Balance Sheet

Hard Practice Test

Introduction to Accounting

Balance Sheet

Hard Practice Test

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

1. Current assets include all assets expected to be consumed or converted to cash

a. within one year or more
b. within one year or less
c. within the company’s operating cycle or one year whichever is less time
d. within the company’s operating cycle or one year whichever is more time

Answer

D. The term current means it is expected to result in a cash flow within the company’s operating cycle which can be more than one year. Normally, current is one year or less; however, if the company’s operating cycle is more than one year, current can be as long as the operating cycle. (Example: a construction company that works on projects that last more than one year.)

2. Which of the following is usually a characteristic of the balance sheet?

a. assets are listed in order of usefulness
b. the balance sheet is used to project future income
c. the balance sheet reports changes in financial position
d. the balance sheet reports economic resources

Answer

D. Economic resources are assets. Assets are reported on the balance sheet. The balance sheet is listed in the order of liquidity. It shows financial position at a given point in time and does not show the change or project future income. The income statement can be used to project future income given trends reported.

3. Which of the following statements related to the balance sheet is not true?

a. it is a primary source of information to determine a company’s liquidity
b. it is used to measure the fair market value of the company
c. it is a financial picture at a given point in time
d. it does not report all of a company’s assets

Answer

B. Balance sheet items are generally reported at historical cost and not fair market value (with the exception of investments with a reliable fair market value.) A company typically has intangible assets that bring future benefit that are not recorded and reported (such as internally generated goodwill.) The balance sheet does indicate liquidity and provides information on of a given date.

4. An operating cycle is best described as

a. any 12-month period
b. the average number of days required to sell inventory and pay bills
c. the average number of days required to collect receivables
d. the average number of days required to sell inventory and collect from customers

Answer

D. An operating cycle is the time it takes a company to sell goods or provide services and collect cash from the customer. It includes both selling inventory and collecting from the customer.

5. Which of the following is a current asset?

a. notes receivable expected to be collected in 36 months
b. a cash fund established to pay for expansion in 24 months
c. trademarks used in day to day business
d. supplies

Answer

D. A current asset is one that will be used up or converted to cash in one year or less. Supplies are typically used up in less than 60 days. Trademarks are used for longer than one year. (a. & b.) are longer than one year and are long term.

6. Which of the following would not be reported as property, plant, and equipment on the balance sheet?

a. leasehold improvements associated with a building being used
b. furniture and computer equipment being used
c. land held for speculation and resale
d. a building currently used for operating activities

Answer

C. Property, plant and equipment are assets used long term to generate revenues. Land being held for speculation and resale is not being used to generate revenues.

7. Investments are not reported as property, plant, equipment because

a. they can be sold at any time
b. they are not used in the operations of the business to generate revenues
c. they are recorded at original cost
d. they are depreciated

Answer

B. Property plant and equipment is used long term to generate revenues. Investments are not used in the operations of the business to generate revenue. An investment is providing your money to someone else and earning a return. P/P/E can be sold at any time if the company desires. Both P/P/E and investments are reported at original cost. Depreciation is associated only with using PPE over a period of time.

8. The balance sheet is reported at historical cost because

a. historical cost is the most reliable value that can be determined
b. fair market value is the most relevant value that can be determined
c. how much cash was originally paid is the most relevant information
d. how much an asset is worth is the most relevant information

Answer

A. Historical cost is used because it is reliable. It is easy to verify the amount paid for an asset. Fair market value is more relevant; however, it is often very subjective and may not be reliable.

9. Redbird recorded the following on their balance sheet:

Cash	35,000
Accounts Payable	12,000
Common Stock	15,000
Inventory	10,000
Long-term Debt	23,000
Bonds Payable	20,000

What will Redbird report for total liabilities?

a. 12,000
b. 43,000
c. 55,000
d. 62,000

Answer

C. The liabilities for Redbird includes: Accounts Payable (12,000) + Long-term Debt (23,000) + Bonds Payable (20,000) = Total liabilities (55,000).

10. Steal Edge reported net income of $20,000; $35,000; and $23,000 for the first three years of operation. If the company paid $2,000 of dividends each year, what would Steal Edge report as their retained earnings at the end of the third year?

a. $78,000
b. $84,000
c. $76,000
d. $72,000

Answer

D. Retained earnings is the cumulative profits kept in the company since the first day of operations. Retained earnings can be found by using the formula: Beginning retained earnings + Net Income – Dividends paid.
Year 1: 0 + 20,000 – 2,000 = 18,000.
Year 2: 18,000 + 35,000 – 2,000 = 51,000.
Year 3: 51,000 + 23,000 – 2,000 = 72,000.

11. Answer the questions below using the following balance sheets.

Best Buy, Inc.
Consolidated Balance Sheets
$ in millions, except per share and share amounts

				February 26, 20×1		February 27, 20×0

Assets
Current Assets
	Cash and cash equivalents			$	1,103	$	1,826
	Short-term investments				22		90
	Merchandise inventories				5,897		5,486
	XXXXXXXXXX				3,451		3,164
	Total current assets				10,473		10,566
		Net property and equipment			3,823		4,070
Goodwill					2,454		2,452
Tradenames, Net					133		159
XXXXXXXXXXXXX					966		1,055

Total Assets				$	17,849	$	18,302

Liabilities and Equity
Current Liabilities
	Accounts payable			$	4,894	$	5,276
	XXXXXXXXXXXXXXX				2,771		3,004
	Short-term debt				557		663
	Current portion of long-term debt				441		35
	Total current liabilities				8,663		8,978
Long-Term Debt					711		1,104
XXXXXXXXXXXXXXX					1,183		1,256
Total Liabilities					10,557		11,338
Equity
		Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 392,590,000 and 418,815,000 shares, respectively			39		42
		XXXXXXXXXXXXX			881		1,125
		Retained earnings			6,372		5,797
			Total equity		7,292		6,964

Total Liabilities and Equity				$	17,849	$	18,302

Microsoft Corp.
BALANCE SHEETS


(In millions)


June 30,	20×1			20×0

Assets
Current assets:
Cash and cash equivalents	$	9,610		$	5,505
Short-term investments		43,162			31,283
Inventories		1,372			740
XXXXXXXXXX		20,774			18,148
Total current assets		74,918			55,676
Property and equipment, net		8,162			7,630
Equity and other investments		10,865			7,754
Goodwill		12,581			12,394
Intangible assets, net		744			1,158
XXXXXXXXXX		1,434			1,501

Total assets	$	108,704		$	86,113

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,197		$	4,025
Short-term debt		0			1,000
XXXXXXXXXX		24,577			21,122

Total current liabilities		28,774			26,147
Long-term debt		11,921			4,939
XXXXXXXXXX		10,926			8,852

Total liabilities		51,621			39,938
Stockholders’ equity:
Common stock and paid-in capital		63,415			62,856
Retained deficit		(6,332	)		(16,681	)

Total stockholders’ equity		57,083			46,175

Total liabilities and stockholders’ equity	$	108,704		$	86,113

Answer the following questions using the above balance sheets for the most current year:

a. Which company has earned the most and kept the earnings in the business since the first day of operations?

b. Determine if either company will have trouble paying the invoices that are due in 30 days or less.

c. Which company appears to have enough cash and investments to carry out a new business strategy?

d. Which company has paid the most for physical long-term assets used to operate the business?

e. Which company has received the most money from investors?

f. Which company has had to borrow the most amount of money from banks or financial institutions that is due in more than 1 year?

g. Which company has the higher amount in the account used to record the amount paid above the fair value for the net identifiable assets when acquiring a customer?

h. Which company has the highest amount in investments that are expected to be held for more than one year?

i. Which of these two companies have borrowed money to finance operations that is due within 1 year?

j. Which company has more items being held to sell to customers?

k. Which of the two companies increased the amount in investments expected to be held for less than 1 year?

Answer

a. Best Buy. This is the definition of retained earnings. Best Buy’s retained earnings is $6,372.
b. Best Buy. To find the answer to this question you must compare cash and cash equivalents to accounts payable. Best Buy has $1,103 in their cash and cash equivalents account, however they owe suppliers (accounts payable) $4,894 in 30 days.
c. Microsoft has the largest amount in their cash and equivalents account and their short-term investment account to carry out a new business strategy.
d. To find the answer you must compare the companies’ property, plant and equipment, net, accounts. Microsoft has $8,162 compared to Best Buy’s $3,823.
e. Microsoft is the correct answer. This is the common stock account on the balance sheet under the owner’s equity section. Microsoft has $63,415 compared to Best Buy’s $39.
f. Microsoft. To find the answer you must compare the long-term debt accounts for each company. Microsoft has long-term debt in the amount of $11,921 compared to Best Buy’s $711.
g. Microsoft. This question applies to the goodwill account. Microsoft has $12,581 in their goodwill account compared to Best Buy who recorded $2,454 in theirs.
h. Microsoft. This is the account titled equity and other investments. Best Buy has no such account.
i. Best Buy. This question applies to short-term debt and current portion of long-term debt. Microsoft reported $0 in short-term debt, while Best Buy reported $557 in their short-term debt account and $441 in their current portion of long-term debt account.
j. Best Buy. The account used for this question is inventory. Best Buy recorded $5,897 in inventory and Microsoft recorded $1,372 in their inventory account.
k. Microsoft. This question pertains to the short-term investment account. Microsoft reported an $11,879 increase in their short-term investment account (43,162-31,283). Best Buy reported a $68 decrease in short-term investments (22-90).

12. Answer the following questions using the most current year information reported on Wal-Mart’s and AT&T’s balance sheets.

a. Which company has paid more for services not yet performed for the company?
b. Determine if either company will have trouble paying the invoices that are due in 30
days or less.
c. Which company has the higher amount in the account used to record the amount
paid above the fair value for the net identifiable assets when acquiring a customer?
d. Which company has received the most money from investors?
e. Which company must pay more back, in 1 year or less, to banks and financial
institutions for money borrowed for operations?
f. Which company has earned the most and kept the earnings in the business since the
first day of operations?
g. Which company has more items being held to sell to customers?
h. Which company has paid the most for physical long-term assets used to operate
the business?
i. Do either of these companies have enough cash and investments to carry out a
new business strategy?
j. Which company has had to borrow the most amount of money from banks or
financial institutions that is due in more than 1 year?

WAL-MART STORES, INC. Consolidated Balance Sheets
		As of January 31,
(Amounts in millions except per share data)		20×1			20×0
ASSETS
*Current assets:*
Cash and cash equivalents		$	7,395		$	7,907
XXXXXXXXXX			5,220			4,284
Inventories			36,318			32,713
Prepaid expenses			2,960			3,128

Total current assets			51,893			48,032

Property and equipment, net			105,098			99,544


Goodwill			16,763			16,126
XXXXXXXXXX			6,909			6,705

Total assets		$	180,663		$	170,407


LIABILITIES AND EQUITY
*Current liabilities:*
Short-term borrowings		$	1,031		$	523
Accounts payable			33,557			30,451
XXXXXXXXXX			19,241			20,519
Long-term debt due within one year			4,655			4,050

Total current liabilities			58,484			55,543

Long-term debt			40,692			33,231
XXXXXXXXXX			10,240			8,985

Total Liabilities	109,416			97,759
*Equity:*
Common stock ($0.10 par value; 11,000 shares authorized, 3,516 and 3,786 issued and outstanding at January 31, 2011 and 2010, respectively)			352			378
Retained earnings			63,967			66,357
XXXXXXXXXX			6,928			5,913

Total equity			71,247			72,648

Total liabilities and equity		$	180,663		$	170,407

AT&T Inc.
Consolidated Balance Sheets
Dollars in millions except per share amounts
	December 31,
	20×1		20×0
*Assets*
Current Assets
Cash and cash equivalents	$	1,437	$	3,741
XXXXXXXXXX		17,056		19,884
Prepaid expenses		1,458		1,562
Total current assets		19,951		25,187

Property, Plant and Equipment – Net		103,196		99,519
Goodwill		73,601		72,782
Other Intangible Assets – Net		5,440		5,494
XXXXXXXXXXX		66,300		65,330
Total Assets	$	268,488	$	268,312

*Liabilities and Stockholders’ Equity*
Current Liabilities
Debt maturing within one year	$	7,196	$	7,361
Accounts payable		20,055		21,260
XXXXXXXXXXXX		6,700		8,330
Total current liabilities		33,951		36,951
Long-Term Debt		58,971		64,720
XXXXXXXXXXXX		63,616		64,652
Total liabilities		156,538		166,323
*Stockholders’ Equity*

		6,495		6,495
XXXXXXXXXXXXX		73,663		73,550
Retained earnings		31,792		21,944
Total stockholders’ equity		111,950		101,989
Total Liabilities and Stockholders’ Equity	$	268,488	$	268,312

Answer

a. Wal-Mart. This question is referring to prepaid expenses.
b. Both companies will have trouble. Compare cash and cash equivalents to accounts payable for each company. Both companies have less cash than what they owe to suppliers that is due in 30 days or less.
c. AT&T. Goodwill is the amount paid above fair value of net identifiable assets when acquiring a company. AT&T reported a greater amount for goodwill than Wal-Mart did.
d. AT&T. The money received from investors is common stock. AT&T reported common stock of $6,495 compared to the $352 reported by Wal-Mart.
e. AT&T. Money that must be paid back to banks and financial institutions in 1 year or less is the combination of short-term debt and current portion of long-term debt. AT&T recorded debt maturing within one year as $7,196. Wal-Mart has short-term borrowings and long-term debt due within one year of $1,031 and $4,655 respectively.
f. Wal-Mart. This question refers to retained earnings. Wal-Mart recorded retained earnings of $63,967 and AT&T reported retained earnings of $31,792.
g. Wal-Mart. Items held for sale to customers is inventory. In this case Wal-Mart is the only company of the two who reported inventory.
h. Wal-Mart. Property, plant and equipment are physical long-term assets used to operate the business. Wal-Mart reported $105,098 of property, plant and equipment. AT&T reported $103,196 of property, plant and equipment.
i. Neither company has the cash or investments to carry out a new business strategy. For one, they both do not have enough cash and cash equivalents to pay what they owe to suppliers. Secondly, both companies do not have enough current assets to cover their current liabilities.
j. AT&T. Money borrowed from banks or financial institutions that is due in more than 1 year is long-term debt. AT&T reported long-term debt as $58,971 compared to Wal-Mart who reported it as $40,692.

13. Use the following information to create a classified balance sheet for XYZ Company.

Items held for sale to customers	25,000
Right to reprint training material	12,000
Money received from investors for ownership	2,000
Money in investments to be held for 4 years	15,000
Amount paid for services not yet provided	10,000
Vehicles used in business operations	18,000
Right to use the name XYZ Company	4,000
Amounts owed to suppliers	20,000
Amounts owed to banks and other financing companies to be paid in 5 years	80,000
Money in the company’s bank	9,000
Equipment used in production	11,000
Items used up in day to day operations	7,000
Amount paid above fair value of identifiable net assets for acquired company	11,000
Amount of money borrowed from banks or financial institutions due within 1 year	15,000
Building used for administrative purposes	42,000
Amount borrowed from investors, due in 10 years	30,000
Money in investments to be held for 1 year	13,000

Answer

Assets		Liabilities
Cash	9,000	Accounts Payable	20,000
Inventory	25,000	Short-term Notes Payable	15,000
Supplies	7,000
Prepaid Expenses	10,000	1 Total Current Liabilities	35,000
Short-term Investments	13,000
		Long-term Notes Payable	80,000
Total Current Assets	64,000	Bonds Payable	30,000

Long-term Investments	15,000	Total Liabilities	145,000

Property, Plant and Equipment
Buildings	42,000
Equipment	11,000
Vehicles	18,000	Stockholder’s Equity
Total Property, Plant and Equipment	71,000
		Common Stock	2,000
		Retained Earnings	30,000
Intangible Assets
		Total S.E.	32,000
Goodwill	11,000
Copyright	12,000
Trademark	4,000
Total Intangible Assets	27,000

Total Assets	177,000	Total Liabilities + S.E.	177,000

Use the accounting equation to find Retained Earnings. Total Assets must equal total liabilities plus stockholder’s equity. Therefore, total assets minus total liabilities gives stockholder’s equity. Then, subtract common stock from total stockholder’s equity to find retained earnings.

Balance Sheet

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