Understanding Balance sheets – Question Bank www.ift.

world

LO.a: Describe the elements of the balance sheet: assets, liabilities, and equity.

1. Which of the following statements is most accurate?

A. A classified balance sheet is one which departs materially from accounting standards as
per an auditor’s opinion.
B. A classified balance sheet is grouped into current and non-current assets and liabilities.
C. The excess of current assets over current liabilities is known as liquidity.

2. An asset or liability is created on the balance sheet when revenue is recognized before cash is
received and vice versa. Which of the following combinations is most accurate regarding the
creation of an asset or liability?

Revenue recognized. Cash not received. Cash received. Revenue not recognized.
A. Asset Asset
B. Asset. Liability.
C. Liability. Asset.

3. Balance sheet provides financial information of a company:

A. For a particular period such as a quarter, or a year.
B. At a specific point in time.
C. In terms of two basic elements: assets and liabilities.

4. Which of the following statements is most accurate about balance sheets?

A. Under US GAAP, intangibles are valued at historical cost.
B. Under US GAAP, a classified balance sheet presents non-current liabilities after current
liabilities.
C. In a liquidity-based presentation, land use rights is ordered above bank deposits.

5. The balance sheet is based upon which of the following equations?

A. Assets = Liabilities + Equity.
B. Assets = Liabilities – Equity.
C. Assets = Equity – Liabilities.

LO.b: Describe uses and limitations of the balance sheet in financial analysis.

6. Which of the following is least likely correct about balance sheets?

A. Different assets and liabilities on the balance sheet have different measurement bases.
B. Equity in the balance sheet is a measure of the intrinsic value of a company.
C. Items on the balance sheet are measured at current value at the end of the reporting period
that are subject to change.

LO.c: Describe alternative formats of balance sheet presentation.

7. A balance sheet format were assets and liabilities are categorized as current and non-current
is referred to as the:

Copyright © IFT. All rights reserved. Page 1

 Understanding Balance sheets – Question Bank www.ift.world

A. classified balance sheet format.

B. liquidity-based format.
C. standard format.

8. With of the following is least likely correct with respect to the liquidity-based balance sheet
format?
A. The liquidity-based format is more appropriate for a bank relative to a manufacturing
company.
B. With a liquidity-based format assets are presented from most liquid to least liquid.
C. With a liquidity-based format liabilities are presented from least liquid to most liquid.

LO.d: Distinguish between current and non-current assets, and current and non-current
liabilities.

9. Which of the following is least likely a criterion for classification of a liability as current?
A. It is expected to be settled in the entity’s normal operating cycle.
B. It is expected to be settled in one year after the balance sheet date.
C. The entity has an unconditional right to defer settlement of the liability for at least one
year after the balance sheet date.

10. The excess of current assets over current liabilities is called:

A. current ratio.
B. net assets.
C. net working capital.

11. Which of the following is least likely classified as a current asset?

A. Prepaid expense.
B. Marketable securities.
C. Trades payable.

12. Which of the following is a contra asset account?

A. Bad debt expense.
B. Doubtful debt allowance.
C. Trade receivables.

13. Which of the following is least likely a current liability?

A. Deferred income.
B. Income tax payable.
C. Prepaid expense.

14. The following information is available for Melissa March Ltd.

Trades receivable $20,000

Trades payable $25,000
Notes payable due in $12,000
2 years

Copyright © IFT. All rights reserved. Page 2

 Understanding Balance sheets – Question Bank www.ift.world

Accrued expenses $1,000

Prepaid expenses $1,500
Deferred revenue $1,000
What is the total value of the company’s current liabilities?
A. $27,000.
B. $34,500.
C. $39,000.

15. Deferred income arises when:

A. delivery of goods and services is done but payment is yet to be received.
B. delivery of goods and services and payment are both due.
C. delivery of goods and services is due and payment has been received.

LO.e: Describe different types of assets and liabilities and the measurement bases of each.

16. The value of inventory under U.S. GAAP is lower of the cost or the market value. This
market value cannot exceed:
A. net realizable value.
B. net realizable value plus a normal profit margin.
C. net realizable value minus a normal profit margin.

17. Which of the following methods is least likely to be used to value investment property?
A. Cost model.
B. Fair value model.
C. Retail method.

18. Which of the following statements is correct regarding intangible assets?

A. An intangible asset with an indefinite useful life is amortized rather than tested for
impairment.
B. IFRS requires that the costs associated with research phase are capitalized.
C. Start up and training costs are expensed under IFRS and U.S. GAAP.

19. When making adjustments for goodwill an analyst should most likely:
A. exclude goodwill from the balance sheet data but consider goodwill impairment on the
income statement.
B. keep goodwill on the balance sheet data but exclude goodwill impairment from the
income statement.
C. exclude goodwill from the balance sheet data and also exclude goodwill impairment from
the income statement.

20. Which of the following financial assets is least likely to be measured at cost or amortized
cost?
A. Available-for-sale security.
B. Held-to-maturity security.
C. Unquoted equity instruments.

Copyright © IFT. All rights reserved. Page 3

 Understanding Balance sheets – Question Bank www.ift.world

21. Which of the following is least likely to be true for long-term financial liabilities?
A. They are due after one accounting period, usually after a year.
B. Loans payable and bonds payable are usually reported at amortized cost on the balance
sheet.
C. At maturity, the carrying amount differs from the face value of the bond.

22. Which of the following is least likely to be the cause of deferred tax liabilities?
A. Temporary timing differences between a company’s income as reported for tax purposes
and income as reported for financial statement purposes.
B. When items of expense are included in taxable income in later periods than for financial
statement net income.
C. When items of income are included in taxable income for later periods.

23. An analyst included in his presentation below accounting treatment for marketable securities
under IAS No. 39.

Category Measurement Method Realized Gains & Losses Reported In

Trading Fair Value Income Statement
Held to maturity Amortized Cost Income Statement
Available for sale Fair Value Equity

The treatment for which category is least likely accurate?

A. Trading.
B. Held to maturity.
C. Available for sale.

24. Alpha-Sine Corporation has the following portfolio of marketable securities which was
acquired at the end of 2012:

Category Original Cost in € Fair Market Value in €

as at the Year End, 2012 as at the Year End, 2013
Held for trading 10,000,000 10,500,000
Available for sale 5,000,000 5,500,000

If the company reports under IFRS instead of U.S. GAAP, its net income will most likely be:
A. the same.
B. €500,000 lower.
C. €500,000 higher.

25. The following information is from a company’s investment portfolio:

Investment
Classification Held-to-maturity
Market value, 31 Dec 2009 $ 10,000
Cost/Amortized cost 31 Dec 2009 12,000
Market value, 31 Dec 2010 9,000
Cost/Amortized cost 31 Dec 2010 10,000

Copyright © IFT. All rights reserved. Page 4

 Understanding Balance sheets – Question Bank www.ift.world

If the investment is reclassified as available-for-sale as of 31 December 2010, the balance

sheet carrying value of the company’s investment portfolio would most likely:
A. remain the same.
B. decrease by $1,000.
C. decrease by $2,000.

26. Which of the following assets are most likely tested for impairment annually?
A. A patent with a legal life of 15 years.
B. A copyright with an expected indefinite life.
C. Land.

LO.f: Describe the components of shareholders’ equity.

27. Which of the following statements is least accurate?

A. Treasury stock is non-voting and receives dividends.
B. Minority interest on the balance sheet represents the proportion of ownership of a
subsidiary not held by the parent company.
C. A classified balance sheet is one organized to group various assets and liabilities into
subcategories.

28. Which of the following components does not comprise of equity attributable to owners of the
parent company?
A. Non-controlling interest.
B. Retained earnings.
C. Other comprehensive income.

29. Which of the following shares is non-voting and does not receive any dividends declared by
the company?
A. Common stock.
B. Preferred stock.
C. Treasury stock.

30. Perpetual, non-redeemable preferred shares are classified as:

A. Equity.
B. Financial liabilities.
C. Assets.

LO.g: Convert balance sheets to common-size balance sheets and interpret common-size
balance sheets.

31. In order to analyze what portion of company’s assets are liquid, an analyst is most likely to
use:
A. cash ratio.
B. common-size balance sheet.
C. current ratio.

Copyright © IFT. All rights reserved. Page 5

 Understanding Balance sheets – Question Bank www.ift.world

32. In a vertical common size balance sheet analysis, each balance sheet item is presented as a
percentage of:
A. fixed assets.
B. total sales.
C. total assets.

LO.h: Calculate and interpret liquidity and solvency ratios.

33. Which of the following is least likely to be a solvency ratio?

A. Acid test.
B. Financial leverage.
C. Long term debt-to-equity.

34. The following table is an extract from the balance sheet of Bell Ltd for the years 2011 and
2012.
2012 2011
Current Assets
Cash and other equivalents $130,000 $160,000
Marketable securities $75,000 $75,000
Accounts receivable $80,000 $60,000
Inventories $56,000 $68,000
Deferred tax asset $15,000 $14,000
Current Liabilities
Accounts payable $90,000 $70,000
Accrued expenses $50,000 $39,000
Short term debt $80,000 $78,000
Which of the following statements is true?
A. The current ratio has improved over the year.
B. The quick ratio in 2012 was greater than the quick ratio in 2011.
C. The cash ratio was 0.93 for 2012 and 1.26 for 2011.

35. Which of the following is least likely a limitation of cross-section financial ratio analysis?
A. Differences in accounting methods.
B. Companies with a similar line of business.
C. Judgement in interpreting the specific ratios.

36. The following data is available for a company:

Cash 7,000
Marketable securities 31,000
Accounts receivable 274,000
Inventory 301,000

Copyright © IFT. All rights reserved. Page 6

 Understanding Balance sheets – Question Bank www.ift.world

Total current assets 549,000

Current liabilities 307,000

The company’s quick ratio is closest to:

A. 0.12.
B. 0.90.
C. 1.02.

37. Which of the following ratios best represent a company’s liquidity?

A. Quick ratio.
B. Cash ratio.
C. Current ratio.

38. Which of the following ratios is a good measure of financial risk and financial leverage?
A. Acid test ratio.
B. Quick ratio.
C. Debt-to-equity ratio.

39. Cash ratio is best described as:

A.
B.
C.

Copyright © IFT. All rights reserved. Page 7

 Understanding Balance sheets – Question Bank www.ift.world

Solutions

1. B is correct. Excess of current assets over current liabilities is known as working capital.

2. B is correct. Recognizing revenue before receiving cash creates an account receivable, an

asset. Receiving cash before recognizing revenue creates a liability.

3. B is correct. Balance sheet provides information about a company at a specific point in time.
C is incorrect because there are three elements: assets, liabilities, and equity.

4. B is correct. C is incorrect because in a liquidity-based presentation, assets are ordered in

decreasing order of liquidity. Less liquid items appear near the bottom of the listing.

5. A is correct. The accounting equations is Assets = Liabilities + Equity.

6. B is correct. Equity is a not a measure of the company’s intrinsic value because different
items are measured differently, such as historical cost, fair value.

7. A is correct. A balance sheet where assets and liabilities are classified as current and non-
current is called a classified balance sheet.

8. C is correct. With a liquidity-based format assets and liabilities are presented from most
liquid to least liquid. Such a presentation is appropriate for banks.

9. C is correct. With a liquidity-based presentation assets and liabilities are presented from most
liquid to least liquid. Such a presentation is appropriate for banks but not for manufacturing
companies.

10. C is correct. The excess of current assets over current liabilities is called net working capital.

11. C is correct. Trade payable is a current liability.

12. B is correct. Allowance for doubtful debt is a contra asset account because it is netted against
the balance of trade receivables.

13. C is correct. Prepaid expense is a current asset and not a current liability.

14. A is correct. Current liabilities will comprise of accounts payable, accrued expenses, and
deferred revenue. Therefore $25,000 + $1,000 + $1,000 = $27,000.

15. C is correct. Deferred income arises when the delivery of goods and services is due and the
payment has been received.

16. A is correct. The market value cannot exceed the net realizable value and cannot be lower
than the net realizable value minus a normal profit margin.

Copyright © IFT. All rights reserved. Page 8

 Understanding Balance sheets – Question Bank www.ift.world

17. C is correct. The retail method is used to value inventories and not an investment property.

18. C is correct. Statement A is incorrect because an intangible asset with an indefinite useful life
is not amortized and rather tested for impairment. Statement B is incorrect because IFRS
requires that the costs associated with research phase are expensed. Statement C is correct.

19. C is correct. When making adjustments for goodwill, an analyst should exclude goodwill
from the balance sheet and also exclude goodwill impairment from the income statement.

20. A is correct. Available-for-sale security is measured at fair value.

21. C is correct. At maturity, the carrying amount is equal to the face value of the bond.

22. B is correct. Deferred tax liability arises when items of expense are included in taxable
income in earlier periods than for financial statement net income. Note: This topic will be
covered in the reading on income taxes.

23. C is correct. All categories treat realized gains or losses in the same way - they are reported
on the income statement. It is the unrealized gains and losses that are included in other
comprehensive income (in owner’s equity) for available for sale securities carried at market
value.

24. A is correct. Whether securities are classified as held for trading or available for sale, they
are measured at their fair value on the balance sheet, but all gains/losses on held for trading
securities are reported on the income statements. The unrealized gains/losses on available for
sale securities are reported as part of equity. However, this treatment is the same under both
IFRS and U.S. GAAP.

25. B is correct. Held-for-trading and available-for-sale securities are carried at market value,
whereas held-to-maturity securities are carried at amortized cost. If the investment is
reclassified as available-for-sale in 2010, the carrying amount should be adjusted to its
market value, which is $9,000. Compared with the amortized cost of $10,000, it is a decrease
of $1,000.

26. B is correct. Intangible assets with indefinite lives are tested for impairment annually.

27. A is correct. Treasury stock is non-voting and does not receive dividends.

28. A is correct. Non-controlling interests are equity interests of minority shareholders in the
subsidiary companies that have been consolidated by the parent company, but that are not
wholly owned by the parent company.

29. C is correct. Common stockholders get dividends once preferred stockholders have been
paid. They enjoy voting rights. Preferred stockholders do not have voting rights, but do get
dividends. Treasury stockholders do not have voting rights and do not get dividends.

Copyright © IFT. All rights reserved. Page 9

 Understanding Balance sheets – Question Bank www.ift.world

30. A is correct. Preferred shares with mandatory redemption are classified as financial
liabilities.

31. B is correct. A common-size balance sheet expresses all balance sheet accounts as a
percentage of total assets and provides insight into what portion of a company’s assets is
liquid. In contrast, cash and current ratios measure liquidity relative to current liabilities, not
relative to total assets.

32. C is correct. In a vertical common size balance sheet analysis, each balance sheet item is
presented as a percentage of total assets.

33. A is correct. Acid test ratio, also called the quick ratio, is a liquidity ratio.

34. C is correct.

35. B is correct. Lack of homogeneity of a company’s operations can limit comparability. A company
with different lines of business will have different industry-specific ratios.

36. C is correct.
= = 1.02.

37. B is correct. The cash ratio is the best indicator of a company’s near-term obligations.

38. C is correct. Debt-to-equity is a solvency ratio which measures financial leverage.

39. A is correct. The cash ratio = (cash + marketable securities) / current liabilities.

Copyright © IFT. All rights reserved. Page 10