Answers: Chapter 4 - Balance Sheet Basics

4.1: The money you invest in a business is called:

1. Equity

2. Liability

3. Asset

The correct answer is #1
In any business, equity is the amount of money its owners contribute.

4.2: What is the correct equation that shows the relationship between assets, liabilities, and equity:

1. Liabilities + Assets = Equity
2. Assets + Liabilities = Equity
3. Liabilities = Assets - Equity

The correct answer is 3
If Assets = Liabilities (borrowed money) + Equity (contributed money), then Assets - Equity = Liabilities.

4.3: If a company's asset balance is \$100,000 and its liability balance is \$80,000, what is its equity?

Equity = Assets - Liabilities = \$20, 000

4.4: If a company has equity of \$50,000, and liabilities of \$150,000, what is the balance of its assets?

Assets =  Liabilities + Equity = \$200,000

4.5: If an asset has a life of 5 years, what is the depreciated value at the end of the 3rd year?

If an asset has a life of 5 years, then at the end of the 3rd year the company has used up 3/5ths of the asset value.The value of the asset at the end of the 3rd year is therefore 2/5ths of the original asset value.

4.6: What one of these calculations most accurately reflects how to calculate current assets of a hypothetical company?

1. Current Asset = Cash + Marketable Securities + Equipment
2. Current Asset = Cash + Marketable Securities + Accounts Payable
3. Current Asset = Cash + Marketable Securities + Long-Term Debt
4. Current Asset = Cash + Marketable Securities + Inventory

The correct answer is #4

Typically, current assets are made up of: cash in bank accounts; marketable securities – that is, certificates of deposit (CDs), U.S. Treasury Bills and Notes, and others items that can easily be converted to cash; accounts receivable – the amount of money owed to the company for goods sold or services delivered; and inventory – the value of finished, unsold products and raw materials.

4.7: What one of these calculations most accurately reflects how to calculate current liabilities of a hypothetical company?

1. Current Liabilities = Accounts Payable + Cash + Equipment
2. Current Liabilities = Accounts Payable + Inventory + Long-Term Debt
3. Current Liabilities = Accounts Payable + Marketable Securities + Long-Term Debt
4. Current Liabilities = Accounts Payable + Notes Payable + Accrued Expenses

The correct answer is #4

Typical corporate current liabilities can be broken down into three sections: accounts payable – money the company owes for products or services it has purchased; notes payable – money the company has borrowed for a short period (usually a year or less); and accrued expenses – wages, taxes and other expenses the company has not yet paid but should pay shortly.