🎯Balance Sheet: 16 MCQs

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Deleted User 27 November 2023

Unearned revenue can classify in short term or long term.

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1. Deleted User 28 November 2023
  
  Hello Maryam,
  
  According to U.S. Generally Accepted Accounting Principles (GAAP), unearned revenue is classified as a liability on the balance sheet until the revenue is recognized. If the company expects to earn the revenue within the next 12 months (one operating cycle, if longer), it is classified as a current liability (short-term). If the company expects to earn the revenue beyond the next 12 months, it is classified as a noncurrent liability (long-term).
  
  In summary, the classification of unearned revenue as short-term or long-term in accounting under U.S. GAAP depends on the time frame within which the company anticipates earning the revenue.
  
  Farhat Lectures support team
  
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Deleted User 27 November 2023

Can you please explain question 14?

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1. Deleted User 28 November 2023
  
  Hello Maryam,
  
  The exception among the given options is:
  
  “The existence of significant accounting estimates that are easy for the auditor to verify and justify.”
  
  When assessing the risk of fraudulent financial reporting, having significant accounting estimates that are easy to verify and justify is generally considered a lower risk factor. The reason is that when estimates are straightforward and easily verifiable, there is typically less room for management to manipulate or misstate the financial statements through complex accounting estimates.
  
  The other three options—information technology personnel not keeping up with internal controls and data security trends, management’s personal net worth being highly dependent on the entity’s financial performance, and several recent acquisitions increasing business complexity—are all factors that can heighten the risk of fraudulent financial reporting.
  
  Farhat Lectures support team
  
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Pedro Vilar 9 December 2023

I think question 11 should be changed because by the wording it seems as thought the dividends are received, instead they should be labeled as dividends payable since dividends are not an expense in the financial statements.

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1. Mansour Farhat 9 January 2024
  
  “Dividends revenue” is dividend received and consider a revenue account.
  “Dividends Payable” is a liability
  “Dividends” is a reduction if retained earnings.
  
  I hope this helps
  
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Akshay Aggarwal 9 January 2024

please elaborate the answer of question 14, explanation the reason of choosing option B.

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1. Mansour Farhat 9 January 2024
  
  The impact on the income is shown quantitively in numbers.
  While the immediate impact on the current year’s income is important, U.S. GAAP may not specifically require its disclosure in the context of related party transactions. This could be because the primary concern is to provide information about the nature and extent of relationships and transactions that might affect the company’s financial position and future performance, rather than focusing on a single year’s results. However, the effect of these transactions is often indirectly apparent through their impact on various line items in the income statement. I hope this helps.
  
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Philistar Bonyo-Ba 19 February 2024

Are salaries payable as current liabilities whilst accrued payroll is a short-term liability? Please could you explain this in detail?

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1. Deleted User 19 February 2024
  
  Hello Philistar,
  
  In order for us to assist you, please can you mention the question number you are referring to ?
  
  Farhat Lectures Support Team
  
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ADEKUNLE ADEGBOYE 31 May 2024

Retained Earnings should be labeled correctly. I assumed it’s ending retained earnings that already considered Net income and dividend for the year.

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1. Deleted User 6 June 2024
  
  Hello Adekunle,
  
  Can you please mention which question are you referring to ?
  
  Farhat Lectures Support Team
  
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Anant 27 July 2024

Can you please explain question 15?

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1. Maroun, CPA 30 July 2024
  
  Hello Anant,
  
  Simply put, the composition of long-term debt is not an accounting policy!
  Accounting policies include principles, bases, conventions, rules, and practices that a company uses in preparing and presenting its financial statements.
  
  The composition of long-term is a factual piece of information about what constitutes the company’s long-term debt. It does not involve a choice among different accounting methods.
  Therefore, it does not belong in the summary of significant accounting policies.
  
  The summary of significant accounting policies includes disclosures of measurement bases used, specific accounting principles and methods such as basis of consolidation, depreciation methods, amortization of intangibles, inventory pricing, use of estimates, fiscal year definition, and special revenue recognition issues like long-term construction contracts, franchising, and leasing operations.
  
  I hope this makes sense!
  
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Rahul Nagar 23 October 2024

Mirr, Inc. was incorporated on January 1, 20X0, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, the revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, 20X1. No additional activities affected owners’ equity in 20X0. Mirr’s liabilities increased to $120,000 by December 31, 20X0. On Mirr’s December 31, 20X0, balance sheet, total assets should be reported at:

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1. Maroun, CPA 29 October 2024
  
  Hello Rahul,
  
  Which question number are you referring to?
  
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Maroun, CPA 14 November 2024

Dear Ghata,

Thank you for reaching out with your observations. I have tested all the questions you mentioned, and in each case, the correct answer is being accurately marked by the system:

Q-2: The correct answer is D, and it is marked correctly.
Q-5: The correct answer is “A year or an operating cycle, whichever is longer,” and it is working as expected.
Q-13: The correct choice C is also accurately marked as correct ($122,000).

Please try reattempting the quiz, and let me know if you continue to experience issues.

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Ryo 27 February 2025

A year or an operating cycle, whichever is longer.

→ current assets are assets are expected to be converted into cash within a year. why would the answer include “an operating cycle”?

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1. Maroun, CPA 1 March 2025
  
  Hello Ryo,
  
  According to GAAP, current assets include cash and other assets that are expected to be converted into cash within a year or an operating cycle, whichever is longer.
  
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Ryo 8 March 2025

Hi, for question 11, do the dividends refer to dividends that are paid to the investors/owners, dividends payable or dividends received?

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1. Maroun, CPA 11 March 2025
  
  Hi Ryo,
  
  Dividends Payable is a liability and Dividends Receivable is an asset. When the word “dividends” is mentioned, it relates to the dividends declared that reduce retained earnings.
  The journal entry is as follows on the date the dividends are declared:
  Dr. Dividends (or Retained Earnings)
  Cr. Dividends Payable
  
  I hope this helps!
  
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Leilani K 28 May 2025

Hello, I think question 11 should specify “beginning retained earnings”, please. I hadn’t realized we were supposed to calculate Ending retained earnings.

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1. Maroun, CPA 29 May 2025
  
  Hello Leilani,
  
  In practice (and on the exam), the general ledger account is simply called “Retained Earnings.”
  Whether the balance shown is beginning or ending depends on when the trial balance is taken:
  • Trial balance prepared before closing entries: income-statement accounts haven’t been closed yet, so Retained Earnings still shows last year’s ending balance (this year’s beginning balance). To get the year-end figure, you must add the current period’s net income (or subtract a net loss) and then subtract any dividends paid.
  
  • Trial balance prepared after closing entries: net income has been closed to retained earnings, so the Retained Earnings figure is already the ending balance.
  
  That’s why Question 11 expects you to update the $22,000 balance: the trial balance is clearly before closing, so net income hasn’t been rolled in. I’ve updated the wording to mention that the trial balance is before recording year-end closing entries.
  
  Hope this helps!
  
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Meghan Cameron 8 July 2025

What video would be best to watch to review question 17?

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1. Maroun, CPA 10 July 2025
  
  Hello Meghan,
  
  I’ve moved Question 17 to the Revenue Recognition quiz, as it’s more directly related to the timing of revenue recognition.
  Thank you for pointing this out! Feel free to let me know if you need further assistance.
  
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Adrian Singh 10 September 2025

Que 5. I don’t understand why option C is incorrect. Current asset should be convert into cash within a year or less.
Longer will be for fixed asset???

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1. Maroun, CPA 12 September 2025
  
  Hello Adrian,
  
  Option C is incorrect because GAAP defines current assets as those expected to be realized in cash, sold, or consumed within one year or the operating cycle, whichever is longer. The operating cycle is the time to buy/produce inventory, sell it, and collect cash. For long-cycle businesses (construction, ship/aircraft manufacturing, wine aging), that cycle can exceed 12 months—inventory and related receivables that turn to cash in, say, 15–18 months are still current.
  
  For example, if your operating cycle is 18 months and inventory will be sold and collected in 15 months, it’s classified as “current” under the correct rule. Using the shorter period (Option C) would wrongly classify it as noncurrent and understate working capital.
  
  On your last point: fixed assets (PPE) are noncurrent because they’re not held to be converted to cash in the normal operating cycle; the “whichever is longer” test doesn’t apply to PPE. It applies to assets tied to the cash-conversion loop (cash, A/R, inventory, certain prepaids/contract assets).
  
  I hope this makes sense!
  
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SHANE 26 February 2026

i might be overthinking this, but I’m confused by the wording in Question #3. It says that lacking long-term solvency means “there is a risk the company will not be able to repay its short- and long-term liabilities.”

Isn’t the main purpose of distinguishing liquidity vs. solvency that a company can be liquid but not solvent (i.e., able to cover short-term obligations while still having long-run solvency problems)? If so, why would short-term liabilities necessarily be included in the definition of a long-term solvency issue?

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1. Maroun, CPA 28 February 2026
  
  Hello Shane,
  
  You’re thinking about this correctly. Liquidity is the ability to pay short-term obligations, while solvency is the ability to meet long-term obligations and remain financially viable. A company can absolutely be liquid today but still insolvent over the long run.
  
  The reason the correct answer mentions short-term liabilities is the key word “risk.” When a company lacks long-term solvency, it raises a going-concern type concern: long-term financing problems can lead to covenant violations, loss of access to credit, and operational strain. Once that happens, the company may eventually struggle to pay any obligations as they come due — including short-term ones.
  
  Therefore, solvency is primarily a long-term concept, but severe long-term solvency issues can ultimately put both short- and long-term payments at risk, which is what that answer choice is trying to capture.
  
  Great catch, and keep up this level of detailed analysis!
  
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Khondaker Ahmed 17 July 2026

Excellent review quiz to test my knowledge of older materials from CPA FAR on UWorld that I haven’t seen a in a while such as basics of balance sheet and mathematical mechanic behind every account that needs to balance!

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🎯Balance Sheet: 16 MCQs

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