Accrual Basis Balance Sheet

Hard Practice Test

Introduction to Accounting

Accrual Basis Balance Sheet

Hard Practice Test

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

1. Which of the following statements is true?

a. The income statement represents when cash is paid and received.
b. The income statement ignores when the cash is paid or received and the balance sheet indicates if the cash was paid or received
c. The income statement and the balance sheet both ignore when cash is paid or received.
d. The cash flow statement is the only way to determine if customers have paid the company for goods or services provided to them.

Answer

B. The income statement ignores when cash is paid or received. The balance sheet indicates if the cash was paid or received by using the accounts: receivable, unearned or deferred, payable, accrued or prepaid. The balance sheet accounts represent when the cash is paid or received (before or after the revenue or expense is recorded.)

2. When receivables increase at a faster pace than sales increase, the company is most likely

a. not paying for invoices when the company receives the invoice
b. not collecting from customers within the agreed upon terms
c. not paying for invoices within the agreed upon terms
d. controlling expenses in relation to sales

Answer

B. Receivables are a result of sales the customer agrees to pay for in a later period; generally 30 days. When receivables are increasing at a faster rate than sales generally is a result of customers not paying within the set days to pay. The company does not pay for receivables; customers pay.

3. Treasury stock is reported as a negative on the balance sheet because

a. the common stock goes away when the company purchases it
b. there is less outside ownership from investors
c. the earnings of the company will be lower in the future
d. cash is received from the owners

Answer

B. Treasury stock is common stock that is now owned by the company. The company purchases common stock back from previous owners. Treasury stock is a reduction of shares owned by outside owners

4. Which of the following will not change as a result of the same transaction?

a. sales and accounts receivable
b. accounts receivable and unearned revenue
c. expense and accrued liability
d. revenue and unearned revenue

Answer

B. Accounts receivable occurs when the customer has not paid the company and unearned revenue occurs when the company has previously paid the company. The two cannot occur at the same time in the same transaction. Accounts receivable occurs when the goods or services have been provided to the customer and the customer has not yet paid. Accrued liabilities are expenses not yet paid. Unearned revenue becomes revenue when the goods or services are provided to the customer.

5. Which of the following could occur when goods are provided to the customer?

a. inventory is used up and is reported as “inventory expense” on the income statement
b. an unearned revenue occurs
c. an accounts receivable occurs
d. a prepaid expense is no longer an asset and becomes a revenue

Answer

C. A revenue occurs when goods or services are provided to customers. When the cash is collected from the customer determines what is reported on the balance sheet. An accounts receivable occurs when the customer pays in a later period. Inventory used up is reported as “cost of goods sold” on the income statement; not inventory expense. A prepaid that is used up is reported as an expense. Unearned revenue occurs when the goods have not yet been provided to the customer.

6. Which of the following is not related to services that were provided by the company?

a. unearned revenue
b. accounts receivable
c. dividends receivable
d. interest receivable

Answer

A. Unearned revenue relates to the fact that the service has not yet been provided to the customer. All receivables are reported as a result of services provided by the company and the company is expected to collect the cash in a future period. The name of the receivable indicates which type of service the company will be paid for in the future. Dividends and interest are related to letting others use the company’s money (investments).

7. The amount of “Property and Equipment, Net” reported on the balance sheet represents the

a. fair market value of property and equipment
b. appraised value of property and equipment
c. the cost of using the property and equipment for the current period
d. the cost of using the property and equipment that will be expensed in future periods

Answer

D. Property and equipment, net is a result of the initial cost of the asset less the amount used in all periods (including the current period) and has been previously reported as an expense on the income statement. The “net” amount is the amount that will be expensed on the income statement in future periods. The reported amount has nothing to do with fair market value or what the company believes the asset is worth.

8. Assets reported on the balance sheet that will not be directly exchanged for cash will eventually become

a. revenues on the income statement
b. expenses on the income statement
c. accounts receivable on the balance sheet
d. payables on the balance sheet

Answer

B. As assets are used up they are reported as an expense on the income statement.

9. Which of the following transactions is not reported as a change to an account on both the income statement and the balance sheet?

a. using an asset to produce revenues
b. a service is provided that was paid for in a previous period
c. providing goods to customers that were paid for in a previous period
d. paying dividends to owners in the current period

Answer

D. Paying dividends to shareholders is a return of cash to owners and is not an expense. Dividends are not reported on the income statement. This transaction changes cash and retained earnings. Providing goods or services to customers and receiving services are reported on the income statement. When the cash is exchanged is reported on the balance sheet using the proper account (accounts receivable, unearned revenue, prepaid expense, payable or accrued.)

10. Which of the following questions cannot be answered by using the balance sheet only?

a. amounts owed by customers for sales that occurred in the current period
b. amounts owed to suppliers to date
c. amounts owed to employees to date
d. the value of services not yet provided to customers that has been paid for by customers to date

Answer

A. The balance sheet reports cumulative amounts; to date. The balance sheet does not show what occurred in the current period. The balance sheet reports two years of amounts which can be used to determine the change in the account only. The balance sheet does not report what happened to cause the change in the account.

11. You opened a concession stand to sell snacks and drinks at the little league baseball field and began operating the business on June 1st. You have the following transactions occur from April to June.

a. purchase snacks and drinks on account for $2,300
b. pay $2,500 for additional snacks and drinks
c. pay $600 to the city for the use of the snack shack during this period
d. pay yourself $1,500 in wages to work the snack shack during this period
e. pay $600 for menu boards and racks to hold the drinks and snacks; the equipment is expected to be used for two years beginning April 1.
f. pay $175 for ice to keep the drinks cold
g. receive $3,000 from family members at the beginning of April in exchange for ownership
h. sell $4,600 in drinks and $3,340 in snacks for cash during the summer that cost a total of $2,100
i. borrowed $1,000 from your parents to make sure you don’t run out of cash
j. income tax is expected to be 30% of income before tax

Prepare an income statement, balance sheet, and statement of cash flows for the period April 1st to June 30th.

Answer

1st: Go through each transaction and identify which type of accounts and the account name will change (revenues, expenses, assets, liabilities or owner’s equity.)

Assets, liabilities, and owner’s equity will be reported on the balance sheet.

Revenues and expenses during the current period will be reported on the quarterly income statement.

a. purchase snacks and drinks on account for $2,300
Acquiring an asset (inventory) in exchange for a liability (accounts payable)
Not a revenue or expense

b. pay $2,500 for additional snacks and drinks
This is exchanging one asset (cash) for another (inventory)
Not revenue or expense

c. pay $600 to the city for the use of the snack shack during this period
This is paying for a service the city provided to the company.
This is rent expense.

d. pay yourself $1,500 in wages to work the snack shack during this period
This is paying for a service the employee (you) provided to the company.
This is salary expense.

e. pay $600 for menu boards and racks to hold the drinks and snacks; the
equipment is expected to be used for two years beginning April 1.

This is exchanging one asset (cash) for another asset (furniture/fixtures)
Not a revenue or an expense.

Using the equipment during the quarter is depreciation expense.
$600 / 24 months = $25 per month x 3 months = $75 depreciation expense

This is also a $75 increase to accumulated depreciation.

f. pay $175 for ice to keep the drinks cold
This is exchanging one asset (cash) for another asset (ice is supplies)
When the asset is used up, it is a supplies expense.
Expense since the ice is used shortly after purchase.

g. received $3,000 in exchange for ownership
This is receiving an asset (cash) in exchange for giving owner’s equity (common stock)

h. sell $4,600 in drinks and $3,340 in snacks for cash during the summer that cost a total of $2,100

Selling drinks and snacks is providing a service.
This is sales revenue.
Giving up the snacks to the customers is using an asset to provide the service and the cost of the asset used is an expense (cost of goods sold)

i. borrowed $1,000 from your parents to make sure you don’t run out of cash
This is receiving an asset (cash) in exchange for a liability (notes payable)
This is not a revenue or expense.

j. income tax expense is expected to be 30% of income before tax
Income tax expense and income tax payable is computed after the income statement is prepared to the point of income before tax

Income before tax is $3,490 x 30% is $1,047 tax expense

Income Statement:

Sales	$7,940	h.
– Cost of goods sold	($2,100)	h.
=Gross Profit	$5,840
– Operating expenses:
Supplies expense	($175)	f.
Wage expense	($1,500)	d.
Rent expense	($ 600)	c.
Depreciation Expense	($ 75)	e.
Operating Income	$3,490
Income Tax Expense	($1,047)
Net Income	$2,443

Balance Sheet:

Assets		Liabilities:
Cash	6,565	Accounts Payable	2,300
Inventory	2,700	Income Tax Payable	1,047
		Notes Payable	1,000
P/P/E:
Furniture & Fixtures	600	Total Liabilities	4,347
– Accum Depreciation	(75)
P/P/E, net	525
		Owner’s Equity
Total Assets	9,790	Common Stock	3,000
		Retained Earnings	2,443
		Total Owner’s Equity	5,443
		Total Liabilities & O.Eq.	9,790

Cash: -2,500 – 600 -1,500 -600 -175 +3,000 +7,940 + 1,000 = 6,565
Inventory: 2,300 + 2,500 – 2,100 = 2,700

Cash Flow Statement:

Cash collected from customers	7,940
Cash paid for inventory/to suppliers	(2,500)
Cash paid for rent	( 600)
Cash paid for wages	(1,500)
Cash paid for supplies	( 175)
Total cash from operating activities	3,165
Cash paid for furniture & fixtures	( 600)
Total cash used for investing activities	( 600)
Cash from borrowings	1,000
Cash from issuing stock	3,000
Total cash from financing activities	4,000
	____
Total change in cash	6,565

12. Answer the following questions using the balance sheet of Ebay.

a. How much do customers owe the company to date?
b. How much have customers paid the company before receiving goods or services from the company?
c. How much has Ebay paid for services that have not yet been provided?
d. How much value has been provided to customers during 20X0?
e. How much has been collected from customers during 20X0?
f. How much does Ebay owe for goods or services that have been provided?
g. What is the amount of physical assets used long-term to produce revenues that will be reported as an expense in future periods?
h. How much does Ebay owe related to goods sold to customers to date?

eBay Inc.
CONSOLIDATED BALANCE SHEET


	December 31, 20XX			December 31, 20X0
	(In thousands, except par value amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	3,999,818		$	5,577,411
Short-term investments	943,986			1,045,403
Accounts receivable, net	407,507			454,366
Loans and interest receivable, net	622,846			956,189
Funds receivable and customer accounts	2,157,945			2,550,731
Other current assets	328,106			481,238
Total current assets	8,460,208			11,065,338
Long-term investments	1,381,765			2,492,012
Property and equipment, net	1,314,328			1,523,333
Goodwill	6,143,086			6,193,163
Intangible assets, net	767,812			540,711
Other assets	341,121			189,205
Total assets	$	18,408,320		$	22,003,762
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	192,412		$	184,963
Short-term debt	—			300,000
Funds payable and amounts due to customers	2,157,945			2,550,731
Accrued expenses and other current liabilities	981,784			1,343,888
Deferred revenue	99,305			96,464
Income taxes payable	210,522			40,468
Total current liabilities	3,641,968			4,516,514
Deferred and other tax liabilities, net	929,143			645,457
Long-term debt	—			1,494,227
Other liabilities	49,561			45,385
Total liabilities	4,620,672			6,701,583
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, $0.001 par value; 3,580,000 shares authorized; 1,297,799 and 1,297,710 shares outstanding	1,486			1,513
Additional paid-in capital	9,986,199			10,480,709
Treasury stock at cost, 188,251 and 215,082 shares	(5,377,258		)	(6,091,435		)
Retained earnings	8,359,117			10,160,078
Accumulated other comprehensive income	818,104			751,314
Total stockholders’ equity	13,787,648			15,302,179
Total liabilities and stockholders’ equity	$	18,408,320		$	22,003,762

Answer

a. Accounts Receivable, net $454,366

b. Current deferred revenue $96,464

c. Prepaid is not listed separately and cannot be determined.

d. This is not reported on the balance sheet.
Revenues is reported on the income statement.

e. The things that occur to change an account are not reported on the balance sheet. The balance sheet reports cumulative amounts only. Cash collected from customers would be reported on a direct cash flow statement only.

f. Accounts Payable $184,963
Accrued expense and other current liabilities $1,343,888

g. Property and Equipment, net $1,523,333

h. Funds payable & amounts due to customers $2,550,731

13. Answer the following questions using the balance sheet of Salesforce.com for 20X1.

a. How much do customers owe the company to date that is expected to be collected?
b. How much has Salesforce.com paid for services that have not yet been received?
c. How much is owed related to leases?
d. How much is invested in financial instruments to earn money?
e. What is the amount of non physical long-term asset that will be reported as an expense spread over future periods?
f. How much does Salesforce.com owe related to investors, banks and financial institutions?
g. How much have customers paid the company before receiving goods or services from the company?
h. How much does Salesforce.com owe for goods and services that have been received?

Salesforce.com, inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)


	January 31, 20X1		January 31, 20X0
Assets
Current assets:
Cash and cash equivalents	$	424,292	$	1,011,306
Short-term marketable securities		72,678		230,659
Accounts receivable, net of allowance for doubtful accounts of $1,711 and $1,050 at January 31, 20X1 and 20X0, respectively		426,943		320,956
Deferred commissions		67,774		47,388
Deferred income taxes		27,516		40,116
Prepaid expenses and other current assets		55,721		55,734

Total current assets		1,074,924		1,706,159
Marketable securities, noncurrent		910,587		485,083
Property and equipment, net		387,174		89,711
Deferred commissions, noncurrent		48,842		28,140
Deferred income taxes, noncurrent		41,199		27,579
Capitalized software, net		127,987		34,809
Goodwill		396,081		48,955
Other assets, net		104,371		39,765

Total assets	$	3,091,165	$	2,460,201

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	18,106	$	14,791
Accrued expenses and other current liabilities		345,121		203,162
Deferred revenue		913,239		690,177

Total current liabilities		1,276,466		908,130
0.75% convertible senior notes due 20X5, net		472,538		450,198
Income taxes payable, noncurrent		18,481		17,551
Long-term lease liabilities and other		25,487		13,485
Deferred revenue, noncurrent		21,702		14,171

Total liabilities		1,814,674		1,403,535

Commitments and contingencies (Notes 8 and 9)
Salesforce.com stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized and none issued and outstanding		0		0
Common stock, $0.001 par value; 400,000,000 shares authorized, 132,921,147 and 127,152,449 issued and outstanding at January 31, 20X1 and 20X0, respectively		133		127
Additional paid-in capital		1,098,604		938,544
Accumulated other comprehensive income (loss)		6,719		(1,430	)
Retained earnings		171,035		106,561

Total stockholders’ equity controlling interest		1,276,491		1,043,802
Total stockholders’ equity noncontrolling interest		0		12,864

Total stockholders’ equity		1,276,491		1,056,666

Total liabilities and stockholders’ equity	$	3,091,165	$	2,460,201

Answer

a. Accounts Receivable, net $426,943

b. Prepaid expenses and other current assets $55,721

c. Long-term Lease Liabilities and other $25,487

d. Short term marketable securities $ 72,678
Marketable securities, noncurrent $910,587

e. Capitalized software, net $127,987
Goodwill is not expensed equally over each period.
Other assets could include intangible assets.

f. 0.75% convertible senior notes due 2015, net $472,538

g. Deferred Revenue, current $913,239
Deferred revenue, noncurrent $ 21,702

h. Accounts Payable $ 18,106
Accrued expenses and other current liabilities $345,121

14. Answer the following questions using the balance sheet of Deere and Company for the year ended 20X0.

a. How much do customers owe the company for products to date? Do not include financing receivables
b. How much have customers paid the company before receiving goods or services from the company?
c. How much has Deere paid for services that have not yet been received?
d. What is the cost of assets currently held for sale?
e. How much does Deere owe for retirees?
f. How much does Deere owe for goods and services that have been provided? Do not include amounts owed to retirees.
g. What is the amount of property, plant, and equipment that will be reported as an expense in future periods?

DEERE & COMPANY
CONSOLIDATED BALANCE SHEET
As of October 31, 20X0 and 20XX
(In millions of dollars except per share amounts)


	20X0			20XX
ASSETS
Cash and cash equivalents	$	3,790.6		$	4,651.7
Marketable securities	227.9			192.0
Receivables from unconsolidated affiliates	38.8			38.4
Trade accounts and notes receivable – net	3,464.2			2,616.9
Financing receivables – net	17,682.2			15,254.7
Restricted financing receivables – net	2,238.3			3,108.4
Other receivables	925.6			864.5
Equipment on operating leases – net	1,936.2			1,733.3
Inventories	3,063.0			2,397.3
Property and equipment – net	3,790.7			4,532.2
Investments in unconsolidated affiliates	244.5			212.8
Goodwill	998.6			1,036.5
Other intangible assets – net	117.0			136.3
Retirement benefits	146.7			94.4
Deferred income taxes	2,477.1			2,804.8
Other assets	1,194.0			1,458.4
Assets held for sale	931.4
Total Assets	$	43,266.8		$	41,132.6

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Short-term borrowings	$	7,534.5		$	7,158.9
Payables to unconsolidated affiliates	203.5			55.0
Accounts payable and accrued expenses	6,481.7			5,371.4
Deferred income taxes	144.3			167.3
Long-term borrowings	16,814.5			17,391.7
Retirement benefits and other liabilities	5,784.9			6,165.5
Total liabilities	36,963.4			36,309.8

Commitments and contingencies (Note 22)

STOCKHOLDERS’ EQUITY
Common stock, $1 par value (authorized — 1,200,000,000 shares; issued — 536,431,204 shares in 2010 and 2009), at paid-in amount	3,106.3			2,996.2
Common stock in treasury, 114,250,815 shares in 20X0 and 113,188,823 shares in 20XX, at cost	(5,789.5		)	(5,564.7		)
Retained earnings	12,353.1			10,980.5
Accumulated other comprehensive income (loss):
Retirement benefits adjustment	(3,797.0		)	(3,955.0		)
Cumulative translation adjustment	436.0			400.2
Unrealized loss on derivatives	(29.2		)	(44.1		)
Unrealized gain on investments	10.6			5.6
Accumulated other comprehensive income (loss)	(3,379.6		)	(3,593.3		)
Total Deere & Company stockholders’ equity	6,290.3			4,818.7
Noncontrolling interests	13.1			4.1
Total stockholders’ equity	6,303.4			4,822.8
Total Liabilities and Stockholders’ Equity	$	43,266.8		$	41,132.6

Answer

a. Trade Accounts and Notes Receivable $3,464.2

b. Nothing; there is no deferred or unearned revenue

c. Prepaid expenses is not reported in its own line item. How much is prepaid cannot be determined.

d. Assets held for sale $931.4

e. Included in: Retirement benefits and other liabilities $5,784.9
The amount owed for retirees and owed for other liabilities cannot be determined.

f. Payables to unconsolidated affiliates 203.5
Accounts payable and accrued expenses 6,481.7

Unconsolidated affiliates are companies that Deere has invested in and is a related party to the company.

g. Equipment on operating leases, net 1,936.2
Property and Equipment, net 3,790.7

Accrual Basis Balance Sheet

Hard Practice Test

Introduction to Accounting