Balance Sheet

Question 1

What do balance sheets show?

Answer 1

Balance sheets show the financial position (listing of resources and obligations) on a specific date.

Question 2

Assets = 100, Liabilities = 50. What is Stockholders’ Equity?

Answer 2

Assets (100) = Liabilities (50) + Stockholders’ Equity (X).

The stockholders’ equity is 50.

Question 3

• Liabilities increase by 100 and Stockholders’ Equity is unchanged. What is the change in Assets?

Answer 3

Assets (X) = Liabilities (+100) + Stockholders’ Equity (0).

The change in assets is +100.

Question 4

All noncash assets = 70, Total Liabilities = 60, Total Stockholders’ Equity = 30. What is Cash?

Answer 4

Cash (X) + Noncash assets (70) = Liabilities (60) + Stockholders’ Equity (30).
The Cash is 20.

Question 5

Cash decreases by 10 and noncash Assets increase by 15. What is the change in Liabilities?

Answer 5

Cash (-10) + Noncash assets (+15) = Liabilities (X) + Stockholders’ Equity (?).
Not enough information!

Question 6

Retained Earnings increase by 100, Dividends = 50. What is Net Income?

Answer 6

Retained Earnings = Prior Retained Earnings + Net Income – Dividends.
(Retained Earnings - Prior Retained Earnings) (100) = Net Income (X) – Dividends (50).
The Net Income is 150.

Question 7

• Revenue increases by 100 and all other categories are unchanged, except Assets. What is the change in Assets?

Answer 7

Assets (X) = Liabilities (0) + Contributed Capital (0) + Prior Retained Earnings (0) + Revenues (+100) – Expenses (0) – Dividends (0).
The change in Assets is +100

Question 8

Expenses increase by 60 and all other categories are unchanged, except Cash. What is the change in Cash?

Answer 8

Cash (X) + Non-cash assets (0) = Liabilities (0) + Contributed Capital (0) + Prior Retained Earnings (0) + Revenues (0) – Expenses (+60) – Dividends (0).
The change in cash is -60.

Question 9

Changes over a period between two Balance Sheets are summarized in the
Income Statement, Statement of Stockholders’ Equity and Statement of Cash
Flows. True or False?

Answer 9

True

Question 10

Assets = Liabilities + Stockholders’ equity.

True or False?

Answer 10

True

Question 11

Stockholders’ Equity = Contributed Capital + Retained Earnings.
True or False?

Answer 11

True

Question 12

Retained Earnings = Prior Retained Earnings + Net Income – Dividends.
True or False?

Answer 12

True

Question 13

Net Income = Revenues – Expenses.

True or False?

Answer 13

True

Question 14

Assets = Liabilities + Contributed Capital + Prior Retained Earnings
+ Revenues – Expenses – Dividends.
True or False?

Answer 14

True

Question 15

What is an asset?

Answer 15

An asset is a resource that is expected to provide future economic benefits (i.e. generate future cash inflows or reduce future cash outflows).

Question 16

What are the two criteria recognised in an asset?

Answer 16

– It is acquired in a past transaction or exchange;
– The value of its future benefits can be measured with a reasonable degree of
precision.

Question 17

BOC sells $100,000 of merchandise to a customer that promises to pay cash within 60 days. Is it an asset?

Answer 17

It’s an asset called Accounts Receivable, $100,000.

Question 18

BOC signs a contract to deliver $100,000 of natural gas to DEF each month for the next year. Is it an asset?

Answer 18

Is is not an asset because these is no past transaction or exchange.

Question 19

BOC buys $100,000 of chemicals to be used as raw materials. BOC pays in cash at time of delivery and receives a 2% discount on the purchase price. Is it an asset?

Answer 19

It is an asset called Inventory, $98,000.

Question 20

BOC pays $12 million for the annual rent on its office building. It has already occupied it for one month. Is it an asset?

Answer 20

It is an asset called Prepaid Rent, $11 million.

Question 21

BOC buys a piece of land for $100,000. Its broker says this was a “steal” because the land is probably worth $150,000. Is it an asset?

Answer 21

It is an asset called Land, $100,000.

Question 22

BOC is advised by a marketing firm that its brand name is worth $63 million. Is it an asset?

Answer 22

It is not an asset, not acquired and not reasonable degree of precision.

Question 23

What is a liability?

Answer 23

A liability is a claim on assets by “creditors” (non-owners) that represents an obligation to make future payment of cash, goods, or services.

Question 24

What are the two criteria recognised in an liability?

Answer 24

– The obligation is based on benefits or services received currently or in the past;
– The amount and timing of payment is reasonably certain.

Question 25

BOC receives $300,000 of raw materials from its supplier and promises to pay within 60 days. Is it a liability?

Answer 25

It is a liability called Accounts Payable, $300,000.

Question 26

Based on this quarter’s operations, BOC estimates that it owes the IRS $3 million in taxes. Is it a liability?

Answer 26

It is a liability called Income Tax Payable, $3 million.

Question 27

BOC signs a three-year, $120 million contract to hire Dakota Dokes as its new CEO, starting next month. Is it a liability?

Answer 27

It is not a liability, benefits not received yet.

Question 28

BOC has not yet paid employees who earned salaries of $1,000,000 during the most recent pay period. Is it a liability?

Answer 28

It is a liability called Salaries Payable, $1,000,000.

Question 29

BOC borrows $500,000 from a bank on a one-year note with a 10% interest rate. Is it a liability?

Answer 29

It is a liability called Notes Payable, $500,000.

Question 30

BOC is sued by a group of customers who claim their products were defective. The suit claims damages of $6 million. Is it a liability?

Answer 30

It is not a liability, amount is not reasonably certain.

Question 31

What is a stockholder’s equity?

Answer 31

Stockholders’ equity is the residual claim on assets after settling claims of creditors (= assets - liabilities).

Question 32

What is a net worth?

Answer 32

It is the same as stockholders’ equity.

Question 33

What is a net assets?

Answer 33

It is the same as stockholders’ equity.

Question 34

What is a net book value?

Answer 34

It is the same as stockholders’ equity.

Question 35

What are the two sources of stockholders’ equity?

Answer 35

• Contributed capital (arises from sale of shares)

- Retained earnings (arises from operations).

Question 36

What are dividends?

Answer 36

Dividends are distributions of retained earnings to shareholders.

Question 37

Why dividends are not an expense?

Answer 37

Dividends are not considered an expense because it is not used to generate revenue.

Question 38

Can dividends generate a liability?

Answer 38

Yes. Dividends are recorded as a reduction of retained earnings on the declaration date and create a liability until payment date.