Changes to the Balance Sheet
Medium Practice Test
Introduction to Accounting
Changes to the Balance Sheet
Medium Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. The repayment of amounts owed to a bank will
a. increase accounts payable and decrease cash
b. increase notes payable and decrease cash
c. decrease notes payable and decrease cash
d. increase profits and decrease cash
Answer
C. Amounts owed to a bank is called notes payable (or long-term debt.) Payments decrease cash. Accounts payable represents amounts owed to suppliers for repeat purchases such as inventory, supplies, utilities, etc. Making payments decreases amounts owed. Repaying what is owed is not reported on the income statement (not a service to customers or cost of providing the service to customers) and does not change profits or losses.
2. The payment for the right to use a symbol will
a. increase goodwill and decrease cash
b. increase copyrights and decrease cash
c. increase ownership and decrease cash
d. increase trademarks and decrease cash
Answer
D. The right to use a symbol is called a trademark. Payments made decrease cash.
3. The purchase of items to be sold to customers on account will
a. increase supplies and decrease cash
b. increase supplies and increase accounts payable
c. increase accounts payable and increase inventory
d. increase prepaid expense and increase accounts payable
Answer
C. Items to be sold to customers is called inventory. Purchasing on accounts means the amount has not yet been paid for (a liability) and it is part of accounts payable. An increase in prepaid expenses means that a service has been paid for ahead of time. A payment cannot be an increase in what is owed.
4. The payment made to a supplier for amounts owed will
a. decrease supplies and decrease cash
b. increase supplies and decrease accounts payable
c. decrease accounts payable and decrease cash
d. increase supplies and increase accounts payable
Answer
C. Payments owed to suppliers is called accounts payable. Making a payment reduces cash and reduces what is owed (accounts payable.) Paying a liability does not increase the asset that was received when the liability was incurred. The asset was increased when the asset was received and is not increases again when the payment is made.
5. The payment for rent before the space is used will
a. decrease prepaid rent and decrease cash
b. increase prepaid rent and decrease cash
c. decrease cash and increase accounts payable
d. decrease rent expense and increase accounts payable
Answer
B. Paying for a service ahead of time (using the rented space) is an asset called prepaid rent. Making a payment always decreases cash. This is trading one asset for another.
6. The earnings (profit) for the period will
a. decrease notes payable and decrease cash
b. increase common stock and increase cash
c. increase various assets (net) and increase retained earnings
d. decrease various assets (net) and increase retained earnings
Answer
C. Earnings for the period increases owner’s equity by increasing the account retained earnings. All profits for all periods are included in retained earnings. When the right side of the accounting equation increases, the left side must also increase, and net assets must increase also.
7. The purchase of copy paper and pens on account will
a. increase inventory and increase accounts payable
b. increase office supplies and decrease cash
c. increase prepaid supplies and decrease accounts payable
d. increase office supplies and increase accounts payable
Answer
D. Copy paper and pens are commonly called office supplies. The company has more and owes for the purchase. This is an increase to office supplies and an increase to accounts payable. Cash does not decrease if payment is not made.
8. Borrowing money from investors will
a. increase bonds payable and increase cash
b. increase notes payable and increase cash
c. increase cash and decrease bonds payable
d. increase cash and increase accounts payable
Answer
A. Borrowing money from investors that must be repaid back creates a liability called bonds payable. The company received the cash and must pay it back in the future. (c.) puts the accounting equation out of balance. It is not possible to get cash and decrease a liability. Liabilities decrease when cash is paid to the party owed.
9. Issuing common stock to owners will
a. increase bonds payable and increase cash
b. increase retained earnings and increase cash
c. increase cash and increase common stock
d. increase cash and increase dividends paid
Answer
C. Issuing common stock to owners is receiving funds from investors in exchange for ownership. This increases cash and common stock (ownership) and is not a loan that must be paid back.
10. Borrowing from the bank to purchase equipment (to be repaid in 5 years) will
a. increase notes payable and increase cash
b. increase common stock and increase long-term notes payable
c. increase cash and increase equipment
d. increase equipment and increase long-term notes payable
Answer
D. Borrowing from the bank is called notes payable. Repaying in 5 years makes it a long-term liability. Cash increases when amounts are borrowed and put into the company which is not the situation here. In this situation, the company does not receive cash and instead receives equipment and the cost of the equipment is paid for in the future. Increasing cash and equipment at the same time will put the accounting equation out of balance.
11. Prepare a classified balance sheet given the company had the following transactions.
1) Investors contributed $50,000 cash in return for ownership.
2) The company purchased computer equipment for $12,000 and paid cash,
3) The company paid cash for the next 2 months of advertising; $2,500
4) The company purchased $1,000 of materials that will be used up in day-to-day business; on account.
5) The company purchased $20,000 of items to be sold to customers, half was paid in cash and half was on account.
Answer
| Assets: | Liabilities: | |||
| Cash | $25,500 | Accounts Payable | $ 11,000 | |
| Prepaid Advertising | 2,500 | |||
| Inventory | 20,000 | |||
| Supplies | 1,000 | Total Current | ________ | |
| Total Current Assets | $49,000 | Liabilities | $11,000 | |
| Owner’s Equity: | ||||
| Equipment | $12,000 | |||
| Common Stock | 50,000 | |||
| _________ | ________ | |||
| Total Assets | $61,000 | Total Liabilities & Owner’s Equity | $61,000 | |
12. State the transactions that occurred at the company.
Answer
1) Investors gave the company $200,000 in return for ownership
2) The company financed the purchase of the equipment ($20,000) and must repay the financing within a year.
3) The company purchased supplies on account; $1,000
4) The company paid $5,000 for insurance coverage for the future.
5) The company put $96,000 of the cash received from investors into instruments that are expected to earn money for the company (investments)
6) The company put the remaining $99,000 cash in the bank.
13. Answer the questions below related to the balance sheet.
A) What type of a business doe this company have?
B) How did the company use the money they borrowed?
C) What must occur in order for the company to pay what it owes within the next year?
D) What types of other transactions has this company done?
Answer
A) Technology; the company most likely hosts websites or operates a website business. The types of property and equipment and intangible assets the company has indicates the type of business. No inventory indicates the company does not sell products. This is a service business.
B) Money borrowed via notes payable and long term debt was used primarily to purchase property and equipment.
C) The company does not have enough cash (and has no current assets that will turn to cash) to pay the amounts owed within the next year. The company must provide services and be paid more than the cost to provide the services during the year to be able to pay back what is owed. Retained earnings is negative which means the company has not made money providing services to customers yet. It is not very likely that the company will be able to pay back what is owed if past history continues.
D)
1) The company has paid for services ahead of time and purchased supplies to use in operating the business.
2) The company has made purchases of property and equipment on credit cards.
3) The company has received $10,000 from owners for ownership in the business.
4) The company has paid to protect the use of a technological innovation; $8,000