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Balance Sheet

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) Hard Practice Test
3) Practice as You Learn  
4) Easy Practice Test  

Self Test - Do You Understand?

1.  Liabilities are
            a.  increases in assets from profitsIncorrect
            b.  obligations resulting from past transactionsB. 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. 
            c.  services provided to customersIncorrect
            d.  equal to increases in equityIncorrect


2.  Prepaid expenses is an asset because
            a.  the company owns itIncorrect
            b.  the company has paid ahead and therefore has future benefitIncorrect
            c.  a past transaction has occurredIncorrect
            d.  all of the aboveD. 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.  assetsA. 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.
            b.  liabilitiesIncorrect
            c.  owner’s equityIncorrect
            d.  expensesIncorrect


4.  What increases retained earnings?
            a. revenuesA. 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. 
            b. assetsIncorrect
            c. dividends paidIncorrect
            d. liabilitiesIncorrect


5.  The definition of an asset is
            a.  possible future economic benefit as a result of a past transaction that is
                   owned or controlledIncorrect

            b.  probable future economic benefit as a result of a past transaction that is
                 owned or controlledB. 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.

            c.  resources that are projected to give future benefitIncorrect
            d.  the use of a future economic resourceIncorrect


6.  The definition of a liability is
            a.  possible future use of an economic benefit as a result of a past transactionIncorrect
            b.  probable future use of an economic benefit as a result of a past transaction 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. 
            c.  resources that are projected to be obtained in the future to be used to pay
                   future obligationsIncorrect

            d.  a future economic resource Incorrect

7.  Assets are listed on the balance sheet in the order of
            a.  largest amount to smallestIncorrect
            b.  liquidityB. 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.
            c.  date of when they were acquiredIncorrect
            d.  importance Incorrect


8.  Which of the following is not considered a usual balance sheet category?
            a.  current assetsIncorrect
            b.  current liabilitiesIncorrect
            c.  intangible liabilitiesC. 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.
            d.  intangible assetsIncorrect


9.  Which of the following is a limitation to the balance sheet?
            a.  it is listed in the order of liquidityIncorrect
            b.  it reports assets at historical costB. 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.
            c.  it subtotals categoriesIncorrect
            d.  different companies use different formats for the balance sheetIncorrect


10.   Which of the following is a current asset?
            a.  landIncorrect
            b.  patentIncorrect
            c.  suppliesC. 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.
            d.  accounts payableIncorrect


11.  Which of the following is not usually a current liability?
            a.  salaries payableIncorrect
            b.  notes payableIncorrect
            c.  bonds payableC. 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.
            d.  taxes payableIncorrect


12.  The operating cycle is completed when
            a.  the fiscal year endsIncorrect
            b.  cash is collected for inventory soldB. 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.
            c.  payment is made for goods purchasedIncorrect
            d.  the calendar year endsIncorrect


13.  Current liabilities are always paid
            a.  in 2 years or lessIncorrect
            b.  in 30 days or lessIncorrect
            c.  in 1 year or lessC. 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. 
            d.  at the time of purchaseIncorrect


14.  All of the following are current assets except
            a.  suppliesIncorrect
            b.  notes receivable to be collected in 2 yearsB. 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. 
            c.  inventoryIncorrect
            d.  investments held for 6 monthsIncorrect


15.  Machinery is listed under which category on the balance sheet?
            a.  current assetsIncorrect
            b.  long term assetsIncorrect
            c.  property, plant, and equipment 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.
            d.  intangible assetsIncorrect


16. Cash is always a:
            a. long-term assetIncorrect
            b. long-term liabilityIncorrect
            c. current liabilityIncorrect
            d. current asset D. Cash is always a current asset.


17. Ending retained earnings is equal to:
            a.  Beginning retained earnings plus net income minus dividends paidA. Beginning retained earnings plus net income minus dividends paid equals ending retained earnings. This is the formula used to find ending retained earnings.
            b.  Beginning retained earnings minus net income minus dividends paidIncorrect
            c.  Beginning retained earnings plus net income plus dividends paidIncorrect
            d.  Net income minus dividends paidIncorrect


18. Which of the following is a long-term liability?
            a.  Debt that is to be repaid in 6 monthsIncorrect
            b.  Amount owed to suppliers due within 30 daysIncorrect
            c.  Amount owed to investors due in 3 yearsC. 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.
            d.  Amount of a 5 year notes payable due next yearIncorrect


19. Retained earnings is
            a.  The current year’s profits for the companyIncorrect
            b.  The cumulative profits and losses since the beginning of operationsB. This is the definition of retained earnings; all the cumulative profits and losses kept in the business since the business began operations.
            c.  The amount of cash on handIncorrect
            d.  The amount of dividends paid to shareholdersIncorrect


20. A balance sheet reports a company’s financial position
            a.  from a certain dateIncorrect
            b.  between a certain dateIncorrect
            c.  for a date endingIncorrect
            d.  as of a certain dateD. A balance sheet is reported as of a certain date.

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