Chap.

4-1
CHAPTER 4

SAMPLE TEST QUESTIONS - Multiple Choice

1. Which of the following is an example of a noncurrent liability?

a. farm machinery
b. loan on feeder livestock
c. loan on farm machinery
d. prepaid expense

2. Which of the following is an example of a current asset?

a. dairy cows
b. farm buildings
c. farm machinery
d. none of the above

3. Another term which has the same meaning as owner's equity is

a. net worth
b. net farm income
c. total asset value
d. total liabilities

4. Of the following, which is the most liquid asset?

a. farm machinery
b. balance in checking account
c. breeding livestock
d. feeder livestock

5. If a business has working capital greater than $0, its current ratio will be
a. greater than one
b. equal to one
c. less than one
d. there is no relationship between the amount of working capital and the current ratio

6. If the debt/asset ratio is increasing, then the debt/equity ratio will be

a. increasing
b. decreasing
c. constant
d. indeterminate, need more information

7. Which of the following best describes a balance sheet?

a. it shows changes in assets and liabilities over the last accounting period
b. it shows changes in assets and liabilities over a period of time
c. it shows assets and liabilities at a point in time
d. it shows profit for the last accounting period

8. The best description of a business which has increased its debt/asset ratio is one which has
 Chap. 4-2
a. purchased more assets
b. sold some assets
c. increased its debt
d. increased its debt relative to total assets

9. Which of the following assets would have the same value using either a cost or a market basis
valuation?
a. land
b. machinery
c. prepaid expenses
d. purchased breeding livestock

10. The degree to which a farm's assets adequately cover or exceed it liabilities is referred to as
a. solvency
b. profitability
c. liquidity
d. working capital

11. A statement of owner equity shows

a. a list of all assets and liabilities
b. the valuation adjustment for owner equity
c. owner equity for the past 20 years
d. the sources and amounts of changes in owner equity

12. Which financial statement covers only a single point in time rather than a period of time?
a. income statement
b. statement of owner equity
c. statement of cash flows
d. balance sheet

13. A lender would usually prefer to have farm assets valued at their ________ value on a balance
sheet that is part of a loan application.
a. cash
b. accrual
c. cost
d. market

14. Another name for a balance sheet is

a. net worth statement
b. income statement
c. statement of owner equity
d. statement of cash flows

15. The “cost value” shown on a balance sheet for an asset such as a tractor is equal to
a. the original purchase price
b. the original purchase price less depreciation expense take to date
c. the original purchase price plus cost all repairs to date
 Chap. 4-3
d. the cost of a new tractor of the same size

16. A “contingent” or “deferred” income tax liability is one that

a. is owed but not yet paid
b. would be owed if and when an asset is sold
c. represents delinquent taxes from past years
d. would be due under cash accounting but not accrual accounting

17. The “cost” value of farmland can change due to

a. changes in the selling price of farmland
b. accumulated depreciation
c. the cost of nondepreciable improvements made, such as terraces and earthen dams
d. increases in property taxes

18. Which of the following is not a source of owner equity for a farm business?
a. loans received to purchase land
b. increases in the value of owned land
c. profit retained in the business
d. assets contributed to the business by the owner(s)

19. Using $20,000 in cash and a new loan of $80,000 to purchase land for $100,000 will cause
equity to
a. increase by $100,000
b. increase by $20,000
c. increase by $80,000
d. not change

20. If $50,000 cash on hand is used to pay a $50,000 operating loan then on the day of the
transaction:
a. net worth will not change but the current ratio will change
b. neither net worth nor the current ratio will change
c. net worth will increase but the current ratio will not change
d. net worth will increase and the current ratio will change
 Chap. 4-4

SAMPLE TEST QUESTIONS - TRUE/FALSE

T F 1. The three major components of a balance sheet are assets, liabilities, and owner's
equity.

T F 2. The Farm Financial Standards Council recommends only two classes of assets,
current and noncurrent.

T F 3. The primary purpose of a balance sheet is to measure and record net farm
income.

T F 4. On a cost basis balance sheet, machinery would be valued at cost less

accumulated
depreciation.
T F 5. Working capital is one measure of solvency.

T F 6. Inventories of grain and feeder livestock would be valued at market on either a

cost or market basis balance sheet.

T F 7. If total asset value increases, owner equity will also increase.

T F 8. Borrowing $20,000 to purchase additional dairy cows will decrease owner

equity.

T F 9. Current liabilities are debts which must be paid in full within one year from the
date of the balance sheet.

T F 10. On a cost basis balance sheet, owner equity will increase if land values increase.

T F 11. Noncurrent assets have a useful life of more than one year.

T F 12. A balance sheet using cost-based valuation will always have a higher owner
equity than it would if market-based valuation methods had been used.
 Chap. 4-5
T F 13. A ranch business with a debt/asset ratio of 0.20 would be in a relatively strong
financial condition.

T F 14. Total liabilities cannot be greater than total assets.

T F 15. A negative owner’s equity indicates an insolvent business.

T F 16. A current ration greater than two indicates a business has good liquidity.

T F 17. Market livestock and inventories of stored grain are noncurrent assets on a
balance sheet.

T F 18. If a depreciable asset is sold for exactly its book value, equity will not change.

T F 19. Marketable securities (stocks, bonds, etc.) and the cash value of life insurance
are also easy to convert to cash and are considered liquid assets.