Your First Accounting Lecture Trivia Quiz

Answer: All of these are assets

All of these items will meet the three criteria of control, past event, and future economic benefit.

Goodwill is an intangible asset i.e. it does not have a physical form. However, it still satisfies those three requirements of an asset.

Answer: Plant & machinery

Joe would anticipate that his plant and machinery (such as hoists, compressors etc) would continue to provide some form of economic benefit beyond twelve months.

On the other hand though you would expect Joe to be collecting his accounts promptly (say seven to fourteen days) and that he is turning his stock over on a regular basis. Office supplies will still be on hand at the end of each financial period but you would not expect the same pencils and pads to still be there - in a similar way to which inventory is bought, used and/or sold.

Answer: Bank overdraft

Bank overdraft will indicate that Joe has overdrawn his bank account. There is an obligation on the business to pay this back. It is also the result of a past event and to repay the bank he will need to forgo some form of resource that holds some future economic benefit.


The remaining options do not impose any obligation upon Joe's Mechanical Workshop. Similar to assets, liabilities can only be recognised on financial statements when it is probable that the obligation will need to be settled and the amount owed can be reliably measured.

Answer: Mortgage loan

All four items are an obligation for Joe's business. They occurred as a result of some past event and will require the business to forgo some future economic benefit to settle them. Accordingly they are all liabilities. A mortgage facility is usually an indication of a borrowing that is likely to extend into more than one financial period.

Certainly Joe's creditors and workers would come hounding him if he held of paying them for twelve months or more. The bank overdraft is an interesting one as some businesses will set up an overdraft facility that continues to be extended well into the next financial period. Banks will allow this (depending on the client's risk rating) provided the client fully fluctuates the account i.e. goes between debit and credit balances on a regular basis rather than allowing 'hardcore' debt to develop. However, banks retain the right to cancel or 'call-up' this facility at short notice and, as such, it needs to be recorded as a current liability.

Answer: $64,000

Assets first:
Cash $24,000
Truck $40,000
Tools $48,000 (remember he'd paid $24,000 for half the tools, hence their total value is $48,000).
Sub-total $112,000.
As he paid for half the tools and that can only have come out of his cash supply, therefore, assets are reduced by $24,000.
TOTAL ASSETS $88,000.

Liabilities:
Joe borrowed $24,000 to pay for half the cost of the tools.
TOTAL LIABILITIES $24,000

OWNERS EQUITY = $64,000
BEING ASSETS $88,000 less LIABILITIES $24,000

Answer: False

The key word in the question was 'always'. The 'Accounting Equation' is as follows: Assets = Liabilities + Owners Equity.

If you increase the assets then it is reasonably safe to assume that either, or both, of liabilities or owners equity will also increase. However, the increase in assets may be the result of a decrease in another asset. For example: Joe's Mechanical Workshop buys a new jack (assets increase) but they use cash from their bank account to pay for it (assets decrease) hence, only left side of the equation has been affected.

Answer: Receipts from the service of motor vehicles.

Two very important words in the above definition are 'ordinary activities'. For Joe's Mechanical this is likely to the service and repair of motor vehicles, sales of parts and oils and other workshop related functions. Hence, any receipts from these activities are, more than likely, revenue. The inflow of revenue will also increase Joe's equity.

'Hang on', you say, 'what happens if he's not making a profit, how can he increase equity'? We must be careful to distinguish between revenue and profit. Profit is not revenue. Profit is a by-product of revenue and expenses. Revenue less expenses equal profit.

Joe's winnings at the track are a personal windfall and nothing to do with the 'ordinary activities' of the business. It is a similar story with Joe's share activities. If the business performs well there may be a case to argue that the share trading will form part of the core activities, however, this information was not provided and the question here called for the 'most likely'.

Finally Joe injects funds into the business. This fulfills one of the criteria - it has increased Joe's equity in the business. However, the inflow is not from 'ordinary activities' of the business.

It should be pointed out that just like assets and liabilities, revenue must meet a recognition criteria in that the receipt of benefits must be probable and they need to be able to be reliably measured.

Answer: $450

Revenue is the receipt of economic benefits from 'ordinary activities'. Simon's 'ordinary activity' is his role as an apprentice mechanic, hence his wage from Joe's Mechanical Workshop is his personal revenue. Additionally, the wages will increase Simon's personal equity, the receipt of his wages is probable and it can be reliably measured.

The purchase of the CD is a personal expense and is not revenue. The gift is interesting. Certainly it increases Simon's personal equity, however, it is not Simon's 'ordinary activity', nor can he rely on receiving it on a regular basis or be able to reliably measure what he is likely to receive.

Answer: Joe takes oil from stock for his own use.

In the same way that Joe injecting his personal cash into the business is not revenue but an increase in Joe's capital, the withdrawal of goods by Joe for personal use is not an expense to the business but a reduction in Joe's capital (equity). These withdrawals are commonly referred to as 'drawings'.

The payment of wages means the business would need to sacrifice cash and Joe's equity reduces. Using electricity will create a liability for the business and will decrease Joe's equity. The purchase of tools will result in the sacrifice of cash or it may create a new liability. (Note) Small tools, different to major purchases of plant & equipment, are expensed and are not seen as assets.

Answer: The profits of the business are reinvested into the business.

If Joe were to leave the profits that the business made in the business, it would be the same as if he'd injected his own money into the business - he is increasing his equity.

By borrowing money the business creates a liability, which also creates an asset (bank account), but has no impact on equity. When the business pays for equipment the value of assets will increase but value of other assets (ban account) will decrease by the same amount. There would be no change in Joe's equity.

When Joe (the individual) received the money from a large corporation, he received it in his personal capacity; the business did not receive it. Joe's personal wealth has increased not his equity in the business.