Analysis Intermediate: Understanding the Balance Sheet

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1.
Shareholder equity is the sum of the companys assets.
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False. The value of assets remaining after all the liabilities have been accounted for belongs to the shareholders.
2.
Steve, a beginning investor, wants to see the balance sheet of his chosen company show a huge profit. If the balance sheet is prepared correctly, it is possible that it will show a profit during a good year.
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False. One of the cardinal rules of balance sheets is that assets and liabilities balance each other. Steve is looking at the wrong piece of data.
3.
When assets outweigh liabilities and shareholder equity on a balance sheet, the sheet has not been constructed correctly.
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True. Balance sheets balance the two sides so that all assets and their sources of payment are accounted for.
4.
The balance sheet item that allows one to spread the purchase price of a fixed asset over the course of years is called ________.
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Depreciation. Depreciation is subtracted on the asset side of the balance sheet.
5.
Too many liabilities on a company balance sheet can indicate the danger of bankruptcy.
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True. Too many liabilities make investors nervous.
6.
Which of the following is not a current asset?
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Stock. Stock is not a current asset. On the balance sheet, it is a liability.
7.
Balance sheets provide information on a companys stock performance.
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False. Balance sheets provide financial information, but not stock performance information.
8.
A companys assets are paid for with liabilities and shareholder equity.
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True. Liabilities (debt) and shareholder equity (stock) finance the purchase of assets.