Balance Sheet

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Key Things to Know

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Medium Test

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Hard Test

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

1. Asset categories would include all of the following except:

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

Answer
A.   An asset is a probable future economic benefit as a result of a past transaction.  There is no such thing as a contingent asset because a company can not project future assets and record them.  The other categories are commonly found on the balance sheet.
2. Liability categories would include which of the following:

a. current liabilities
b. short term liabilities
c. possible liabilities
d. owed to suppliers

Answer
A.   Liabilities are a probable use of an economic resource as a result of a past transaction.  Possible liabilities are not recorded. Amounts owed to suppliers is called accounts payable and is an item on the balance sheet not a category.  Short term liabilities is not a general category that is used. Current liabilities is the category for liabilities that will be repaid in one year or less.
3. Office supplies is listed under which category?

a. current liabilities
b. current assets
c. intangible assets
d. property, plant, equipment

Answer
B.  Office supplies are owned as a result of a past purchase transaction and give future benefit when used to provide goods and services.  Office supplies are assets used within one year and are current. Intangible assets have no physical substance and P/P/E is used longer than one year.
4. A patent is listed under which category?

a. current liabilities
b. current assets
c. intangible assets
d. property, plant, equipment

Answer
C.  A patent has no physical substance and is a right to do something that brings future benefit for normally 17 years.  P/P/E have physical substance.
5. Goodwill is recorded when

a. it is internally generated
b. the total asset value of the company is increased
c. it is paid for when purchasing another company
d. it is recognized by management

Answer
C.  Goodwill is recorded only when a total company is purchased. The amount recorded is the difference between the amount paid for the company and the fair market value of the net assets of the company.  Internally generated goodwill is not recorded because it can not be reliably valued.
6. Which of the following is a current liability?

a. accrued expenses
b. goodwill
c. inventory
d. retained earnings

Answer
A.  Accrued means incurred and not yet paid.  Not yet paid means it is owed. Owed is a liability.  The obligation is paid within one year making it a current liability.  Goodwill and inventory are assets used for producing future benefit. Retained earnings is the profits the owners keep which is part of owner’s equity.
7. The balance sheet will be used by an investor to answer which of the following questions?

a. how much the company earned this period
b. what was paid for inventory purchased this period
c. what is owed for inventory purchases
d. what is the fair market value of company assets

Answer
C.  The balance sheet reports assets (have), liabilities (owed) and owner’s equity (owned).  It does not report revenues and expenses which net to earnings and it does not show cash flows during the period.  It is reported at historical cost and not fair market value due to reliability.
8. Which accounts are typically included in stockholders equity?

a. common stock
b. retained earnings
c. additional paid in capital
d. all of the above

Answer
D.  All of the above, along with treasury stock are typically reported as stockholder’s equity.
9. Intangible assets

a. are not really a real asset
b. have no physical substance
c. are reported at fair market value
d. all of the above

Answer
B.   Intangible assets have no physical substance, are real assets because they provide future benefit gained from the right to use it and they are reported at historical cost just like all other assets. 
10. Property, plant and equipment is

a. used to produce revenues over a long period of time
b. does not generate an expense to the company
c. is used to produce revenues for a short period of time
d. are reported at fair market value

Answer
A.   By definition, P/P/E are assets used to produce revenues over a period of more than one year.  They are reported at historical cost for reliability. The use of the asset generates the expense called depreciation expense.  Depreciation expense is spreading the cost of the asset over the period of time the asset is used.
11. A patent on a new drug will be reported under

a. current assets
b. liquid non current assets
c. property, plant, equipment
d. intangible assets

Answer
D.  A patent has no physical substance and is granted for 17 years, making it long term. Intangible assets are long term assets with no physical substance.
12. The balance sheet reports

a. how assets were gained during a period of time
b. assets, liabilities and equity during a period of time
c. assets, liabilities and equity at a point in time
d. the cause of the change in assets during a period of time

Answer
C.   The balance sheet reports what the company has, what they owe and what is owned on a given date.  It normally reports two years and the user can see the difference in the categories reported, but not the cause. 
13. The operating cycle is

a. the same as current
b. always one year or less
c. the time it takes to use cash to produce a service and collect from the
customer
d. the time it takes a company to pay accounts payable

Answer
C. The operating cycle is the time it takes a company to use cash to produce a goods or service, provide the goods or services to the customer, and collect from the customer. In effect, cash is used to receive more (hopefully) cash. It is sometimes more than one year depending on the industry.
14. Current means

a. more than one year
b. less than one year
c. one year or the operating cycle whichever occurs first
d. one year or the operating cycle whichever is longer

Answer
D. Current means it will convert to cash or cash will be paid in one year or the operating cycle, whichever is longer.
15. The purpose of financial accounting disclosures is to

a. show what cash was used for
b. provide additional information for items reported to shareholders
c. provide detailed information on the company’s customers
d. explain immaterial transactions

Answer
B. Footnote disclosure provide additional relevant information for elements that are reported on the financial statements and material transactions and events that are not reported on the financial statements.
16. For each of the following accounts, indicate where the account is reported on the
balance sheet as of December 31st.

CA    Current asset          LTA Long term asset          SE Stockholder’s Equity
CL    Current liability       LTL Long term liability         N Not reported

________a. accounts receivable
________b. accounts payable
________c. treasury stock
________d. sales
________e. supplies
________ f. patents
________ g. accrued expenses
________ h. common stock
________ i. bonds payable
________ j. accumulated depreciation
________ k. cost of inventory sold
________ l. unearned revenues

Answer
CA     a.  accounts receivable
CL     b.  accounts payable
SE     c.  treasury stock
N        d.  sales
CA     e.  supplies
LTA    f.   patents
CL     g.  accrued expenses
SE     h.  common stock
LTL     i.   bonds payable
LTA     j.   accumulated depreciation
N         k.  cost of inventory sold
CL       l.   unearned revenues
17. The following items were taken from the records of a company as of December 31st.

Accounts Payable 27,000 Long-term Notes Receivable 15,000
Accounts Receivable 22,000 Patent, net 36,000
Building 201,000 Accrued Expenses 6,000
Cash 15,000 Long Term Debt 120,000
Equipment 76,000 Common Stock 50,000
Retained Earnings ?? Inventory 26,000
Prepaid Expenses    8,000 Accumulated depreciation 42,000
Long term Investments 100,000 Treasury Stock 5,000

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

Answer
Assets: Liabilities:
Current Assets: Current Liabilities:
Cash 15,000 Accounts Payable 27,000
Accounts Receivable 22,000 Accrued Expenses   6,000
Inventory 26,000 Total Current Liabilities 33,000
Prepaid Expenses   8,000
Long Term Debt 120,000
     Total Current Assets          71,000
Long-term Investments 100,000 Total Liabilities _______
153,000
Long-term Notes Rec 15,000
Property/Plant/Equipment:
Building 201,000
 Equipment 76,000
Less Accum Depreciation   (42,000)
           Net P/P/E 235,000 Stockholder’s Equity:
Intangible Assets Common Stock 50,000
Retained Earnings 259,000
Patents, net 36,000    less Treasury Stock (5,000)
     Total Intangible Assets 36,000    Total Stockholder’s Equity 304,000
            Total Assets _______
457,000		 =          Total Liabilities &
             Stockholder’s Equity   		_______
457,000

 

To find retained earnings, you first make total liabilities plus owner’s equity equal total assets.  Then subtract total liabilities from total liabilities and owner’s equity to be the total owner’s equity.  Subtract common stock from total owner’s equity to get retained earnings.    

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

18. Review each of the following transactions and determine if the transaction will increase (I) decrease (D) or have no effect (NA) on TOTAL ASSETS of the company.

_______1. Borrow money from the bank
_______2. Pay cash for inventory to sell to the customers
_______3. Issue common stock to investors
_______4. Purchase a truck for company use, agree to a notes payable
_______5. Pay employees who worked this week
_______6. Receive the utility bill – it will be paid later
_______7. Sell goods to a customer on account
_______8. Pay for insurance for the next 6 months
_______9. Use cash to make an investment to be held long term
______10. Purchase the company’s own stock from investors

Answer
  I        1.  Borrow money from the bank – Cash is increased

NA      2.  Pay cash for inventory to sell to the customers – Cash down and inventory up

                 for the same amount 

  I        3.  Issue common stock to investors – Cash increased

  I        4.  Purchase a truck for company use, agree to a notes payable  – Truck

                 increases and a liability increases

  D     5.  Pay employees who worked this week   – Cash down, expense incurred

NA      6.  Receive the utility bill – it will be paid later     No effect on asset until paid

  I        7.  Sell goods to a customer on account     Inventory decreases and accounts

                 receivable increases more than the inventory cost (sell for more than cost).

NA      8.  Pay for insurance for the next 6 months.   Cash decreases and prepaid

                  insurance increases the same amount

NA      9.  Use cash to make an investment to be held long term   

                   Traded one asset for another – cash for investment

  D     10.  Purchase the company’s own stock from investors

                    Cash decreases and treasury stock an owner’s equity decreases