Balance Sheet

Medium Practice Test

Financial Accounting

Medium Practice Test

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

1.  The accumulated depreciation account records

a.  the decline in fair market value of the asset
b.  the increase in fair market value of the asset
c.  the cumulative expense of using the asset
d.  the cost of using the asset for this year only

Check Your Answer

C.   Accumulated depreciation is the total depreciation expense for all prior years.  Depreciation expense is the cost of using the asset during the period (d.) Depreciation expense is not an indication of a decline in fair value, although this does occur with some assets as they get used. 

2.  Liquidity on the balance sheet means

a.  the amount of cash a company currently has
b.  how soon an asset is expected to be converted into cash
c.  the amount of time before a company will have to borrow money
d.  the amount of money a company has the ability to borrow

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B.  Liquidity refers to how quickly an asset will convert to cash or get used up and how quickly a liability will be paid.  Liquidity can be an indicator of c. and d., however, this is not what it means.

3.  The most common difference between notes payable and accounts payable is

a.  one if legally enforceable and one is not
b.  one is classified as current and one is not
c.  one has known payment terms and the other does not
d.  one carries interest and the other does not

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D.   A notes payable incurs interest and accounts payable does not have interest.  Accounts payable is extended time from the purchase to payment to a supplier, which is someone you do business with over and over – usually 30 days.  Notes payable can be current or long term depending on the repayment terms. Both have a specified repayment term and are legally enforceable.

4.  Asset never include

a.  property, plant, equipment
b.  investments
c.  unexpired rent
d.  paid in capital

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D.   Paid in capital is part of owner’s equity.  It is received from investors for ownership.  Unexpired rent is the asset called prepaid rent.  (a.) and (b.) are common assets.

5.  Which account is part of owner’s equity?

a.  investments
b.  dividends payable
c.  treasury stock
d.  goodwill

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C.   Treasury stock is the shares a company owns of their own stock.  They are repurchased from original investors. Common stock represents all shares that have been issued and treasury stock represents the portion of shares the company owns.  A company can not invest in itself and call it an asset, it is ownership.  Dividends payable is a liability. Goodwill and investments are assets.   

6.  Notes payable is reported as a

a.  current asset
b.  current liability
c.  long term liability
d.  can’t determine where to report it without additional information

Check Your Answer

D.  Notes payable can be either current or long term.  It is reported based on the repayment date. Repayment in one year or less is current and repayment in more than one year is long term.  It is always a liability. “Payables” are always liabilities.

7.  Which of the following accounts is always a current liability account?

a.  salaries payable
b.  accrued expenses
c.  prepaid expenses
d.  unearned revenue

Check Your Answer

A.   Salaries payable is the only account listed that is always paid within one year.  Accrued expenses and unearned revenues can be long term if the obligation will be paid in more than one year.  Prepaid expenses is an asset.

8.  Rent collected before providing the use of the facility is

a.  current asset
b.  current liability
c.  revenue
d.  expense

Check Your Answer

B.   Rent collected from a customer before the service is provided is a current liability called unearned revenue.  It is not a revenue until the service is provided to the customer.

9.  A major reason for categorizing the balance sheet is to report

a.  current versus long term
b.  owed internally versus owed externally
c.  assets used versus assets not used
d.  owner’s equity is at a given time

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A.  The balance sheet is categorized so that the user can determine if the company has enough cash or will have enough cash to pay liabilities.  Current and long term categories facility this. All assets are used to provide future benefit. Only assets owned by the company, internally, are presented.  Assets less liabilities equals owner’s equity and you do not need to categorize to determine owner’s equity.

10.  Assets less liabilities reported on the balance sheet will directly measure

a.  the company’s book value
b.  the company’s fair market value
c.  the company’s ability to pay debt
d.  the amount an intangible asset is worth at a given time

Check Your Answer

A.  Assets less liabilities equals owner’s equity.  This is at book value, or the net of historical cost.  Assets and liabilities are not recorded at fair market value and therefore owner’s equity is not at fair market value.  The company does not repay debt with owner’s equity.

11.  Assets that have physical substance used long term to generate revenues are classified as

a.  intangible assets
b.  total long term assets
c.  property, plant, equipment
d.  accumulated depreciation

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C.    This is the technical definition of property, plant, and equipment.  Intangible assets have no physical substance. Total long term assets include assets with no physical substance such as more liquid assets and intangible assets.  Accumulated depreciation is the total of all prior year’s depreciation expense.

12.  Goodwill reported on the balance sheet is

a.  the increase in value of the business over time
b.  the amount paid for a company less than its fair market value
c.  the amount paid for a company above its fair market value
d.  always adjusted to fair market value

Check Your Answer

C.  The definition of goodwill is the amount paid when purchasing a company above the fair market value of net assets purchased.  Once this is reported it is not adjusted to fair market value. Internally generated goodwill (a.) is not reported on the balance sheet due to unreliability of the estimated amount.

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

Prepare a balance sheet in proper format for the company as of December 31st

Check Your Answer

To find retained earnings, you first make total liabilities and owner’s equity the same amount as total assets.  The two amounts have to be the same. You then subtract total liabilities from total liabilities and owner’s equity to get what total owner’s equity must be.  Add treasury stock and subtract common stock from total owner’s equity to get the retained earnings amount.     

Do not forget to subtotal and total.  This is very important and will cost you points.

Revenues and Expenses do not go on the balance sheet.  Dividends paid is not reported on the balance sheet, it is a part of retained earnings and is not shown separately.

14.  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 will be paid $10,000, they are paid the first of the following month

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 – recorded depreciation expense of $56 for the month

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

Check Your 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. + S.Eq.     120,944

Cash – $100,000 (1) -10,000 (6) – 30,000 (7)  – 2,000 (8)

Accounts Receivable (3)

Inventory 35,000 (2) – 29,000 (3)

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)

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, so retained earnings = this months profits

15.  Following is a list of the accounts for XYZ Company as of December 31st.  This is not the company’s first year of operations.

A.  Determine the total amount of assets expected to be converted into cash in one year or less.

B.  Determine the total amount of long term assets and the amount within each category of long term assets.

C.  Determine total current liabilities

D.  Determine total long term liabilities

E.  Determine the amount of retained earnings.

Check Your Answer

A.  This will be the total of all assets that you would classify as current assets:

B.  This will be all assets you would classify as liquid non current, property, plant & equipment and intangibles.

C.  Current liabilities are those that will be paid within one year or less:         

D.  Long Term Liabilities will be repaid in longer than one year: 

E.  Use the accounting equation:    Assets = Liabilities + Owner’s Equity

Total Assets = 167,000 + 50,000 + 258,000 + 31,000 = 506,000
Total Liabilities = 28,500 + 198,000 = 226,500
Total Owner’s Equity has to = 506,000 – 226,500 = 279,500
      Common stock is $1,000, paid in capital is $29,000, Retained                earnings  must be $249,500

Important:  Since this is not the company’s first year of operations, retained earnings will not equal this year’s profit/loss.   Retained earnings is equal to the company’s total of all prior years’ profits and losses. Retained earnings is a cumulative amount.