Neuro Lingual Programming

Financial Accounting problems and Solutions

These sample problems are intended as a supplement to my book Accounting Made Simple: Accounting Explained in 100 Pages or Less.

Chapter 1: The Accounting Equation

Question 1: Define the three components of the Accounting Equation.

Question 2: If a business owns a piece of real estate worth $250, 000, and they owe $180, 000 on a loan for that real estate, what is owners’ equity in the property?

Answer to Question 1:

  • Assets: All the property owned by a business.
  • Liabilities: A company’s outstanding debts.
  • Owners’ Equity: The company’s ownership interests in its property after all debts have been repaid.

Answer to Question 2: $70, 000

Chapter 2: The Balance Sheet

Question 1: Categorize the following accounts as to whether they’re Asset, Liability, of Owners’ Equity accounts.

  • Common Stock
  • Accounts Receivable
  • Retained Earnings
  • Cash
  • Notes Payable

Question 2: For each of the following assets or liabilities, state whether it is current or non-current:

  • Accounts Payable
  • Property, Plant, and Equipment
  • Note Payable
  • Inventory
  • Common Stock: Owners’ Equity
  • Accounts Receivable: Asset
  • Retained Earnings: Owners’ Equity
  • Cash: Asset
  • Notes Payable: Liability

Answer to Question 2:

  • Accounts Payable: current liability
  • Cash: current asset
  • Property, Plant, and Equipment: non-current asset
  • Note Payable: non-current liability (Though if a portion of the note is due within the next twelve months, that portion should be shown as a current liability.)
  • Inventory: current asset

Chapter 3: The Income Statement

Question 1: Given the following information, calculate ABC Corp’s Net Income:

  • Sales: $260, 000
  • Cost of Goods Sold: $100, 000
  • Salaries and Wages: $20, 000
  • Rent Expense: $15, 000
  • Advertising Expense: $35, 000
  • Cost of repairs resulting from fire: $50, 000

Question 2: Using the above information, calculate ABC Corp’s Operating Income.

Question 3:Using the above information, calculate ABC Corp’s Gross Profit.

Answer to Question 1: $40, 000 (Sales of $260, 000 minus $220, 000 of total expenses.)

Answer to Question 2: $90, 000 (Operating Income is intended to represent income from typical business operations. As a result, expenses resulting from a fire would certainly not be included when calculating Operating Income.)

Answer to Question 3: $160, 000 (Sales minus Cost of Goods Sold)

Chapter 4: The Statement of Retained Earnings

Question 1: Using the following information, calculate the ending balance in Retained Earnings:

  • Beginning Retained Earnings: $10, 000
  • Net Income: $5, 000
  • Dividends Paid: $4, 000

Question 2: Calculate Net Income given the following information:

  • Consulting Revenue: $50, 000
  • Rent Expense: $5, 000
  • Software Licensing Fees: $3, 000
  • Dividends Paid: $6, 000
  • Advertising Expense:$20, 000

Question 3: Using the following information, calculate how much was paid out in dividends during the year:

  • Beginning Retained Earnings: $40, 000
  • Net Income: $15, 000
  • Ending Retained Earnings: $30, 000

Answer to Question 1: $11, 000

Answer to Question 2: $22, 000 (Remember, dividends are not an expense! They are a distribution of net income rather than a reduction of net income.)

Answer to Question 3: $25, 000

Chapter 5: The Cash Flow Statement

Question 1: Calculate cash flow from operating activities using the following information:

  • Cash sales: $10, 000
  • Credit sales: $15, 000
  • Cash received from prior credit sales: $8, 000
  • Rent paid: $3, 000
  • Inventory purchased: $6, 000
  • Wages paid:$5, 000

Question 2: Categorize the following cash flows as to whether they are operating, investing, or financing activities:

  • Taxes paid
  • Dividends paid to shareholders
  • Interest paid on loans
  • Dividends received on investments
  • Cash sales
  • Purchase of new office furniture

Answer to Question 1: Net cash inflow of $4, 000. (Remember not to include the $15, 000 of credit sales when calculating cash flow.)

  • Taxes paid: Operating Activities
  • Dividends paid to shareholders: Financing Activities
  • Interest paid on loans: Operating Activities (Note: Principal paid on loans is a financing activity.)
  • Dividends received on investments: Operating Activities
  • Cash sales: Operating Activities
  • Purchase of new office furniture: Investing Activities

Chapter 6: Financial Ratios

Questions 1-3: Use the following income statement and balance sheet to answer the following questions.

Income Statement
Sales 130, 000
Cost of Goods Sold 26, 000
Profit Margin 104, 000
Salaries and Wages 15, 000
Rent Expense 5, 000
Licensing Expenses 20, 000
Advertising Expense 4, 000
Total Expenses 44, 000
Net Income
60, 000
Balance Sheet
Assets
Cash 10, 000
Inventory 15, 000
Property, Plant, and Equipment 250, 000
Accounts Receivable 5, 000
Total Assets 280, 000
Liabilities
Accounts Payable 20, 000
Notes Payable 40, 000
Total Liabilities 60, 000
Owners’ Equity
Common Stock 120, 000
Retained Earnings 100, 000
Total Owners’ Equity 220, 000

Question 1: Calculate the company’s current ratio and quick ratio.

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