Intro to Financial Statements

Medium Practice Test

Financial Accounting

Introduction to Financial Statements

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.  The balance sheet reports

a. goods and services provided to the customer
b. resale value of assets currently held
c. economic resources and claims to those resources
d. probable resources in the future

Check Your Answer
c.  The balance sheet reports assets (economic resources) and liabilities (claims to economic resources). Assets and liabilities are a result of a past transaction and are going to occur in the future. Assets are reported at historical cost; the amount paid. Goods and services provided to the customer are revenues which are reported on the income statement.
2.  Which of the following is not true?

a. assets = liabilities + equity
b. liabilities = assets – equity
c. equity = assets – liabilities
d. assets + liabilities = equity

Check Your Answer
d.  The accounting equation is assets = liabilities + owners equity.  D is the only equation that does not give the same answer.
3.  Which of the following would be an appropriate heading for a balance sheet?

a. as of December 31, 2XXX
b. for the period ended December 31, 2XXX
c. for the year ended December 31, 2XXX
d. any of the following would be appropriate

Check Your Answer
a.  The balance sheet reports what a company has and owes on a particular date.  The heading is “as of”.   For the period or year is used for all other financial statements.
4.  An investor looking to determine the financial strength of a company as of a certain date would use which financial statement?

a. balance sheet
b. income statement
c. statement of detail expenses
d. statement of stockholder’s equity

Check Your Answer
a.  The balance sheet shows assets and liabilities which is referred to as the financial position of the company.   The income statement and statement of stockholder’s equity report what occurred during a particular period of time.  The statement of detail expenses is not one of the four primary financial statements.
5.  Which of the following are categories that are reported on an income statement?

a. current assets and current liabilities
b. revenues and expenses
c. sales and assets
d. expenses and liabilities

Check Your Answer
b.  The income statement reports revenues and expenses.  The balance sheet reports assets, liabilities, and owner’s equity. 
6.  Which of the following statements is not true relative to the statement of cash flows?

a. it does not show the financial resources a company owns
b. it does not show the amount of services a company provided
c. it does not show the amounts owed by a company
d. it does not show the amount spent for long term assets

Check Your Answer
d.  The investing activities section will report amounts spent for long term assets.  Financial resources are assets reported on the balance sheet.  Services a company provided are revenues reported on the income statement.  Amounts owed are liabilities reported on the balance sheet.
7.  The difference in revenues and expenses during a specific period of time is

a. net income
b. net liabilities
c. net assets
d. net sales

Check Your Answer
a.  Revenues less expenses = net income.  Net assets = Assets – Liabilities which is also called owner’s equity. 
8.  The price of goods or services provided in exchange for an asset is called

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

Check Your Answer
d.  The definition of revenue is providing a good or service to a customer in exchange for an asset (cash or accounts receivable).  An expense is having a service provided to the company.  A liability is what is owed.  An asset is something that you have.
9.  Total owner’s equity is increased when

a. services provided are less than the cost of providing services
b. dividends are paid to shareholders
c. services provided is more than the cost of providing services
d. interest is paid

Check Your Answer
c.  Owner’s equity increases with profit and decreases with a loss or dividends paid Owner’s equity will also increase when common stock is issued, which is not one of the choices.  (a.) will result in a loss which will decrease owner’s equity.  (c.) will result in a profit which will increase owner’s equity.  Paying interest is an expense which will decrease owner’s equity.
10.   What account is used to record cash collected in the period after goods are provided?

a. accounts payable
b. accounts receivable
c. accrued liabilities
d. expenses

Check Your Answer
b.  If the customer has not yet paid for the goods received they owe the company.  Accounts receivable is the account that represents what the customer owes the company.  Receiving payment from a customer reduces accounts receivable.
11.  Taxes payable is reported on the balance sheet as

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

Check Your Availability
b.  A payable is always a liability because it is something the company owes.
12.  A company had assets of $230,000 and liabilities of $145,000 at the beginning of the year.  During the year the company earned $45,000 and reduced what it owed by $22,000.  What is total assets at the end of the year?

a. $185,000
b. $275,000
c. $253,000
d. $297,000

Check Your Answer
c. Put the amounts into the accounting equation.  Income increases assets and some assets were used to pay liabilities.

Assets = Liabilities + Owner’s Equity
Beginning $230,000 = $145,000 + ??? has to be $85,000
During ($22,000) = ($22,000)
$45,000 $45,000
End of Yr $253,000 $123,000 + $130,000

 

13.   The company received bills for services provided to them during this month totaling $11,800 and paid bills this month totaling $13,600.  What will be reported as expenses for this month?

a. $13,600
b. $11,800
c. $25,400
d. $ 1,800

Check Your Answer
b.  An expense is recorded and reported when the service is provided to the company.  When the amount is paid does not matter.  The amount paid could be related to the prior month or future months.  The amount provided to the company this month is expensed this month.
14.  The company provided goods to customers totaling $34,800 and collected payments from customers this month in the amount of $39,200.  What will be reported as revenues for this month?

a. $39,200
b. $34,800
c. $74,000
d. $ 4,400

Check Your Answer
b.  A revenue is recorded and reported when the service or goods is provided to the customer.  When the cash is received does not matter.  The amounts received could be related to prior or future months.  The value of services provided to the customer this month is the revenue for this month.
15.  Cash transactions related to common stock are reported in which section of the cash flow statement?

a. operating
b. investing
c. financing
d. stockholder’s equity

Check Your Answer
c.  Common stock is an owner’s equity account.  Transactions related to owners are reported in the financing section of the cash flow statement.
16.  State whether each of the following is an asset (A), liability (L), stockholder’s equity (S), revenue  ( R), or an expense (E)      (The answer will not be the asset cash)

______1.  Paid for advertising run this month.
______2.  Amounts that the company owes for utilities
______3.  Buildings
______4.  Items held only to sell to a customer
______5.  A customer pays for a service provided at the time it is provided
______6.  Paying expenses before they are used
______7.  Patents
______8.  The cost of inventory that was sold to customers
______9.  Total profits and losses for all periods
_____10.  Earning interest on investments this period

Check Your Answer
   E   1. Paid for advertising run this month – a service was provide to the company
   L   2. Amounts that the company owes for utilities – accounts payable – owed
   A   3. Buildings – used to bring future benefit
   A   4. Items held only to sell to a customer – inventory
   R   5. A customer pays for a service provided at the time it is provided
   A   6. Paying expenses before they are used – prepaid expense
   A   7. Patents – used to bring future benefit
   E   8. The cost of inventory that was sold to customers – cost of goods sold
   S   9. Total profits and losses for all periods – retained earnings
   R   10. Earning interest on investments this period – interest revenue
17.   The company prepared the following balance sheet:

Assets Liabilities
Cash $12,000 Accounts Receivable $33,500
Accounts Payable $22,000 Equipment $67,000
Revenues $123,000 Goodwill $88,000
Salaries Payable $4,000 Inventory $29,000
Investments $10,000 Notes Payable $20,000
Interest Earned $1,000 Cost of Goods Sold ($62,000)
Common Stock $5,000 Supplies $1,500
Total Assets 177,000 Total Liabilities $177,000
Check Your Answer
 

Assets Liabilities
Cash 12,000 Accounts Payable 22,000
Accounts Receivable 33,500 Salaries Payable 4,000
Inventory 29,000 Notes Payable 20,000
Supplies 1,500
Total Liabilities 46,000
Investments 10,000
Equipment 67,000 Owner’s Equity
Goodwill 88,000 Common Stock 5,000
Retained Earnings 190,000
Total O. Eq. 195,000
Total Assets 241,000 Total L + O.Eq. 241,000

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’ equity to get what total owner’s equity must be.  Subtract common stock from total owner’s equity to get the retained earnings amount.    

Revenues and expenses are not listed on the balance sheet.  They are included in retained earnings because retained earnings has all profits and losses and profits and losses comes from revenues less expenses.

The balance sheet is listed in the order of liquidity.  Amounts are at historical cost.

 

18.    Prepare a statement of cash flows using the following information:

a.  cash borrowed from the bank
$100,000
b.  cash paid for equipment
$  32,000
c.  cash collected from customers
$237,000
d.  cash received from selling land
$  68,000
e.  cash used to repay long term debt
$  50,000
f.   cash paid to suppliers
$  76,000
g.  cash received for interest income
$5,000
h.  cash dividends paid
$3,000
i.  revenues earned from providing services
$157,000
j.  expenses incurred this period
$97,000
k. expense paid this period
$93,000
Check Your Answer
First, go down the list of things that happened and decide what it is associated with. This will tell you which section it is reported in. Only amounts of cash received or paid are reported on the cash flow statement.

a. notes payable – long term liability – financing
b. equipment – long term asset – investing
c. day to day operations – operating
d. land – long term asset – investing
e. long term debt – long term liability – financing
f. day to day operations – operating
g. day to day operations – operating
h. dividends paid to owners – owners equity – financing
i. not reported on the cash flow statement – not the cash amount
j. not reported on the cash flow statement – not the cash amount
k. day to day operations – operating

Cash collected from customers 237,000
Cash from interest 5,000
Cash paid to suppliers (76,000)
Cash paid for expenses (93,000)
Cash from operating activites 73,000
Cash paid for equipment (32,000)
Cash received from selling land 68,000
Cash from investing activites 36,000
Cash received from bank borrowings 100,000
Cash used to repay debt (50,000)
Cash dividends paid  (3,000)
Cash from financing activities 47,000
Total change in cash 156,000
19.  Using the following information – prepare an income statement in proper format

 

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

 

Check Your 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

 

Or, if your instructor wants you to do the 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 Revenue/Expense:
Interest income 2,000
Rent income 1,200
Income before tax 41,200

Important to notice:

Prepaid expenses is an asset – you paid ahead – gives future benefit

Accrued expenses 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.

20.  Using the following information – prepare a Statement of Retained Earnings

a.  cumulative dividends paid for prior periods $30,000
b.  dividends paid to shareholders during this year $5,000
c.  cumulative earnings for all prior periods $250,000
d.  net loss this period $22,000
e.  issued shares to shareholders this period $100,000
f.   provided goods to customers this period $75,000
Check Your Answer
A statement of retained earnings shows what happened this period to change the retained earnings balance.  Retained earnings changes with profits/losses and with dividends paid.  Retained earnings is the total profits and losses less dividends paid for all periods cumulative.

Beginning Retained Earnings $220,000 (250,000 cum. earnings-30,000 cum. dividends)
– Loss this period ($22,000)
– Dividends paid this period ($5,000)
Ending Retained Earnings $193,000

Important to notice:

The beginning balance is total profits and losses less total dividends paid for all prior periods and does not include this year.  The ending balance includes this year.

Shares issued changes common stock, not retained earnings.

Goods provided to customers is a revenue which is already included in the loss.