AREC 305 Midterm Exam Questions and Answers Already Passed Latest Update 2025-2026
Definition of Net Worth - Answerssummarizes assets of business if they were liquidated and
financial obligations are paid
Formula for Net Worth - Answerstotal assets - total liabilities = net worth
What is a balance sheet used for? - Answers- formal accounting statement
- summary of a firm's financial position at a specific point in time
Solvency Defintion - AnswersThe ability of a firm to pay off all financial obligations if all assets
were sold
What is solvency in relation to net worth? - Answers> 0 implies firm is solvent, larger is more
solvent
What is solvency in relation to debt to asset ratio? - Answers< 1 implies firm is solvent; closer to
zero, more solvent
total L / Total A
What is leverage ratio in relation to solvency - Answers> 0 implies firm is solvent, though
smaller is more solvent
Total L / Net Worth
Definition of Liquidity - Answersthe ability of a firm to meet its financial obligations as they
come due without disrupting the normal course of business
what is working capital in relation to liquidity? - Answers> 0 implies firm is liquid, larger is more
liquid
current assets - current liabilities
what is current ratio in relation to liquidity? - Answers> 1 implies firm is liquid, larger more liquid
total assets/ total liabilities
what is profitability - Answers- ability of a firm to create additional net value by generating
revenues that exceed the costs of doing so
, examples of current liabilities - Answers- accounts payable
- accrued expenses including:
- loans
- taxes accrued but not paid (Real Estate, Income)
- payroll earned by employees but as yet unpaid
Principle on short term loans (operating loans) principal due within on term loans
example of current assets - Answers- cash
- stocks and bonds
- accounts receivable
- inventories of products for sale
- inventories of inputs prepaid expenses
- investment in growing crops
examples of noncurrent assets - Answers- generate services for multiple years
- machinery and equipment
- breeding livestock
- draft and other service animals
- buildings
- land
Example of Non-current Liabilities - Answersprinciple portion of term loans that is not due to be
paid until after one year (outstanding principle balance)
what is cost basis method of determining asset values? - Answersassets are valued at what
they originally costed less any depreciation was claimed
- avoids estimating market value
- conforms to accounting standards
- net worth is more accurate
what is the market basis method of determining asset values? - AnswersAssets are valued at
their "fair market value" less estimated selling costs
Definition of Net Worth - Answerssummarizes assets of business if they were liquidated and
financial obligations are paid
Formula for Net Worth - Answerstotal assets - total liabilities = net worth
What is a balance sheet used for? - Answers- formal accounting statement
- summary of a firm's financial position at a specific point in time
Solvency Defintion - AnswersThe ability of a firm to pay off all financial obligations if all assets
were sold
What is solvency in relation to net worth? - Answers> 0 implies firm is solvent, larger is more
solvent
What is solvency in relation to debt to asset ratio? - Answers< 1 implies firm is solvent; closer to
zero, more solvent
total L / Total A
What is leverage ratio in relation to solvency - Answers> 0 implies firm is solvent, though
smaller is more solvent
Total L / Net Worth
Definition of Liquidity - Answersthe ability of a firm to meet its financial obligations as they
come due without disrupting the normal course of business
what is working capital in relation to liquidity? - Answers> 0 implies firm is liquid, larger is more
liquid
current assets - current liabilities
what is current ratio in relation to liquidity? - Answers> 1 implies firm is liquid, larger more liquid
total assets/ total liabilities
what is profitability - Answers- ability of a firm to create additional net value by generating
revenues that exceed the costs of doing so
, examples of current liabilities - Answers- accounts payable
- accrued expenses including:
- loans
- taxes accrued but not paid (Real Estate, Income)
- payroll earned by employees but as yet unpaid
Principle on short term loans (operating loans) principal due within on term loans
example of current assets - Answers- cash
- stocks and bonds
- accounts receivable
- inventories of products for sale
- inventories of inputs prepaid expenses
- investment in growing crops
examples of noncurrent assets - Answers- generate services for multiple years
- machinery and equipment
- breeding livestock
- draft and other service animals
- buildings
- land
Example of Non-current Liabilities - Answersprinciple portion of term loans that is not due to be
paid until after one year (outstanding principle balance)
what is cost basis method of determining asset values? - Answersassets are valued at what
they originally costed less any depreciation was claimed
- avoids estimating market value
- conforms to accounting standards
- net worth is more accurate
what is the market basis method of determining asset values? - AnswersAssets are valued at
their "fair market value" less estimated selling costs
