Drill 20 ·
AP Business with Personal Finance Balance Sheet and Net Worth Drill 20 is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
A business-finance drill on reading a balance sheet and computing owner's equity, with interest rates shown inline on each debt; uses an invented business and original figures.
Riverbend Ceramics is a one-person pottery studio. The owner prepares a balance sheet to check the studio's financial position. Each debt lists its annual interest rate in parentheses. The figures are hypothetical.
Balance Sheet for Riverbend Ceramics (as of December 31)
| Item | Amount |
|---|---|
| Assets | |
| Cash and checking | $6,200 |
| Inventory (finished pottery) | $4,800 |
| Equipment (kiln, wheels) | $14,000 |
| Studio van | $9,000 |
| Total assets | $34,000 |
| Liabilities | |
| Equipment loan (7%) | $8,000 |
| Auto loan (6%) | $5,000 |
| Credit card balance (19%) | $1,200 |
| Total liabilities | $14,200 |
| Net worth (owner's equity) | $19,800 |
Question 1. Q1: According to the balance sheet, what are Riverbend Ceramics' total assets?
Explanation: Q1: Read the total-assets line: $34,000. $14,200 is total liabilities. $19,800 is net worth. $6,200 is only the cash line, not total assets.
Question 2. Q2: On a balance sheet, net worth (owner's equity) is defined as which of the following?
Explanation: Q2: Net worth equals total assets minus total liabilities. Adding the two overstates the figure and has no accounting meaning here. Liabilities minus assets reverses the subtraction and would give a negative number. Cash minus the credit card balance ignores most of the assets and debts and is not how net worth is defined.
Question 3. Q3: Confirm the net worth figure: using the totals shown, what is total assets minus total liabilities?
Explanation: Q3: $34,000 in assets minus $14,200 in liabilities equals $19,800, matching the net-worth line. $14,200 is the liabilities total, not the difference. $20,800 results from subtracting the wrong figure. $48,200 adds assets and liabilities instead of subtracting, which is not net worth.
Question 4. Q4: Which debt carries the highest annual interest rate, making it the most expensive to carry per dollar owed?
Explanation: Q4: The credit card at 19% has the highest rate of the three debts, so each dollar owed costs the most per year. The equipment loan at 7% and the auto loan at 6% are both far lower. The studio van is an asset, not a debt, so it carries no interest rate at all.
Question 5. Q5: The owner wants to report the studio's financial position to a lender. Based on the balance sheet, which statement best communicates that position?
Explanation: Q5: The accurate summary states assets of $34,000, liabilities of $14,200, and the resulting $19,800 net worth. The studio owns far more than it owes, so 'owes more than it owns' is false. Net worth ($19,800) is below total assets ($34,000) because debt is subtracted, so they are not equal. Carrying some debt does not erase equity; positive net worth of $19,800 remains.