Balance Sheet
Self Test
Introduction to Accounting
Balance Sheet
Self Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. Liabilities are
a. increases in assets from profits
b. obligations resulting from past transactions
c. services provided to customers
d. equal to increases in equity
Answer
B. A liability is something that a company owes (is obligated to pay) because the company was provided a good or service. Projected liabilities are not recorded. Services provided to customers are revenues. Equity increases with profits (revenues less expenses). Revenues generate an increase in profits and assets, not liabilities.
2. Prepaid expenses is an asset because
a. the company owns it
b. the company has paid ahead and therefore has future benefit
c. a past transaction has occurred
d. all of the above
Answer
D. An asset is a probable future economic benefit; something that will be used in the future to generate cash. It is also owned or controlled. The past transaction is the previous payment. The right to receive the service in the future is a future benefit. Prepaid expenses meet all of the requirements of an asset.
3. Economic resources is the technical term for
a. assets
b. liabilities
c. owner’s equity
d. expenses
Answer
A. An economic resource is an asset. A use of a future economic resource is a liability. Owner’s equity is resources less the obligated future use of the resource. An expense occurs when the economic resource is used up.
4. What increases retained earnings?
a. revenues
b. assets
c. dividends paid
d. liabilities
Answer
A. Retained earnings is increased by net income. Net income occurs when revenues are greater than expenses. Revenues increase retained earnings. Dividends paid directly reduce retained earnings. Liabilities and assets do not change retained earnings.
5. The definition of an asset is
a. possible future economic benefit as a result of a past transaction that is owned or controlled
b. probable future economic benefit as a result of a past transaction that is owned or controlled
c. resources that are projected to give future benefit
d. the use of a future economic resource
Answer
B. The technical definition of an asset is a probable future economic benefit as a result of a past transaction that is owned or controlled. A company can not record assets for projected events. An asset must give a probable future benefit. Projected future economic resources are not recorded.
6. The definition of a liability is
a. possible future use of an economic benefit as a result of a past transaction
b. probable future use of an economic benefit as a result of a past transaction
c. resources that are projected to be obtained in the future to be used to pay future obligations
d. a future economic resource
Answer
B. The technical definition of a liability is a probable future use of an economic benefit as a result of a past transaction. A transaction has to have occurred that obligates the company to give up an asset to repay the obligation.
7. Assets are listed on the balance sheet in the order of
a. largest amount to smallest
b. liquidity
c. date of when they were acquired
d. importance
Answer
B. Assets are listed on the balance sheet in the order of liquidity. Liquidity means how quickly the asset will turn to cash or be used up or how quickly a liability will be repaid with cash.
8. Which of the following is not considered a usual balance sheet category?
a. current assets
b. current liabilities
c. intangible liabilities
d. intangible assets
Answer
C. Intangibles are things owned that do not have physical substance. Things owned are assets. Intangible liabilities do not exist. Current indicates it will be received or paid within one year.
9. Which of the following is a limitation to the balance sheet?
a. it is listed in the order of liquidity
b. it reports assets at historical cost
c. it subtotals categories
d. different companies use different formats for the balance sheet
Answer
B. The balance sheet reports assets at historical cost which is not a representation of what the asset is worth. This limits the usefulness of the balance sheet, however, assets are reported at historical cost because this is a reliable value. There is only one required format for the balance sheet under GAAP. Listing in the order of liquidity is helpful for determining if the company will have enough cash to pay current liabilities. Subtotaling categories is helpful.
10. Which of the following is a current asset?
a. land
b. patent
c. supplies
d. accounts payable
Answer
C. Supplies is a current asset. It is used to generate revenues and is normally used up in less than one year. Land and patent are also assets; however, they are long term and held for more than one year. Accounts payable is a liability owed to suppliers.
11. Which of the following is not usually a current liability?
a. salaries payable
b. notes payable
c. bonds payable
d. taxes payable
Answer
C. Bonds payable is borrowing from investors, which has a normal payback of more than one year. Notes payable can be current or long term depending on when the note is repaid. Salaries are paid within 1 month. Taxes are usually paid within 3 months.
12. The operating cycle is completed when
a. the fiscal year ends
b. cash is collected for inventory sold
c. payment is made for goods purchased
d. the calendar year ends
Answer
B. The operating cycle is the time it takes a company to make inventory, sell the inventory and collect from the customer (or the time it takes the company to provide the service and collect from the customer). The fiscal year and calendar year do not determine the operating cycle since the operating cycle is part of ongoing business. Payment for goods purchased is only part of the operating cycle.
13. Current liabilities are always paid
a. in 2 years or less
b. in 30 days or less
c. in 1 year or less
d. at the time of purchase
Answer
C. Current means one year or less. Accounts payable is an example of a current liability that is normally paid within 30 days. Payments at the time of purchase is not a liability.
14. All of the following are current assets except
a. supplies
b. notes receivable to be collected in 2 years
c. inventory
d. investments held for 6 months
Answer
B. Current means one year or less. Notes receivable collected in two years is long term. Supplies are normally used up very quickly and then purchased again to be used up quickly. Inventory is normally sold to the customer within 6 months or less.
15. Machinery is listed under which category on the balance sheet?
a. current assets
b. long term assets
c. property, plant, and equipment
d. intangible assets
Answer
C. Property, plant, and equipment are long term assets that have physical substance that are used to produce revenues. Machinery has physical substance and is used for more than 1 year to produce revenues. Intangible assets do not have physical substance. There is no separate category (subtotal) called long term assets. Long term assets consist of long term liquid assets, property, plant, and equipment and intangible assets.
16. Cash is always a:
a. long-term asset
b. long-term liability
c. current liability
d. current asset
Answer
D. Cash is always a current asset.
17. Ending retained earnings is equal to:
a. Beginning retained earnings plus net income minus dividends paid
b. Beginning retained earnings minus net income minus dividends paid
c. Beginning retained earnings plus net income plus dividends paid
d. Net income minus dividends paid
Answer
A. Beginning retained earnings plus net income minus dividends paid equals ending retained earnings. This is the formula used to find ending retained earnings.
18. Which of the following is a long-term liability?
a. Debt that is to be repaid in 6 months
b. Amount owed to suppliers due within 30 days
c. Amount owed to investors due in 3 years
d. Amount of a 5 year notes payable due next year
Answer
C. This is bonds payable. A long-term liability is expected to be paid in more than 1 year. Amounts due next year are current liabilities; even when they are part of a note that is repaid over more than one year.
19. Retained earnings is
a. The current year’s profits for the company
b. The cumulative profits and losses since the beginning of operations
c. The amount of cash on hand
d. The amount of dividends paid to shareholders
Answer
B. This is the definition of retained earnings; all the cumulative profits and losses kept in the business since the business began operations.
20. A balance sheet reports a company’s financial position
a. from a certain date
b. between a certain date
c. for a date ending
d. as of a certain date
Answer
D. A balance sheet is reported as of a certain date.