Liabilities and Equity on a Balance Sheet — Practice Problems - dummies

Liabilities and Equity on a Balance Sheet — Practice Problems

By Kenneth Boyd, Kate Mooney

The balance sheet reports a company’s assets, liabilities, and equity as of a specific date. This is different from an income statement, which covers a period of time.

The following example questions ask you to calculate a company’s total liabilities and total equity on a given day.

Practice questions

Use the following information to answer the questions. A company reports the following on its balance sheet:

  • Cash: $10,000

  • Accounts receivable: $20,000

  • Inventory: $14,000

  • Prepaid expenses: $3,000

  • Property, plant, and equipment: $35,000

  • Accumulated depreciation: $2,000

  • Accounts payable: $5,000

  • Accrued expenses: $6,000

  • Short-term notes: $7,000

  • Long-term notes: $10,000

  • Capital stock: $40,000

  • Retained earnings: $12,000

  1. What are the company’s total liabilities?

  2. What is the company’s total equity?

Answers and explanations

  1. $28,000

    In the problem presented, total liabilities include accounts payable, accrued expenses, short-term notes, and long-term notes. To calculate the total liabilities, you need to add them up as follows: accounts payable of $5,000 plus accrued expenses of $6,000 plus short-term note of $7,000 plus long-term notes of $10,000 equals total liabilities of $28,000.

  2. $52,000

    In the problem presented, total equity includes capital stock and retained earnings. To calculate the total equity, you need to add them up as follows: capital stock of $40,000 plus retained earnings of $12,000 to give a total equity of $52,000.

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