Balance Sheet quiz level 1

Paying rent in advance will reduce cash and increase prepaid expenses, both of which are assets.

The cash received from customers represents an asset. The obligation to provide a product in the future is a liability called “unearned income” or “unearned revenue.” As the product is delivered, revenue will be recognized and the liability will be reduced.

Liabilities are obligations resulting from past events that are expected to require a future outflow of resources. Assets are resources that are expected to provide future benefits. Equity is residual ownership interest in an entity's assets (i.e., assets minus liabilities).

Common equity is a component of the balance sheet and represents the owners’ residual interest in the company’s assets after deducting its liabilities.

Common equity includes the initial investment by the shareholders and the retained earnings; this definition is incomplete.

Assets are a component of the balance sheet and represent resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow.

Common size balance sheets express all balance sheet items as a percentage of assets. Common size income statements express all income statement items as a percentage of sales .

The current ratio provides a comparison of assets that can be turned into cash relatively quickly and liabilities that must be paid within one year.

The other ratios are more suited to longer-term concerns.

The three elements of a balance sheet are assets, liabilities, and equity.

Items measured at current value reflect the value that was current at the end of the reporting period. The values of those items can change after the balance sheet is prepared.

(start of the reporting period) is incorrect because items measured at current value reflect the value that was current at the end of the reporting period (not at the start of the reporting period).

(midpoint of the reporting period) is incorrect because items measured at current value reflect the value that was current at the end of the reporting period (not at the midpoint).

Under US GAAP, intangibles must be valued at historical cost; under IFRS they can be valued at cost or revaluation.

(IFRS, a classified balance sheet must present current assets before non-current assets) is incorrect. Under IFRS, a classified balance sheet does separate current assets from non-current assets, but non-current assets could be presented first.

(IFRS, a commercial real estate company should use a liquidity based presentation) is incorrect. A commercial real estate company would have many non-liquid assets and would not likely use the liquiditybased presentation under IFRS. A commercial bank would use this format.

The balance sheet omits important aspects of a company’s ability to generate future cash flows, such as its reputation and management skills. The balance sheet measures some assets and liabilities based on historical cost and measures others based on current value.

Market value of shareholders’ equity is updated continuously. Shareholders’ equity reported on the balance sheet is updated for reporting purposes and represents the value that was current at the end of the reporting period.

The item “retained earnings” is a component of shareholders’ equity.

Deferred income arises when a company receives payment in advance of delivery of the goods and services associated with the payment.

normal operating expenses that have been paid in advance are a type of prepaid expense and are included in other current assets, not deferred income.

an expense that has been recognized on a company’s income statement but has not yet been paid as of the balance sheet date is an accrued expense, not deferred
income.

By definition, P/P/E are assets used to produce revenues over a period of more than one year.

They are reported at historical cost for reliability. The use of the asset generates the expense called depreciation expense.

Depreciation expense is spreading the cost of the asset over the period of time the asset is used.

Goodwill is recorded only when a total company is purchased.

The amount recorded is the difference between the amount paid for the company and the fair market value of the net assets of the company.

Internally generated goodwill is not recorded because it can not be reliably valued.

Deferred tax liabilities result when, for a given period, taxable income and the associated income tax payable are less than the reported financial statement income before taxes and the associated income tax expense.

(items of expense are included in financial statement income in earlier periods than those for which taxable income is reported) is incorrect because if items of expense are included in financial statement income in earlier periods than those for which taxable income is reported, then the financial statement income and associated reported income tax expense will be less than taxable income and actual income tax payable. A deferred tax liability occurs only in the opposite case, when taxable income
and income tax payable are smaller. Deferred tax liabilities result from timing differences between financial statement income and taxable income when taxable income is lower than financial statement income, not higher.

(straight-line depreciation methods are used for tax purposes and accelerated methods are employed for financial statement purposes) is incorrect because straight-line depreciation methods result in lower depreciation expense than accelerated methods. This approach would produce higher taxable income than financial statement income, with no resulting deferred tax liability.

Equipment is reported in the balance sheet at historical cost less accumulated depreciation .

The balance sheet reports what the company has, what they owe and what is owned on a given date.

It normally reports two years and the user can see the difference in the categories reported, but not the cause.

A classified balance sheet is one that classifies assets and liabilities as current or non-current and provides a subtotal for current assets and current liabilities.

A liquidity-based balance sheet broadly presents assets and liabilities in order of liquidity.

Payments due within one operating cycle of the business, even if they will be settled more than one year after the balance sheet date, are classified as current liabilities.

Payment received in advance of the delivery of a good or service creates an obligation or liability. If the obligation is to be fulfilled at least one year after the balance sheet date, it is recorded as a non-current liability, such as deferred revenue or deferred income. Payments that the company has the unconditional right
to defer for at least one year after the balance sheet may be classified as non-current liabilities

Classified balance sheets have categories for current assets, non-current assets, current liabilities, and non-current liabilities.

Assets = Liabilities + Equity and, therefore, Assets – Liabilities = Equity

Trade receivables are typically reported at net realizable value, based on estimates of collectability.

trade receivables are reported net of an allowance for doubtful accounts or at their net realizable value.

trade receivables are amounts owed to a company by its customers for products and services already delivered, not for items with delivery pending.

Liabilities are a probable use of an economic resource as a result of a past transaction.

Possible liabilities are not recorded.

Amounts owed to suppliers is called accounts payable and is an item on the balance sheet not a category.

Current liabilities is the category for liabilities that will be repaid in one year or less.

Balance sheet information is as of a specific point in time, and items measured at current value reflect the value that was current at the end of the reporting period.

For all financial statement items, an item should be recognized in the financial statements only if it is probable that any future economic benefit associated with the item will flow to or from the entity and if the item has a cost or value that can be measured with reliability.

Current liabilities are those liabilities, including debt, due within one year.

Preferred refers to a class of stock.

Convertible refers to a feature of bonds (or preferred stock) allowing the holder to convert the instrument into common stock.

Retained earnings, a component of equity, is defined as the cumulative amount of earnings recognized on the company’s income statements that have not been distributed as dividends to the company’s owners.

Other comprehensive income is also a component of equity, but it is defined as items of comprehensive income not reported on the income statement.

Dividends payable represent dividends that have been declared but not yet paid. Not all earnings not yet paid out would be accrued as a liability: only those that have been declared as dividends.

A contra asset account is netted against (reduces) the balance of an asset account.

The allowance for doubtful accounts reduces the balance of accounts receivable.

Accumulated depreciation, not depreciation expense, is a contra asset account.

Sales returns and allowances create a contra account that reduce sales, not an asset.

Accrued expenses, also known as accrued liabilities, have been recognized on a company’s income statement but have not been paid as of the balance sheet date. Unpaid interest costs are an example of an accrued expense.

Deferred expenses refer to payments that have been made but will not be reported as an expense until a future accounting period.

Accounts payable are amounts that a company owes its vendors for purchases of goods and services that have already been delivered. They represent the unpaid amount of the company’s purchase on credit as of the balance sheet date.

Assets are resources that are expected to provide future benefits and are controlled as a result of past transactions. Liabilities are obligations resulting from past events that are expected to require a future outflow of resources. Equity is a residual interest in assets after deducting liabilities.

Estimated income taxes for the current year are likely reported as a current liability. To recognize the warranty expense, it must be probable, not just possible. Recognizing impairment of PP&E does not create a liability.

Goodwill is a long-term asset, and the others are all current assets.

A patent has no physical substance and is a right to do something that brings future benefit .

P/P/E have physical substance.

Intangible assets have no physical substance, are real assets because they provide future benefit gained from the right to use it and they are reported at historical cost just like all other assets.

A liquidity-based presentation, rather than a current/noncurrent presentation, may be used by such entities as banks if broadly presenting assets and liabilities in order of liquidity is reliable and more relevant.

Office supplies are owned as a result of a past purchase transaction and give future benefit when used to provide goods and services.

Office supplies are assets used within one year and are current.

Intangible assets have no physical substance and P/P/E is used longer than one year.

Treasury shares or treasury stock are shares in the company that have been repurchased by the company and not cancelled.

preferred shares are a separate class of equity or financial liability based upon their characteristics and rights that take precedence over the rights of common shareholders.

contributed capital is the amount contributed to the company by owners and is evidenced through the issuance of common shares.

The accrual process refers to accounting for transactions when revenue or expense recognition does not coincide with the exchange of cash. Accounts receivable, for example, represent sales of goods and services that have been recognized as revenue, but for which the firm has not yet been paid cash. Cash equivalents are highly liquid marketable securities, such as Treasury bills, in which a firm typically invests its short-term cash balances.

Current assets are assets expected to be sold, used up, or otherwise realized in cash within one year or one operating cycle of a business, whichever is greater. A receivable expected to be collected within one operating cycle is therefore a current asset.

a trade payable is considered a current liability.

goodwill is not expected to be sold or used up within one year or one operating cycle of a business. Long-term assets such as goodwill are classified as non-current assets.

Accrued liabilities are expenses that have been reported on a company’s income statement but have not yet been paid.