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The Balance Sheet
True / False Questions
1. A transaction is an exchange or event that directly affects the assets, liabilities, or stockholders’
equity of a company.
2. A debit may increase or decrease an account, depending on the type of account.
3. If a company uses $100 million in cash to pay off debt, its stockholders’ equity will rise $100
4. General Motors (GM) signs a new labor agreement that its workers will receive a 5% wage
increase next year. This is considered a transaction that affects GM’s financial statements in the
5. The normal balance of an account is on the same side that increases the account.
6. If total assets increase, then either liabilities or stockholders’ equity must also increase.
7. Company X issues $40 million in new stock for cash. This does not affect stockholders’ equity
because as new shares are sold the value of existing shares falls.
8. Transactions are analyzed from the point of view of the company, not the company’s owners.
9. You are pleasantly surprised to discover that a popular actress appears on The Tonight Show
wearing your company’s jeans. Later, your company’s sales increase by $500,000 as a result.
When the actress appeared on TV, you would have recorded an asset because the TV
appearance was expected to bring future economic benefits to your company.
10. If the total dollar value of credits to an account exceeds the total dollar value of debits to that
account, the ending balance of the account will be a debit balance.
11. A company signed an agreement to rent store space from another company. This is an example
of a recordable transaction.
12. Retained earnings is the cumulative earnings of a company which have not been distributed to
owners, and is the same as the amount of cash in the bank.
13. The trial balance is a financial statement that reports the assets, liabilities, and equity of a
business at a point in time.
14. Every transaction increases at least one account and decreases at least one account.
15. The ledger consists of all of the accounts used by a business.
16. A business is obliged to repay both debt and equity financing.
17. The list of names and reference numbers that the company will use when accounting for
transactions is called the Chart of Accounts.
18. Journal entries show the effects of transactions on the elements of the accounting equation, as
well as the account balances.
19. The acquisition of equipment in an exchange for a company’s stock would increase the current
ratio of the company.
20. The current ratio can be used to evaluate a company’s ability to pay liabilities in the short term,
and in general, a lower ratio means better ability to pay.
Multiple Choice Questions
21. Which of the following statements regarding the balance sheet is true?
A. A “classified” balance sheet is one that contains privileged information.
B. All liabilities require that the company sacrifice resources at some time in the future.
C. All companies use an identical list of account names defined by the Financial Accounting
Standards Board (FASB).
D. A balance sheet is prepared for a period of time.
22. Which of the following statements regarding debits and credits is always true?
A. Debits decrease accounts while credits increase them.
B. The total value of all debits recorded in the ledger must equal the total value of all credits
recorded in the ledger.
C. The total value of all debits to a particular account must equal the total value of all credits to
D. A debit balance of $500 in the cash account means that cash receipts exceeded cash
payments by $500.
23. Which of the following statements regarding the balance sheet is true?
A. Any item on a balance sheet labeled payable is a liability of that company.
B. Current Assets are listed on the balance sheet in alphabetical order.
C. Assets + Liabilities = Equity
D. It lists all the accounts and their debit and credit balances.
24. How many of the following statements regarding posting and classification are true?
A. Posting journal entries involves copying the dollar amounts from the ledger into the journal.
B. If a $100 debit is erroneously posted to an account as a $100 credit, the accounts will be out of
balance by $100.
C. If a $5,000 liability is misclassified as stockholders’ equity then the accounting equation will still
D. If a purchase of supplies on account for $100 is recorded with a debit to supplies of $10 and a
credit to accounts payable for $10, the accounting equation will not balance.
25. Which of the following statements regarding the concepts underlying the balance sheet are true?
A. A company buys land for $5 million dollars in 1983. The land is now worth $15 million. The
company should increase the book value of this asset on its balance sheet to reflect its current
B. All events affecting the current value of a company are reported on the balance sheet.
C. According to the cost principle, assets are valued at their replacement cost.
D. Under Generally Accepted Accounting Principles, assets are generally written down if the
market value declines, but are not written up if the market value increases.
26. Which one of the following would be listed as a long-term asset?
C. Buildings and equipment
D. Prepaid insurance
27. Which of the following would be listed as a current liability?
A. Cash in the bank
B. Notes payable due in two years
D. Accounts payable
28. A long-term liability is one that the company:
A. has owed for over one year.
B. has owed for over five years.
C. will not pay off for over one year.
D. will not pay off for over five years.
29. A current asset is one that:
A. the company has owned for over one year.
B. the company has owned for over five years.
C. the company will use up or convert into cash in less than one year.
D. the company has updated to reflect its current value.
30. At the start of the first year of operations, retained earnings on the balance sheet would be:
A. equal to zero.
B. equal to contributed capital.
C. equal to stockholders’ equity.
D. equal to the net income.
31. Account titles in the chart of accounts are:
A. general purpose and do not indicate the nature of the account.
B. consistent with those used by other companies.
C. linked to account numbers.
D. the names mandated for use by the FASB.
32. Which line items on the balance sheet would be classified as long term?
A. Cash; Supplies; Accounts Payable.
B. Property, Plant and Equipment; Notes Payable; Other Assets.
C. Supplies; Property, Plant and Equipment; Notes Payable.
D. Accounts Receivable; Property, Plant and Equipment; Other Assets
33. How much financing did the stockholders of Purrfect Pets, Inc., directly contribute to the
34. How will a company’s current ratio be affected by the purchase of equipment for cash?
A. The current ratio will increase because current assets increase.
B. The current ratio will decrease because current liabilities increase.
C. The current ratio will decrease because current assets decrease.
D. The current ratio will remain unchanged.
35. The local branch of the Universal Bank System (UBS) receives money from depositors and lends
it to borrowers. Which of the following would be true about UBS’s financial statements?
A. UBS reports deposits as assets and loans as liabilities.
B. UBS reports both deposits and loans as assets.
C. UBS reports deposits as liabilities and loans as assets.
D. UBS reports both deposits and loans as liabilities.
36. Which of the following is not an example of an asset?
A. Notes receivable
C. Prepaid expenses
D. Retained Earnings
37. If a company borrows money from a bank and signs an agreement to repay the loan several
years from now, in which account would the company report the amount borrowed?
A. Contributed Capital
B. Accounts Payable
C. Notes Payable
D. Retained Earnings
38. The Sweet Smell of Success Fragrance Company borrowed $60,000 from the bank and used all
of the money to redesign its new store. Sweet Smell’s balance sheet would show this as:
A. $60,000 under Furnishings and Equipment and $60,000 under Notes Payable.
B. $60,000 under Supplies and $60,000 under Notes Payable.
C. $60,000 under Furnishings and Equipment and $60,000 under Accounts Payable.
D. $60,000 under Other Assets and $60,000 under Other Liabilities.
39. The Buddy Burger Corporation owes $1.5 million to the Texas Wholesale Meat Company from
whom Buddy Burger buys its burger meat. Which account would Buddy Burger use to report the
B. Accounts Payable
C. Notes Payable
D. Accounts Receivable
40. Which of the following describes the classification and normal balance of the retained earnings
A. Asset, debit
B. Stockholders’ equity, credit
C. Liability, credit
D. Stockholders’ equity, debit
41. If a company receives $20,000 cash on accounts receivable and uses the cash to pay $20,000 on
accounts payable then:
A. assets would increase by $20,000 while liabilities would decrease by $20,000.
B. liabilities would decrease by $20,000 while stockholders’ equity would increase by $20,000.
C. assets would decrease by $20,000 while liabilities would decrease by $20,000.
D. liabilities would decrease by $20,000 while stockholders’ equity would decrease by $20,000.
42. In 1999, the Denim Company bought land that cost $15,000. In 2013, a similar piece of land was
bought for $28,000 and the company’s existing land was estimated to be worth $18,000. On the
balance sheet at the end of 2013, the land that was purchased in 1999 would be reported at:
D. the average of the three prices.
43. What is the minimum number of accounts that must be involved in any transaction?
D. There is no minimum.
44. Transactions include which two types of events?
A. Direct events, indirect events.
B. Monetary events, production events.
C. External exchanges, internal events.
D. Past events, future events.
45. A hurricane destroyed a company’s building that originally cost $1 million. Which of the following
could not be true?
A. Assets remain the same, and liabilities and stockholders’ equity both decrease by $1 million.
B. Assets decrease by $1 million, liabilities decrease by $1 million, and stockholders’ equity is
C. Assets, liabilities, and stockholders’ equity all remain the same.
D. Assets decrease by $500,000, and liabilities decrease by $500,000.
46. Your company orders and broadcasts a 30 second ad during the Super Bowl for $1.2 million. It is
legally obligated to pay for the ad but has not yet done so.
A. This is an internal event and it does NOT affect the balance sheet.
B. This is an external event and it does NOT affect the balance sheet.
C. This is an internal event that affects the balance sheet.
D. This is an external event that affects the balance sheet.
47. In part, a transaction affects the accounting equation as follows:
Which of the following must be true for this transaction?
A. If other assets are unchanged, stockholders’ equity must be increasing.
B. If other assets are unchanged, stockholders’ equity must be decreasing.
C. If stockholders’ equity is unchanged, another asset must be decreasing.
D. If stockholders’ equity is unchanged, other assets must be unchanged.
48. Which of the following sequences indicates the correct order of steps in the accounting cycle?
A. T-accounts, journal entries, trial balance, financial statements.
B. T-accounts, journal entries, financial statements, trial balance.
C. Journal entries, T-accounts, trial balance, financial statements.
D. Journal entries, T-accounts, financial statements, trial balance.
49. Your company pays back $2 million on a loan it had received earlier from a bank.
A. Assets decrease by $2 million, liabilities and stockholders’ equity are both unchanged.
B. Assets decrease by $2 million, liabilities decrease by $2 million, stockholders’ equity is
C. Assets decrease by $2 million and liabilities increase by $2 million.
D. Assets decrease by $2 million, liabilities are unchanged, stockholders’ equity decreases by $2
50. A company issues $20 million in new stock. It later uses the cash received to pay off promissory
notes. How many different accounts and which account names are affected by these two
A. 3 accounts involved: contributed capital, cash, and notes payable.
B. 4 accounts involved: contributed capital, cash, investments, and notes payable.
C. 3 accounts involved: cash, contributed capital, and accounts payable.
D. 3 accounts involved: contributed capital, investments, and accounts payable.
51. A company borrows $2 million from its bank. It then uses this money to buy equipment. How does
this transaction affect the accounting equation?
A. Assets and Liabilities both rise $2 million.
B. Assets increase by $2 million and Liabilities decrease by $2 million.
C. Assets decrease by $2 million and Liabilities increase by $2 million.
D. Assets remain unchanged and Liabilities increase by $2 million.
52. A company receives $100,000 cash from investors in exchange for stock. Several weeks later,
the company buys a $250,000 machine using all of the cash from the stock issue and signing a
promissory note for the remainder. The accounts involved in these two transactions are:
A. Cash; Equipment; Long-term Investments; and Accounts Payable.
B. Cash; Long-term Investments; Contributed Capital; and Notes Payable.
C. Cash; Equipment; Contributed Capital; and Notes Payable.
D. Equipment; Notes Payable; and Retained Earnings.
53. A company purchases $23,000 of supplies in the current month and promises to pay for them
next month. How would the company record a liability for the supplies?
A. This liability is not a recognized liability until the payment is due.
B. $23,000 would be journalized as a credit to Accounts Payable.
C. $23,000 would be journalized as a debit to Accounts Payable.
D. $23,000 would be journalized as a debit to Prepaid Expenses.
54. If total liabilities decreased by $25,000 and stockholders’ equity increased by $5,000 during a
period of time, then total assets must change by what amount and direction during the same time
A. $20,000 increase.
B. $20,000 decrease.
C. $30,000 increase.
D. $30,000 decrease.