Understanding Accounting
Menu

Chapter 9 practice

Classify reported amounts, test what they establish, and compare them on a sound basis.

These 20 questions are optional and are not submitted. Choice and number-entry questions provide immediate feedback. Written questions ask you to compare your reasoning with a worked answer.

Use the Chapter 9 reading when you need to review classification, carrying amounts, liquidity, or comparisons.

Classify resources and obligations

Identify what the item is before deciding whether it is current or noncurrent. The expected use, conversion, or settlement period determines the classification.

Question 1: Classify equipment held for sale

Foundational

Horizon Supply buys forklifts for resale to customers. It expects to sell one forklift during the next 10 months. How should Horizon classify that forklift?

Choose the best answer.
Show explanationHide explanation

Answer: a

Choice A. Horizon classifies the forklift as current inventory because its ordinary use is sale to customers within the current period.

Question 2: Classify equipment used in service

Foundational

Metro Repair uses a similar forklift to move customer equipment inside its repair facility. Metro expects to use the forklift for four more years. How should Metro classify it?

Choose the best answer.
Show explanationHide explanation

Answer: b

Choice B. The same physical asset can receive a different classification because Metro uses it in operations rather than holding it for sale.

Question 3: Classify restricted cash

Intermediate

Northgate Foods has $40,000 of cash that a construction agreement restricts to a new warehouse project in 2028. Northgate cannot use the cash to pay current suppliers. How should Northgate classify the cash at December 31, 2026?

Choose the best answer.
Show explanationHide explanation

Answer: c

Choice C. Cash restricted for the 2028 warehouse cannot support current operations, even though the company plans to spend it in the future.

Question 4: Classify a customer advance

Foundational

Brightline Events receives a $12,000 customer deposit in December for an event it will provide in February. What does the deposit represent at December 31?

Choose the best answer.
Show explanationHide explanation

Answer: b

Choice B. The deposit may be called a customer advance or, under an ASC 606 contract, a contract liability. Brightline reports a liability because it still owes the promised services.

Question 5: Split the portions of a borrowing

Intermediate

At December 31, Harbor Tool owes $150,000 of principal. Its loan agreement requires $30,000 of principal payments during 2027 and the remaining $120,000 after 2027. No other condition changes the classification. What should Harbor report?

Choose the best answer.
Show explanationHide explanation

Answer: c

Choice C. Classification follows the repayment requirements remaining at the reporting date, not the loan’s original term.

Read reported amounts and their limits

A balance-sheet caption may be a net carrying amount. Recognition and measurement requirements determine what appears in the statement and what the amount can establish.

Question 6: Read a net equipment amount

Foundational

Pine Street Bakery reports equipment at $500,000 cost less $140,000 accumulated depreciation. Calculate the equipment carrying amount that appears on the balance sheet.

Enter your answer.
Show explanationHide explanation

$500,000 less $140,000 equals a $360,000 carrying amount. The equipment caption reports that net amount after accumulated depreciation.

Question 7: Distinguish a collection from a revised estimate

Intermediate

A company increases its allowance for expected credit losses by $8,000. What effect does that adjustment have on net receivables before any customer pays?

Choose the best answer.
Show explanationHide explanation

Answer: b

Choice B. The adjustment changes the reported net amount because the company expects to collect less of its outstanding receivables. It does not represent a customer payment.

Question 8: Evaluate an unreported resource

Intermediate

A consulting firm has built a strong reputation through years of successful projects. Management estimates that the reputation will increase future sales. Which conclusion is best supported?

Choose the best answer.
Show explanationHide explanation

Answer: d

Choice D. Economic usefulness and separate asset recognition are different judgments. The firm needs the applicable recognition requirements before it can report a separate asset.

Question 9: Separate reported equity from business value

Advanced

A buyer says, “Lakeside Services reports $700,000 of equity, so the shareholders’ interest is worth exactly $700,000.” What does the balance sheet support?

Choose the best answer.
Show explanationHide explanation

Answer: b

Choice B. A buyer also considers expected performance, risk, resources not separately recognized, and current values that may differ from carrying amounts.

Question 10: Explain what a net caption does not show

Intermediate

A balance sheet reports “trade receivables, net” of $94,000. A note states that gross receivables are $100,000 and the allowance for expected credit losses is $6,000. In two or three sentences, explain what the $94,000 amount represents and why it does not mean customers have already paid $6,000 less.

Compare your reasoning with the worked answer

Worked answer: The $94,000 caption is the $100,000 gross customer balance less the $6,000 allowance for expected credit losses. The allowance reflects the company’s estimate of amounts it does not expect to collect. It does not mean that customers have paid only $94,000 or that the company has received cash from the allowance.

Interpret liquidity measures

Working capital and the current ratio summarize classified amounts at one date. Trace the accounts behind a change before treating either measure as a conclusion about payment capacity.

Question 11: Calculate both liquidity measures

Foundational

At December 31, Alder Supply reports $360,000 of current assets and $300,000 of current liabilities. Calculate its working capital and current ratio.

Enter your answer.
Show explanationHide explanation

Working capital is $360,000 minus $300,000, or $60,000. The current ratio is $360,000 divided by $300,000, or 1.20.

Question 12: Trace a cash purchase of inventory

Intermediate

A company with a 1.50 current ratio buys $24,000 of inventory for cash. Both assets are current, and no liability changes. What happens immediately?

Choose the best answer.
Show explanationHide explanation

Answer: c

Choice C. The company has less cash and more inventory, but the current totals are unchanged. The measures do not reveal that composition change.

Question 13: Trace payment of a current payable

Intermediate

A company begins with current assets of $480,000 and current liabilities of $400,000. It pays $20,000 of accounts payable with cash. Calculate working capital after the payment and the current ratio, rounded to two decimal places.

Enter your answer.
Show explanationHide explanation

Both current assets and current liabilities fall by $20,000. Working capital remains $80,000. The current ratio is $460,000 divided by $380,000, or 1.21 after rounding.

Question 14: State what the current ratio leaves unresolved

Advanced

Two companies each report a current ratio of 1.40. Company A’s current assets are mostly cash and receivables due next month. Company B’s current assets are mostly slow-moving inventory. Which conclusion is best?

Choose the best answer.
Show explanationHide explanation

Answer: c

Choice C. The current ratio compares totals. It does not show how quickly particular assets become cash or when individual obligations must be settled.

Question 15: Interpret a ratio change

Advanced

A company’s current ratio rises from 1.10 to 1.35 during the year. Its cash balance falls, inventory rises, and current liabilities decline. Explain why the higher ratio does not, by itself, establish improved liquidity. Name the next facts you would examine.

Compare your reasoning with the worked answer

Worked answer: The higher ratio may reflect the decline in current liabilities and the increase in inventory rather than more cash available for payment. Inventory may need to be sold and, if sold on credit, collected before it provides cash. Examine the composition and expected conversion of current assets, along with the amounts and settlement dates of the remaining current liabilities.

Compare reported amounts

Compare the same accounts on a comparable measurement basis. Use horizontal analysis to describe change from an earlier amount and common-size analysis to describe a share of total assets.

Question 16: Identify an incomparable caption

Intermediate

In 2025, a company reports one $90,000 “cash” caption that includes $65,000 available for operations and $25,000 restricted for construction. In 2026, it reports $65,000 of operating cash and $25,000 of restricted cash separately. What does a direct comparison of the two captions show?

Choose the best answer.
Show explanationHide explanation

Answer: b

Choice B. Reconstruct comparable groupings before interpreting a change. Use $65,000 in both periods to compare operating cash, or combine both cash categories in both periods to compare total cash.

Question 17: Calculate a horizontal change

Foundational

A company’s inventory increased from $200,000 in 2025 to $250,000 in 2026. Calculate the horizontal percentage increase.

Enter your answer.
Show explanationHide explanation

Inventory increased by $50,000. Horizontal analysis divides that change by the earlier $200,000 balance: $50,000 divided by $200,000 equals 25.00%.

Question 18: Calculate an average balance

Advanced

A company wants to compare annual cost of goods sold with inventory held throughout the year. It has beginning inventory of $180,000 and ending inventory of $220,000. Calculate the beginning-and-ending average inventory.

Enter your answer.
Show explanationHide explanation

The average of the two observations is ($180,000 plus $220,000) divided by 2, or $200,000. This is an approximation of the inventory held during the period, not an exact daily average.

Question 19: Explain a common-size result

Intermediate

Sutton Manufacturing’s inventory rises from $200,000 to $250,000. Total assets rise from $1,100,000 to $1,200,000. Explain what horizontal analysis and common-size analysis each show. Then state what they do not explain.

Compare your reasoning with the worked answer

Worked answer: Inventory increased by $50,000, or 25.00% of its 2025 balance. Inventory represented 18.18% of total assets in 2025 and 20.83% in 2026, so it became a larger part of reported assets. The calculations do not explain why inventory increased; Sutton might be preparing for sales growth or holding goods that are becoming harder to sell.

Question 20: State the comparison checks

Intermediate

A company’s net receivables decline from $140,000 to $120,000. Before concluding that customers paid their balances, state the two comparison checks from this chapter and one possible measurement explanation for the decline.

Compare your reasoning with the worked answer

Worked answer: First identify whether both captions include the same underlying accounts. Then determine whether the accounts use a comparable measurement basis. For example, a larger allowance for expected credit losses could reduce net receivables even if gross customer balances and cash collections did not change.