Changes to the Balance Sheet
Easy Practice Test
Introduction to Accounting
Changes to the Balance Sheet
Easy Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. The purchase of equipment for cash will be accounted for as
a. an increase in an asset and a decrease of an asset
b. an increase in an asset and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in an asset and an increase in owner’s equity
Answer
A. Equipment is an asset and cash is an asset. One asset is traded for another; which keeps the accounting equation in balance.
2. The repayment of amounts owed to a bank will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
C. Amounts owed are liabilities. Making a payment decreases a liability. Making a payment always decreases the asset cash. This keeps the accounting equation in balance.
3. A payment for the right to use a symbol will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
A. The right to use a symbol is an asset called trademark. Paying for a trademark is trading one asset for another; a trademark for cash.
4. The purchase of items to be sold to customers, on account, will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
B. Inventory (items to be sold to customers) is an asset and “on account” means that the inventory will be paid for at a later date. Paying later is a liability. This increases an asset (inventory) and increases a liability (accounts payable.)
5. The payment made to a supplier for amounts owed will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
C. Paying always decreases the asset, cash. Paying amounts owed always decreases a liability.
6. The payment for rent before the space is used will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
A. Paying for a service (space to use) ahead of time is an asset, called prepaid expense. This is trading one asset for another; cash for a prepaid.
7. The profits of a company will change which of the following?
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in net assets and a decrease in liabilities
d. an increase in net assets and an increase in owner’s equity
Answer
D. The earnings of the company are initially reported on the income statement. All cumulative earnings are part of retained earnings. Owner’s equity, which includes retained earnings, will increase. To keep the accounting equation in balance, net assets (assets less liabilities) must also increase.
8. The purchase of office supplies on account will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
B. Office supplies is an asset that will be used in the future; on account means the office supplies will be paid for in the future, which is a liability.
9. Borrowing money from the bank will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
B. Borrowing money increases a liability. Borrowing money means cash is received, which increases an asset.
10. Issuing common stock to owners will be accounted for as
a. an increase in assets and a decrease in assets
b. an increase in assets and an increase in liabilities
c. a decrease in assets and a decrease in liabilities
d. an increase in assets and an increase in owner’s equity
Answer
D. Issuing common stock is selling ownership for cash. This increases common stock, which is owner’s equity and increases cash.
11. Look at the following balance sheet and describe the transactions that have occurred at the company.
Answer
Start with owner’s equity and then liabilities and state how the company raised their money.
1) Received $10,000 from investors for ownership in the company
2) Borrowed $50,000 from a bank
Then go to the asset side and state how the company used the money received
3) Paid $10,000 to rent space from another party before the space was used.
4) Purchased office furniture that cost $10,000.
5) Purchased computer equipment that cost $5,000
12. Answer the questions and state the account name for each of the following transactions.
a. cash received from borrowing from a bank; repayment to be in ten years.
1) What does the company have more or less of?
2) Does the company owe more or less?
3) Was there an exchange that involved the owners?
b. cash loaned to another company; expected to be received in six months.
1) What does the company have more or less of?
2) Does the company owe more or less?
3) Was there an exchange that involved the owners?
c. purchase items to be sold to customers; on account
1) What does the company have more or less of?
2) Does the company owe more or less?
3) Was there an exchange that involved the owners?
d. purchased a forklift to be used in the warehouse, paid cash
1) What does the company have more or less of?
2) Does the company owe more or less?
3) Was there an exchange that involved the owners?
e. paid for a patent to protect the company’s products
1) What does the company have more or less of?
2) Does the company owe more or less?
3) Was there an exchange that involved the owners?
Answer
a. cash received from borrowing from a bank; repayment to be in ten years.
1) What does the company have more or less of? more cash
2) Does the company owe more or less? more, long term notes payable
3) Was there an exchange that involved the owners? no
b. cash loaned to another company; expected to be received in six months.
1) What does the company have more or less of? less cash and more short-term notes receivable
2) Does the company owe more or less? no
3) Was there an exchange that involved the owners? no
c. purchase items to be sold to customers; on account
1) What does the company have more or less of? more inventory
2) Does the company owe more or less? more accounts payable
3) Was there an exchange that involved the owners? no
d. purchased a forklift to be used in the warehouse, paid cash
1) What does the company have more or less of? less cash,more equipment (forklift)
2) Does the company owe more or less? no
3) Was there an exchange that involved the owners? no
e. paid for a patent to protect the company’s products.
1) What does the company have more or less of? more patent, less cash
2) Does the company owe more or less? no
3) Was there an exchange that involved the owners? no
13. State the two items the company exchanged in the following transactions? Use the proper common balance sheet account name.
a. The company purchased desks and bookcases; agreed to pay for the items in 30 days.
b. The company borrowed money from investors that will be repaid in 5 years.
c. The company purchased new laptops for each of their employees; paid cash.
d. The company paid for insurance coverage for the next 3 months.
e. The company received money from investors that became owners of the company.
f. The company purchased items that will be used up in day to day business on account.
g. The company paid for the right to use a technological innovation.
h. The company invested their money in another company (expected to be held for 3 years)
i. Paid for advertising expected to be run over the next 3 months.
j. The company user’s manual for the product was protected; paid cash.
Answer
- The company purchased desks and bookcases; agreed to pay for the items in 30 days.
Office Furniture and Accounts Payable - The company borrowed money from investors that will be repaid in 5 years.
Bonds Payable and Cash - The company purchased new laptops for each of their employees; paid cash.
Computer Equipment and Cash - The company paid for insurance coverage for the next 3 months.
Prepaid Insurance and Cash - The company received money from investors that became owners of the company.
Cash and Common Stock - The company purchased items that will be used up in day to day business; on account.
Supplies and Accounts Payable - The company paid for the right to use a technological innovation.
Patent and Cash - The company invested their money in another company (expected to be held for 3 years)
Cash and Long-term Investments - Paid cash for advertising expected to be run over the next 3 months.
Prepaid Advertising and Cash - The company user’s manual for the product was protected; paid cash.
Copyright and Cash