Balance Sheet quiz level 1

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

The allowance fordoubtful accounts reduces the balance of accounts receivable.

Accumulated depreciation, not depreciation expense, is a contraasset account.

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

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

Common equity includes the initial investment bythe shareholders and the retained earnings; this definition isincomplete.

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

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

Other comprehensive income is also a componentof equity, but it is defined as items of comprehensive income notreported on the income statement.

Dividends payable represent dividends that havebeen declared but not yet paid. Not all earnings not yet paid outwould be accrued as a liability: only those that have beendeclared as dividends.

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

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

Under US GAAP, intangibles must be valued athistorical cost; under IFRS they can be valued at cost orrevaluation.

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

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

An asset is a probable future economic benefit as a result of a past transaction. There is no such thing as a contingent asset because a company can not project future assets and record them. The other categories are commonly found on the balance sheet.

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.

Working capital is defined as the excess of current assets overcurrent liabilities.

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.

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 .

Assets are resources controlled by a company as a result of past events.

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.

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

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

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

Liabilities represent obligations of a companyarising from past events, the settlement of which is expected toresult in an outflow of economic benefits from the entity.

prepaid expenses are assets, and assetsare fundamentally resources controlled by a company as a resultof past events.

shareholders’ equity represents theshareholders’ residual interest in a company’s assets afterdeducting its liabilities.

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

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

Accounts payable are amounts that a company owes itsvendors for purchases of goods and services that have already beendelivered. They represent the unpaid amount of the company’s purchase oncredit as of the balance sheet date.

Accrued liabilities are expenses that have beenreported on a company’s income statement but have not yetbeen paid.

Balance sheet values may use a mixture of measurement bases (historical cost, fair value, etc.). As a result, balance sheet values of assets, liabilities, and equity may not reflect their intrinsic values. Balance sheets provide the information necessary to calculate the firm's solvency and liquidity ratios. Items are recognized on the balance sheet only if a flow of future economic benefits to or from the firm is probable.

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

Deferred tax liabilities result when, for a givenperiod, taxable income and the associated income tax payableare less than the reported financial statement income beforetaxes 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 infinancial statement income in earlier periods than those for whichtaxable income is reported, then the financial statement incomeand associated reported income tax expense will be less thantaxable income and actual income tax payable. A deferred taxliability occurs only in the opposite case, when taxable income
and income tax payable are smaller. Deferred tax liabilities resultfrom timing differences between financial statement income andtaxable income when taxable income is lower than financialstatement 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 resultin lower depreciation expense than accelerated methods. Thisapproach would produce higher taxable income than financialstatement income, with no resulting deferred tax liability.

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

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.

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.

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.

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

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

trade receivables are amounts owed to acompany by its customers for products and services alreadydelivered, not for items with delivery pending.

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.

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.

An asset is a future economic benefit obtained or controlled as a result of past transactions. Some assets are intangible (e.g., goodwill), and others may be donated .

The cash ratio determines how much of acompany’s near-term obligations can be settled with existingamounts of cash and marketable securities.

Deferred income arises when a company receivespayment in advance of delivery of the goods and servicesassociated with the payment.

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

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

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

P/P/E have physical substance.

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

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.

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

(start of the reporting period) is incorrect because items measured at current value reflectthe value that was current at the end of the reporting period (notat the start of the reporting period).

(midpoint of the reporting period) is incorrect because items measured at current value reflectthe value that was current at the end of the reporting period (notat the midpoint).

Current liabilities are those liabilities, includingdebt, 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.

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

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

Initially, goodwill is measured as the differencebetween the purchase price paid for an acquisition and the fairvalue of the acquired, not acquiring, company’s net assets(identifiable assets less liabilities).

The non-controlling interest in consolidatedsubsidiaries is shown separately as part of shareholders’ equity.