1. d. Correct. Current assets are assets that the company expects to convert to cash or use up within the next year.

Answers a and c contain equipment and building which are long-lived assets and do not qualify for the current classification. Answer b has notes payable, which is a liability.

2. c. Correct. Deposits made in transit would be added our cash balance but not the banks (until the bank receives them).

Answers a., b., and d. are all incorrect. These answers would cause the bank balance to be greater than the balance sheet balance.

3. b. Correct. Assets that will be consumed within the next year or are highly likely to be converted into cash in that time are current assets. Short-term investments, accounts receivable, inventory, prepaid expenses such as rent and insurance and expected tax refunds are the typical items comprising the current asset section of a company’s balance sheet.

Answers a., c., and d. are all incorrect. Although supplies could be sold for cash (but usually aren't), the answer does not give a specific time period.

4. d. Correct. The balance sheet equation is assets = liabilities + shareholders’ equity

5. b. Correct. Wages payable and taxes payable require payment well before twelve months. Answers a., c., and d. are all incorrect. Each answer includes an asset along with a liability.

6. a. Correct. Assets – Liabilities = Owner's Equity

Answers b., c., and d. are all incorrect. Shareholders' (Owners') Equity for a business has nothing to do with market price of the business; it is not cash and it does not includes personal assets.

7. c. Correct. The current ratio is calculated by dividing current assets by current liabilities. The current ratio for 2000 (the beginning of 2001) is 1.33 calculated by dividing $2 million by $1.5 million. The current ratio for 2001 is 2.0 calculated by dividing $4 million by $2 million. The higher value of the current ratio indicates better liquidity and improved ability to pay liabilities when they are due.

Answers a., b., and d. are all incorrect. Shareholders' (Owners') Equity for a business has nothing to do with market price of the business; it is not cash and it does not includes personal assets.

8. c. Correct. Current liabilities are those whose terms require payment within the next twelve months from the balance sheet date. Long- term liabilities require payment beyond the next year. Answers a., b., and d. are all incorrect. Notes payable can be both current and long term. Many liabilities, both current and long-term, do not involve banks. The amount of the liability is irrelevant to determining the liability's classification as current or long-term.

9. Answers a., b., and c. are all incorrect which makes answer d correct. The retained earnings account is shown in the owners' equity section of the balance sheet. Retained earnings is not necessarily cash. Retained earnings includes net earnings of the business (not necessarily cash because of accrual basis accounting) since its inception that the corporation has retained.

10. a. Correct. This is the only transaction that results in income greater than cash. If the company earns revenue on credit that is still uncollected at year end, this will cause retained earnings for that first year to increase more than cash. Answers b., c., and d. are all incorrect. Answers b and c cause a reduction in cash.