D366 Financial Statement Analysis - Set 2 - Part 1

Correct Answer: Balance sheet

The balance sheet presents a company's financial position at a single point in time, listing assets, liabilities, and shareholders' equity. It reflects the accounting equation: assets equal liabilities plus equity.

Correct Answer: Assets = Liabilities + Equity

The accounting equation states that Assets = Liabilities + Equity. It must always balance because every asset is financed either by creditors (liabilities) or by owners (equity).

Correct Answer: Income statement

The income statement (profit and loss statement) reports revenues, expenses, and the resulting net income or loss over a period, such as a quarter or year. It shows how profitably the company operated.

Correct Answer: Revenues minus expenses for the period

Net income equals total revenues minus total expenses over a period. It is often called the bottom line and represents the profit available to owners after all costs, including taxes and interest.

Correct Answer: Accounts receivable

Accounts receivable are expected to be collected within one year, making them a current asset. Land and goodwill are long-term assets, and a bond the company issued is a liability, not an asset.

Correct Answer: Operating, investing, and financing

The statement of cash flows groups cash movements into operating activities (core business), investing activities (buying/selling long-term assets), and financing activities (debt and equity transactions).

Correct Answer: Accounts payable

Accounts payable is a liability, representing amounts the company owes suppliers for goods or services purchased on credit. Inventory, cash, and equipment are all assets.

Correct Answer: Cumulative net income not distributed as dividends

Retained earnings are the cumulative profits a company has kept and reinvested rather than paid out as dividends. They are a component of shareholders' equity, not a cash balance.

Correct Answer: It is earned, regardless of when cash is received

Accrual accounting recognizes revenue when it is earned (goods delivered or services performed), regardless of when cash changes hands. This matches revenues to the period in which they are generated.

Correct Answer: Statement of changes in equity

The statement of changes in equity (or statement of stockholders' equity) reports how equity accounts, such as common stock and retained earnings, changed over the period through net income, dividends, and share transactions.

Correct Answer: Allocating the cost of a tangible asset over its useful life

Depreciation systematically allocates the cost of a tangible long-term asset over its useful life, matching the expense to the periods that benefit from the asset's use. It is a non-cash expense.

Correct Answer: Revenue minus cost of goods sold

Gross profit equals revenue minus the cost of goods sold. It measures the profit a company makes from its products before deducting operating expenses, interest, and taxes.

Correct Answer: Patent

A patent is an intangible asset because it has no physical substance but provides economic value through legal rights. Trucks, inventory, and receivables are tangible or monetary assets.

Correct Answer: Expenses be recorded in the same period as the revenues they help generate

The matching principle requires expenses to be recognized in the same period as the revenues they help produce, giving a more accurate picture of profitability for that period.

Correct Answer: Sales revenue

Sales revenue is an income statement account measured over a period. Accounts payable, retained earnings, and equipment are balance sheet accounts reflecting position at a point in time.

Correct Answer: Current assets minus current liabilities

Working capital equals current assets minus current liabilities. It indicates the short-term resources available to fund day-to-day operations and meet near-term obligations.

Correct Answer: The residual interest in the assets after deducting liabilities

Shareholders' equity is the residual interest in a company's assets after subtracting its liabilities. It represents the owners' claim and includes contributed capital and retained earnings.

Correct Answer: The direct costs of producing the goods a company sold

COGS is the direct cost of producing or purchasing the goods that were sold during the period, including materials and direct labor. It is subtracted from revenue to compute gross profit.

Correct Answer: Subtracted from net income in operating cash flow

Under the indirect method, an increase in accounts receivable means revenue was recorded but cash was not yet collected, so it is subtracted from net income to arrive at cash flow from operations.

Correct Answer: Faithful representation

Faithful representation requires that financial information accurately reflect the economic events it purports to represent, meaning it should be complete, neutral, and free from material error.