Balance Sheet

Medium Test

Medium 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

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

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

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

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

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

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

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

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

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

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

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

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. Which of the following is not true regarding a related party transaction?

a. a related party transaction does not occur with employees
b. a related party transaction could occur between family members
c. must be disclosed if the transaction is material
d. none of the above

A. Related party transactions are between the company and employees, family members, or related entities. Material related party translations must always be disclosed.  
14. Management is responsible for

a. establishing quality internal controls
b. the financial statements
c. both a. and b.
d. none of the above

C. The company’s management is responsible for both the financial statements and implementing internal controls that will prevent material misstatement of the financial statements.
15. The wording in the auditor’s report is specified by

d. APB

C. The Public Company Auditing Oversight Board (PCAOB) is currently responsibility for regulating public company auditors, which includes the wording in the audit report.

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

Building 209,000 Accrued Expenses 9,000
Cash 35,000 Short term notes payable 135,000
Computer Equipment 26,000 Common Stock 200,000
Retained Earnings ?? Bonds Payable 75,000
Prepaid Expenses 12,000 Accumulated depreciation 72,000
Sales 123,000 Dividends paid 10,000
Depreciation Expense 18,000 Unearned Revenue 8,000
Accounts Payable 47,000 Long-term Notes Receivable 35,000
Interest Payable 1,000 Long Term Debt 100,000
Cost of Goods Sold 75,000 Goodwill 125,000
Long term Investments 80,000 Treasury Stock 15,000
Inventory 56,000 Short Term Investments 50,000
Accounts Receivable 42,000 Trademark, net 6,000

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

Assets: Liabilities:
Current Assets: Current Liabilities:
Cash 35,000 Accounts Payable 47,000
Accounts Receivable 42,000 Accrued Expenses 9,000
Inventory 56,000 Interest Payable 1,000
Prepaid Expenses 12,000 Short Term Notes Payable 135,000
Short Term Investment 50,000 Unearned Revenue 8,000
    Total Current Assets 195,000     Total Current Liabilities 200,000
Long-term Investments 80,000 Long Term Debt 100,000
Long-term Notes Rec 35,000 Bonds Payable 75,000
Property/Plant/Equipment:    Total Liabilities 375,000
    Building 209,000
   Computer Equipment 26,000
 Less Accum Depreciation (72,000)
       Net P/P/E 163,000 Stockholder’s Equity:
Intangible Assets Common Stock 200,000
  Goodwill 125,000 Retained Earnings 44,000
    Trademark, net 6,000 less Treasury Stock (15,000)
      Total Intangible Assets 131,000 Total Stockholder’s Equity 229,000
        Total Assets 604,000 = Total Liabilities & Stockholder’s Equity 604,000
17. 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.

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. + O.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 month’s profits

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

Cash $ 34,000
Inventory $ 97,000
Long term Debt – 10% to be paid in 1 year $120,000
Patent $ 11,000
Sales $378,000
Cost of Goods Sold $195,000
Accumulated Depreciation $ 56,000
Land $100,000
Prepaid Insurance $ 4,000
Paid in Capital $ 29,000
Salary Expense $ 39,000
Supplies Expense $ 3,000
Unearned Revenue $ 2,500
Manufacturing Building $125,000
Accrued Expense $ 14,000
Common Stock $ 1,000
Mortgage Payable – due in 10 years $ 90,000
Accounts Receivable $ 27,000
Long-Term Investment $ 50,000
Goodwill $ 20,000
Notes Receivable – due in 6 months $ 5,000
Manufacturing Equipment $ 89,000

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.


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

Cash $ 34,000
Inventory $ 97,000
Prepaid Insurance $ 4,000
Accounts Receivable $ 27,000
Notes Receivable – due in 6 months $ 5,000


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

Long-Term Investment $ 50,000
   Land $100,000
   Manufacturing Building $125,000
   Manufacturing Equipment $   89,000
     – Accumulated Depreciation $ (56,000)
      Net Property, Plant, Equipment $ 258,000
Intangible Assets
   Patent $ 11,000
     Goodwill $ 20,000
      Total Intangible Assets $ 31,000
Total Long-term Liabilities $339,000


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

Unearned Revenue $ 2,500
Accrued Expense $ 14,000
Current maturities of LTD $ 12,000  (120,000 x 10%)
    Total current liabilities $ 28,500


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

Mortgage Payable – due in 10 years $ 90,000
Long Term Debt – 10% paid in 1 year $108,000 (120,000 x 90%)
    Total Long Term Liabilities $198,000


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 $278,500 



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.