L/T INVESTMENT
14. The accountant for XYZ Company prepared the following balance sheet:
| XYZ Company Balance Sheet Forthe Year Ended December 31st, 2XXX |
| Cash | $88,000 | Bonds Payable | $100 000 |
| Accounts Receivable | $45,000 | Long Term Debt | $140,000 |
| Inventory | $64,000 | Salaries Payable | $ 4,000 |
| Building—net | $96,000 | Dividends Paid | $ 8 000 |
| Land | $50,000 | Stockholder’s Equity | $218,000 |
| Goodwill | $60,000 | ||
| XYZ Company Stock | $10,000 | ||
| Investments | $55,000 | ||
| Supplies | $ 2,000 | ||
| Total Assets | $470,000 | Total Liabilities and Stockholder’s Equity |
$470,000 |
You have been made aware of the following information.
1) The company expects that $6,000 of the accounts receivable will not be collected.
2) Accumulated depreciation related to the building is $26,000
3) Goodwill had originally cost $40,000 and the $60,000 represents an estimated fair value as of December 31st.
4) Investments are intended to be sold within one year
5) Supplies are used up approximately every 2 months.
6) The bonds payable is due to investors in 10 years
7) $6,000 of the long term debt is due 6 months from now
8) Common stock issued has a total par value of $1,000 and the company originally received $25,000 when the stock was issued. There are 100,000 shares authorized, and 50,000 shares issued.
9) The company paid $10,000 to purchase 4,000 shares of their own stock
10) The company estimates it will owe income taxes of $13,000. The tax return has not yet been finalized and filed.
Prepare the balance sheet in proper format.
Answer
| XYZ Company Balance Sheet As of December 31, 2XXX |
| Cash | $88,000 | Salaries Payable | $ 4,000 |
| Accounts Receivable | $45,000 | Income Tax Payable | $ 13,000 |
| – Allowance for U. A | ($ 6,000) | Current Maturities of LTD | $ 6,000 |
| Inventory | $64,000 | Total Current Liabilities | $ 23,000 |
| Supplies | $ 2,000 | ||
| Short Term Investments | $55,000 | Bonds Payable | $100,000 |
| Total Current Assets | $248,000 | Long Term Debt | $134.000 |
| P/P/E: | Total Liabilities | $257,000 | |
| Land | $50,000 | ||
| Building | $122,000 | ||
| – Accumulated Deprec | ($26,000) | Stockholder’s Equity: | |
| Net Prop/Plant/Equip. | $146,000 | ||
| Common Stock** | $ 1,000 | ||
| Intangible Assets: | Additional Paid in Capital | $ 24,000 | |
| Goodwill | $40,000 | Retained Earnings | $162,000 |
| Treasury Stock | ($10,000) | ||
| Stockholder’s Equity | $177,000 | ||
| Total Assets | $434,000 | Total Liabilities and Stockholder’s Equity |
$434,000 |
* Common stock (100,000 shares authorized, 50,000 shares issued, 46,000 shares outstanding)
To find retained earnings, you first make total liabilities and owner’s equity the same amount as total assets. The two amounts must be the same. You then subtract total liabilities from total liabilities and owner’s equity to get what total owner’s equity must be. Do the math to determine the amount retained earnings has to be to make total stockholder’s equity equal to $177,000.
Dividends paid is not reported separately. It is included in retained earnings. This is not the first year of operations so retained earnings will not equal this years profit/loss. Retained earnings is a cumulative amount for all prior years.
Do not forget to subtotal and total. This is very important and will cost you points.