Answers: Chapter 4 - Balance Sheet Basics
4.1: The money you invest in a business is called:
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:
- Liabilities + Assets = Equity
- Assets + Liabilities = Equity
- 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?
- Current Asset = Cash + Marketable Securities + Equipment
- Current Asset = Cash + Marketable Securities + Accounts Payable
- Current Asset = Cash + Marketable Securities + Long-Term Debt
- 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?
- Current Liabilities = Accounts Payable + Cash + Equipment
- Current Liabilities = Accounts Payable + Inventory + Long-Term Debt
- Current Liabilities = Accounts Payable + Marketable Securities + Long-Term Debt
- 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.