Build the MBA Math and Spreadsheet Skills You'll Need

Below are some sample accounting exercises and solutions from the MBA Math quant skills course.

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(2:12)

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Exercise #1: Balance Sheet Update
Use the starting balance sheet and the list of changes to create an updated balance sheet and to answer the question.

Ruston Company
Balance Sheet
As of December 31, 2008
(amounts in thousands)

Cash 3,300 Liabilities 5,100

Other Assets 3,000 Equity 1,200

Total Assets 6,300 Total Liabilities & Equity 6,300

Between January 1 and March 31, 2009:

1. Cash decreases by $300,000
2. Other Assets decrease by $200,000
3. Equity increases by $400,000

What is the value for Liabilities on March 31, 2009?

Solution Commentary

(2:57)

Manual Solution

Begin by updating the starting balance sheet with the changes provided:

Ruston Company Balance Sheet As of March 31, 2009 (amounts in thousands)

Cash	3,000	Liabilities
Other Assets	2,800	Equity	1,600
Total Assets		Total Liabilities & Equity

Next, compute the sum of the left side of the balance sheet:

Ruston Company Balance Sheet As of March 31, 2009 (amounts in thousands)

Cash	3,000	Liabilities
Other Assets	2,800	Equity	1,600
Total Assets	5,800	Total Liabilities & Equity

Then, remembering the balance sheet equation, which states:

Total Assets = Total Liabilities + Total Equity

we have:

Ruston Company Balance Sheet As of March 31, 2009 (amounts in thousands)

Cash	3,000	Liabilities
Other Assets	2,800	Equity	1,600
Total Assets	5,800	Total Liabilities & Equity	5,800

Finally, we do a simple subtraction to compute the value we seek:

Ruston Company Balance Sheet As of March 31, 2009 (amounts in thousands)

Cash	3,000	Liabilities	4,200
Other Assets	2,800	Equity	1,600
Total Assets	5,800	Total Liabilities & Equity	5,800

Liabilities = $4,200,000

Exercise #2: Balance Sheet Transactions
Evaluate each of the following transactions in terms of their effect on assets, liabilities, and equity.

1. Buy $17,000 worth of manufacturing supplies on credit
2. Issue $90,000 in stock
3. Receive payment of $10,000 owed by a customer
4. Purchase equipment for $46,000 in cash

What is the net change in Total Assets?

Solution Commentary

(4:50)

Manual Solution

Remember the following:

Uses of funds = Sources of funds
Assets = Liabilities + Equity

Assets are uses of funds in the form of money, credit extended to customers, and stuff owned
Liabilities and equity are sources of funds
Liabilities are forms of borrowing from non-owners
Equity is funding from owners

We will evaluate the impact of each transaction on assets, liabilities, and equity.
Then we will answer the question by summing up the net change in Total Assets.

Description	Assets	=	Liabilities	+	Equity	Explanation
1. Buy supplies on credit	17,000	=	17,000	+	0	Physical assets increase and are offset by obligation to repay supplier
2. Issue stock	90,000	=	0	+	90,000	Cash asset increases and is offset by increase in funding equity from owners
3. Receive payment owed by customer	+10,000 -10,000	=	0	+	0	Transfer of assets from non-cash customer IOU (accounts receivable) to cash
4. Buy equipment for cash	+46,000 -46,000	=	0	+	0	Transfer of assets from cash to equipment
Totals	107,000	=	17,000	+	90,000

The net change in Total Assets is $107,000

Exercise #3: Income Statement
Suppose Lightspeed Industries has the following revenue and expenses for 2008:

Revenues of $8,800,000
Cost of Goods Sold of $2,640,000
Depreciation Expenses of $1,200,000
Income Taxes of $1,452,000
Interest Expenses of $50,000
Other Expenses of $400,000
Sales, General, & Administrative Expenses of $880,000

Create an income statement with amounts in thousands

What is the value of Pre-Tax Income?

Solution Commentary

(3:17)

Manual Solution

Pre-Tax Income, sometimes written as PT Income, is exactly what the name states.
Pre-Tax Income is the last of the intermediate measures of the profit from running a firm.

Lightspeed Industries Income Statement January 1 to December 31, 2008 (amounts in thousands)

Revenue	8,800
Cost of Goods Sold (COGS)	2,640
Gross Income	6,160
Sales, General, & Administrative Expenses (SG&A)	880
Depreciation Expense	1,200
Other Expenses	400
Earnings Before Interest & Taxes (EBIT)	3,680
Interest	50
Pre-Tax Income	3,630
Income Taxes	1,452
Net Income	2,178

Pre-Tax Income = $3,630,000

Exercise #4: Journal and T-Accounts

Ruston Company
Balance Sheet
As of January 4, 2009
(amounts in thousands)

Cash 9,300 Accounts Payable 2,500

Accounts Receivable 5,000 Debt 2,300

Inventory 5,500 Other Liabilities 6,500

Property Plant & Equipment 15,900 Total Liabilities 11,300

Other Assets 1,400 Paid-In Capital 5,700

Retained Earnings 20,100

Total Equity 25,800

Total Assets 37,100 Total Liabilities & Equity 37,100

Transfer the journal entries to T-accounts for the transactions below, compute closing amounts for the T-accounts, and construct a final balance sheet to answer the question.

Journal amounts in thousands

Date Account and Explanation Debit Credit

Jan 4 Accounts Payable 8

   Cash 8

Paid money owed to supplier

Jan 5 Property, Plant & Equipment 49

   Cash 49

Paid cash for machine

Jan 6 Cash 70

   Paid-In Capital 70

Issued stock

Jan 7 Cash 20

   Inventory 16

   Retained Earnings 4

Sold and delivered product to customer

Jan 8 Cash 51

   Debt 51

Borrowed money from bank

Jan 9 Inventory 14

   Accounts Payable 14

Bought manufacturing supplies on credit

Jan 10 Cash 10

   Accounts Receivable 10

Received customer payment

What is the final amount in Total Assets?

Solution Commentary

(3:53)

Manual Solution

The first step is to transfer the journal entries to T-accounts:

Cash
Balance 9,300	8
70	49
20
51
10

PP&E, Net
Balance 15,900
49

Accounts Payable
8	Balance 2,500
	14

Other Liabilities
	Balance 6,500

Accounts Receivable
Balance 5,000	10

Other Assets
Balance 1,400

Debt
	Balance 2,300
	51

Paid-In Capital
	Balance 5,700
	70

Inventory
Balance 5,500	16
14

Retained Earnings
	Balance 20,100
	4

Next, we compute the net balances for the T-accounts:

Cash
Balance 9,300	8
70	49
20
51
10
Balance 9,394

PP&E, Net
Balance 15,900
49



Balance 15,949

Accounts Payable
8	Balance 2,500
	14



	Balance 2,506

Other Liabilities
	Balance 6,500




	Balance 6,500

Accounts Receivable
Balance 5,000	10




Balance 4,990

Other Assets
Balance 1,400




Balance 1,400

Debt
	Balance 2,300
	51



	Balance 2,351

Paid-In Capital
	Balance 5,700
	70



	Balance 5,770

Inventory
Balance 5,500	16
14



Balance 5,498

Retained Earnings
	Balance 20,100
	4



	Balance 20,104

Finally, we create a balance sheet using the closing T-account amounts:

Ruston Company Balance Sheet As of January 10, 2009 (amounts in thousands)

Cash	9,394	Accounts Payable	2,506
Accounts Receivable	4,990	Debt	2,351
Inventory	5,498	Other Liabilities	6,500
Property Plant & Equipment	15,949	Total Liabilities	11,357
Other Assets	1,400	Paid-In Capital	5,770
		Retained Earnings	20,104
		Total Equity	25,874
Total Assets	37,231	Total Liabilities & Equity	37,231

The final amount in Total Assets is $37,231,000

Sample MBA Math Exercises - Accounting