Changes to the Balance Sheet
Self Test
Introduction to Accounting
Changes to the Balance Sheet
Self Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Which of the following is the accounting equation?
a. Assets = Liabilities – Owner’s Equity
b. Liabilities = Assets + Owner’s Equity
c. Owner’s Equity = Liabilities + Assets
d. Assets = Liabilities + Owner’s Equity
Answer
D. The accounting equation is: Assets = Liabilities + Owner’s Equity
What a company has (assets) is either owed (liabilities) or owned (owner’s equity)
2. The accounting system is often referred to as a
a. double entry accounting system
b. transaction system
c. direct system
d. management decision system
Answer
A. The accounting system is referred to as a double entry accounting system because at least two things must change for the accounting equation to remain in balance.
3. A transaction normally represents
a. the company has received something without giving up anything
b. the company has given up something without receiving something
c. the company exchanges of one thing for another
d. the company signs a contract to do something in the future
Answer
C. A transaction is an exchange of one thing for another. If no exchange occurs, the accounting equation will be out of balance because only one side of the equation changes.
4. An increase in a particular asset could cause
a. the company to owe less than it previously did
b. the company to always have more total assets than it previously did
c. the company to have less ownership than it previously did
d. the company to owe more than it previously did
Answer
D. An increase in a particular asset can occur with 1) a trade of one asset for another, 2) receiving an asset and owing for it, 3) gaining an asset by providing to customers (cash for revenue). When total assets increase, liabilities and owner’s equity on the other side of the accounting equation must also increase. An increase to a liability (owe more) will balance an increase to an asset. A particular asset can increase at the same time another asset decreases causing a decrease in total assets (also results in a loss.)
5. An increase in a liability will also cause
a. the company to owe less in total than it previously did
b. the company to provide more to customers
c. the company to have less expense than it previously did
d. the company to own more that it previously owned (more total assets)
Answer
D. An increase to a liability also requires an increase to an asset or a decrease to owner’s equity for the accounting equation to stay in balance. Providing to customers results in an asset in exchange, not a liability. All other answers will cause the accounting equation not to balance
6. A change in ownership (owner’s equity) could mean
a. the company incurred a profit or loss
b. the company exchanged one asset for another
c. the company borrowed money from the bank
d. the company owes more money to suppliers
Answer
A. Ownership changes when cash is received from owners, cash is paid back to owners and the company earns profits or losses. The owners are entitled to the profits of the company. Trading assets does not impact the other side of the accounting equation. Ownership is not a liability that must be repaid.
7. An “account” name is
a. the common name used to describe what occurred at the company
b. keeping track of how much profit is earned
c. only the total owed to lenders outside the company
d. the list of who owns the company
Answer
A. An “account” name is the common name that most companies use to describe an item of the company or an activity that occurred in the accounting system and on the financial statements.
8. Balance sheet accounts
a. are always cumulative
b. never have a beginning balance
c. start over each period
d. are temporary and go away at the end of the period
Answer
A. Balance sheet accounts are always cumulative. Cumulative is the total of everything added to the account less everything subtracted from the account since the day the business started operations. The beginning balance for this period is always the ending balance from the last period. Balance sheet accounts do not start over each period.
9. The company purchases equipment for cash. Which of the following will be the results of this transaction?
a. a change in total assets and total liabilities
b. a change in total assets and total owner’s equity
c. a change in total liabilities and total owner’s equity
d. no change in total assets or total liabilities
Answer
D. This is trading one asset (equipment) for another (cash). This will not change total assets. The other side of the equation should not change either.
10. The company borrows money from a bank. Which of the following will be the results of this transaction?
a. a change in total assets and total liabilities
b. a change in total assets and total owner’s equity
c. a change in total liabilities and total owner’s equity
d. no change in total assets or total liabilities
Answer
A. Borrowing money is a liability that must be repaid. An asset, cash, is received that must be paid back at a later time (liability).
11. The company purchases inventory on account. Which of the following will be the results of this transaction?
a. a change in total assets and total liabilities
b. a change in total assets and total owner’s equity
c. a change in total liabilities and total owner’s equity
d. no change in total assets or total liabilities
Answer
A. Inventory is an asset. A purchase of inventory increases an asset. On account means the inventory will be paid for in the future. Payment required in the future is a liability.
12. The company issues stock to investors (owners). Which of the following will be the results of this transaction?
a. a change in total assets and total liabilities
b. a change in total assets and total owner’s equity
c. a change in total liabilities and total owner’s equity
d. no change in total assets or total liabilities
Answer
B. Issuing stock to owners increases ownership, which is owner’s equity. Cash is received from the owners in exchange for ownership, increasing assets. Ownership is not a liability that must be paid back.
13. The company repays debt. Which of the following will be the results of this transaction?
a. a change in total assets and total liabilities
b. a change in total assets and total owner’s equity
c. a change in total liabilities and total owner’s equity
d. no change in total assets or total liabilities
Answer
A. Repaying always indicates that cash, an asset, is decreased. Repaying a liability (debt) will always decrease liabilities. Owner’s equity is not impacted by debt.
14. The company pays for insurance coverage before the coverage will be provided. Which of the following will result from this transaction?
a. a change in total assets and total liabilities
b. a change in total assets and total owner’s equity
c. a change in total liabilities and total owner’s equity
d. no change in total assets or total liabilities
Answer
D. Paying for a service ahead of time is an asset called prepaid expense. Paying always means that an asset, cash, is decreased. This transaction is trading one asset for another and does not impact liabilities or owner’s equity.
15. The company pays for a trademark. Which of the following will be the results of this transaction?
a. a change in total assets and total liabilities
b. a change in total assets and total owner’s equity
c. a change in total liabilities and total owner’s equity
d. no change in total assets or total liabilities
Answer
D. A trademark is an asset that gives the right to use something for future benefit. Paying always means that the asset cash is decreased. This is trading one asset for another. Trading one asset for another does not change liabilities or owner’s equity.