Balance Sheet
Medium Practice Test
Introduction to Accounting
Balance Sheet
Medium Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. 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
Answer
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 the definition.
2. The most common difference between notes payable and accounts payable is
a. one if legally enforceable and one is not
b. one is always 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
Answer
D. A notes payable carries interest and accounts payable does not carry 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.
3. 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
Answer
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.
4. 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. changes in owner’s equity during a period of time
Answer
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 are presented. The balance sheet is cumulative and does not show changes during a period of time.
5. 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
Answer
A. Assets less liabilities equals owner’s equity. This is at book value; the net at 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.
6. 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. liquid non-current assets
Answer
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.
7. 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 the fair market value of net assets
c. the amount paid for a company above the fair market value of net assets
d. always adjusted to fair market value
Answer
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 recorded it is not increased to fair market value. Internally generated goodwill (a.) is not reported on the balance sheet due to unreliability of the estimated amount and the fact that no exchange has occurred.
8. Which of the following transactions is not typically part of the operating cycle:
a. Pay for assets purchased
b. Collect from customers
c. Reporting financial numbers
d. Provide goods or service to customers
Answer
C. Reporting financial numbers is not a part of the operating cycle. The operating cycle is the time it takes the company to spend cash to do business and get the cash back again. The operating cycle typically involves purchasing assets to be sold to customers, paying for assets purchased, selling assets or providing service to customers, and collecting from customers.
9. Which of the following criteria is not required to be an intangible asset:
a. Has physical substance
b. Is used long-term to generate revenue
c. Has no physical substance
d. Gives the company an exclusive right
Answer
A. An intangible asset has no physical substance. The other choices are all part of the definition of an intangible asset.
10. The balance sheet will be used by an investor to answer which of the following questions?
a. How much did the company earn this period?
b. What was paid for inventory purchased this period?
c. What is owed for purchases?
d. What is the fair market value of all 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 the amount of cash paid or received during the period. It is reported at historical cost because cost is reliable.
11. Answer the following questions using the balance sheet as of May 31, 20×1
for Nike (see below.)
a. How much does Nike owe to banks or other financing institutions that is due in more than 1 year?
b. How much has Nike paid for physical long-term assets, net, used to operate business?
c. What is the amount Nike reports for items that are held for sale to customers?
d. What is the amount of profits that Nike has kept in the business since the first day of operations?
e. How much has Nike paid in advance for services not yet provided to Nike?
f. What is the amount that Nike has in investments that are expected to be held for less than a year?
g. How much have investors paid for ownership in the company?
h. What is the amount that Nike owes to suppliers?
i. How much cash does Nike have in the bank and invested with no risk?
j. What is the amount of long-term debt that is due within 1 year?
k. What is the amount that Nike paid over fair value of net assets when they acquired companies?
l. How much did Nike borrow from banks or financing institutions that must be repaid in 1 year or less?
NIKE, INC.
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May 31, |
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20×1 |
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20×0 |
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(In millions) |
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ASSETS |
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Current assets: |
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Cash and equivalents |
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$ |
1,955 |
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$ |
3,079 |
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Short-term investments |
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2,583 |
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2,067 |
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XXXXXXXXXXXXX |
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3,138 |
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2,650 |
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Inventories |
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2,715 |
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2,041 |
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XXXXXXXXXXXXX |
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312 |
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249 |
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Prepaid expenses |
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594 |
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873 |
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Total current assets |
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11,297 |
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10,959 |
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Property, plant and |
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2,115 |
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1,932 |
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Identifiable intangible assets, net |
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487 |
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467 |
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Goodwill |
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205 |
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188 |
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XXXXXXXXXXXXX |
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894 |
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873 |
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Total assets |
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$ |
14,998 |
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$ |
14,419 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
200 |
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$ |
7 |
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Notes payable |
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187 |
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139 |
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Accounts payable |
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1,469 |
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1,255 |
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XXXXXXXXXXXXX |
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2,102 |
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1,963 |
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Total current liabilities |
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3,958 |
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3,364 |
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Long-term debt |
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276 |
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446 |
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XXXXXXXXXXXXXXXX |
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921 |
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855 |
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Total liabilities |
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5,155 |
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4,665 |
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Shareholders’ equity: |
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Common stock at stated |
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Class B — 378 and 394 |
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3,947 |
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3,444 |
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XXXXXXXXXXXXXX |
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95 |
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215 |
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Retained earnings |
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5,801 |
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6,095 |
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Total shareholders’ equity |
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9,843 |
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9,754 |
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Total liabilities and shareholders’ equity |
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$ |
14,998 |
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$ |
14,419 |
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Answer
a. Long-term debt = 276
b. Property, plant and equipment, net = 2,115
c. Inventory = 2,715
d Retained earnings = 5,801
e. Prepaid expenses = 594
f. Short-term investments = 2,583
g. Common stock = 3,947
h. Accounts payable = 1,469
i. Cash and equivalents = 1,955
j. Current portion of long-term debt = 200
k. Goodwill = 205
l. Short-term notes payable = 187
12. Answer the following questions using the 201x balance sheet for General Electric.
a. What is the amount of money that a bank would accept for deposit to GE’s account and investments with no risk?
b. What is the amount that GE owes to suppliers?
c. What is the amount that investors have paid for ownership in GE?
d. What is the amount that GE paid above fair value for companies they have acquired?
e. How much did GE borrow from banks or financial institutions that is due within 1 year?
f. How much did GE pay to purchase physical long-term assets, net, that are used in its business operations?
g. How much did GE borrow that is due in more than 1 year?
h. What is the amount of cumulative profits that GE has kept in the business since the first day of operations?
i. What is the cost of the items that GE is holding for sale to customers?
j. What could be included in “other intangible assets, net”?
General Electric
Statement of Financial Position
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General Electric Company |
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At |
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201x |
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200x |
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Assets |
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Cash and equivalents |
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$ |
78,958 |
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$ |
70,488 |
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Investment securities |
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43,938 |
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51,343 |
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XXXXXXXXXX |
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18,621 |
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16,458 |
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Inventories |
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11,526 |
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11,987 |
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XXXXXXXXXX |
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319,006 |
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333,303 |
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Property, plant and |
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66,214 |
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68,970 |
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Goodwill |
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64,473 |
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65,076 |
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Other intangible assets – |
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9,973 |
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11,751 |
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XXXXXXXXXX |
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42,165 |
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42,239 |
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Total assets(a) |
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$ |
751,216 |
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$ |
781,901 |
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Liabilities and equity |
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Short-term borrowings |
$ 117,959 |
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Accounts payable, |
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14,657 |
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19,527 |
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Other GE current |
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91,459 |
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64,121 |
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Total current liabilities |
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109,620 |
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213,517 |
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Long-term borrowings |
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293,323 |
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336,172 |
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Other long-term |
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109,620 |
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107,076 |
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627,018 |
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656,765 |
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Common stock |
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702 |
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702 |
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Retained earnings |
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131,137 |
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126,363 |
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XXXXXXXXXXXX |
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(7,641) |
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(1,929) |
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Total equity |
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124,198 |
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125,136 |
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XXXXXXXXXXXX |
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Total equity |
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124,198 |
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125,136 |
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Total liabilities and equity |
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$ |
751,216 |
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$ |
781,901 |
Answer
a. Cash and equivalents = 78,958
b. Accounts payable = 14,657
c. Common stock = 702
d. Goodwill = 64,473
e. Short-term borrowings = 117,959
f. Property, plant and equipment = 66,214
g. Long-term borrowings = 293,323
h. Retained Earnings =131,137
i. Inventories = 11,526
j. Trademarks, Copyrights, Customer lists, and Patents
13. Prepare a classified balance sheet using the following accounts:
| Accounts Payable | 35,000 |
| Equipment | 25,000 |
| Supplies | 2,000 |
| Cash and Cash equivalents | 55,000 |
| Common Stock | 4,000 |
| Notes Payable due in 5 years | 30,000 |
| Land | 15,000 |
| Patent | 8,000 |
| Investment to be held for 3 years | 9,000 |
| Inventory | 18,000 |
| Long-term Debt due within 1 year | 5,000 |
| Building | 25,000 |
| Retained Earnings | ??? |
| Goodwill | 13,000 |
| Owed to Investors | 40,000 |
| Prepaid Expenses | 6,000 |
Answer
| Assets | Liabilities | |||
| Current Assets: | Current Liabilities: | |||
| Cash and cash equivalents | 55,000 | Accounts Payable | 35,000 | |
| Inventory | 18,000 | Current Portion of | 5,000 | |
| Supplies | 2,000 | long-term debt |
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| Prepaid Expenses |
6,000 | |||
| Total Current Liabilities | 40,000 | |||
| Total Current Assets | 81,000 | |||
| Long-term Investments | 9,000 | Long-term Notes Payable | 30,000 | |
| Bonds Payable | 40,000 | |||
| Property, Plant and Equipment | ||||
| Total Liabilities | 110,000 | |||
| Land | 15,000 | |||
| Building | 25,000 | |||
| Equipment |
25,000 | Stockholder’s Equity | ||
| Total Property, Plant and Equipment | 65,000 | |||
| Common Stock | 4,000 | |||
| Retained Earnings |
62,000 | |||
| Intangible Assets | ||||
| Total S.E. | 66,000 | |||
| Goodwill | 13,000 | |||
| Patent |
8,000 | |||
| Total Intangible Assets | 21,000 | |||
| Total Assets | 176,000 | Total Liabilities + S.E. | 176,000 | |
Use the accounting equation to find Retained Earnings. Total Assets must equal total liabilities plus stockholder’s equity. Find total stockholder’s equity by taking total assets minus total liabilities. Then subtract common stock from total stockholder’s equity to find retained earnings.