B.8 Financial Statements

Question 1

Which financial statement shows the company’s financial position at a specific point in time?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 1

B. Balance sheet

The balance sheet shows the company’s financial position at a specific point in time, listing its assets, liabilities, and equity.

B.8 Financial statements

Question 2

Which financial statement shows a company’s revenue, expenses, and net income over a period of time?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 2

A. Income statement

The income statement shows a company’s revenue, expenses, and net income over a period of time, usually a quarter or a year

B.8 Financial statements

Question 3

Which financial statement shows the changes in a company’s equity over a period of time?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 3

D. Statement of changes in equity

A statement of changes in equityn measures the changes in a company’s equity throughout a specific accounting period. It covers the following elements: Net profit or loss. Dividend payments.

B.8 Financial statements

Question 4

Which financial statement shows a company’s cash inflows and outflows over a period of time?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 4

C. Statement of cash flows

The statement of cash flows shows a company’s cash inflows and outflows over a period of time, divided into three categories: operating, investing, and financing activities.

B.8 Financial statements

Question 5

Which of the following is not a category of assets on a balance sheet?

A. Current assets
B. Long-term assets
C. Intangible assets
D. Equity assets

Answer 5

D. Equity assets

Equity assets are not a category of assets on a balance sheet. The three main categories of assets are current assets, long-term assets, and intangible assets.

B.8 Financial statements

Question 6

Company A reported net income of $100,000 for the year ended December 31, 2022. If the company paid $10,000 in dividends to its shareholders during the year, what is its retained earnings as of December 31, 2022?

A. $90,000
B. $100,000
C. $110,000
D. $120,000

Answer 6

A. $90,000

Retained earnings is the portion of a company’s net income that is kept by the company instead of being distributed as dividends. Therefore, the retained earnings as of December 31, 2022, would be $100,000 (net income) minus $10,000 (dividends), or $90,000, plus any previous retained earnings. We don’t have information about previous retained earnings, so we can’t calculate the exact amount, but $90,000 is the closest option.

B.8 Financial statements

Question 7

Which of the following is a non-cash expense that is added back to net income when calculating cash flows from operating activities?

A. Depreciation
B. Interest expense
C. Income tax expense
D. Dividend paid

Answer 7

A. Depreciation

Depreciation is a non-cash expense that represents the decrease in the value of an asset over time due to wear and tear or obsolescence. Since it doesn’t involve an actual cash outflow, it is added back to net income when calculating cash flows from operating activities.

B.8 Financial statements

Question 8

Company B had the following transactions during the year:
Sold goods for $150,000, of which $50,000 were on credit
Paid $40,000 in rent and $20,000 in salaries
Purchased $30,000 in inventory on credit and paid $10,000 in cash
Received $5,000 in interest income
What is the company’s net cash inflow from operating activities?

A. $75,000
B. $80,000
C. $85,000
D. $90,000

Answer 8

B. $80,000

$150,000 (Cash received from sales) - $40,000 (Rent paid) - $20,000 (Salaries paid) - $10,000 (Cash paid for inventory purchase) = $80,000

B.8 Financial statements

Question 9

Which financial statement would show the purchase of a new patent for cash?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 9

B. Balance sheet

The purchase of a new patent for cash would increase the company’s intangible assets, which are reported on the balance sheet.

B.8 Financial statements

Question 10

Which financial statement would show the repayment of a long-term loan?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 10

C. Statement of cash flows

The repayment of a long-term loan would be reported as a cash outflow from financing activities on the statement of cash flows.

B.8 Financial statements

Question 11

Which financial statement would show the issuance of new common shares?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 11

D. Statement of changes in equity

The issuance of new common shares would increase the company’s share capital, which is reported on the statement of changes in equity.

B.8 Financial statements

Question 12

Sarah Thompson, a Certified Financial Planner CFP®, was reviewing the financial statements of Baxter Corporation. Baxter recently sold one of its properties, which had been used as a long-term asset, for $450,000 in cash. On which of the following financial statements would Sarah most likely find details about this transaction?

A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of changes in equity

Answer 12

C. Statement of cash flows

The Statement of Cash Flows provides detailed information about a company’s cash inflows and outflows from its operations, investing activities, and financing activities. The disposal of a long-term asset for cash is considered an investing activity, and thus, would be recorded in the investing section of the Statement of Cash Flows.

B.8 Financial statements

Question 13

Martin is analyzing the financial statements of BlueCreek Corp., a company he’s considering for a client’s diversified portfolio. He is particularly interested in locating where the company records its unrealized gains or losses on investments. Which financial statement should Martin refer to for this information?

A. Profit and Loss Statement
B. Statement of Financial Position
C. Cash Flow Statement
D. Statement of Equity Changes

Answer 13

B. Statement of Financial Position

The unrealized gains or losses on investments, depending on their classification, are typically recorded on the Statement of Financial Position (commonly known as the Balance Sheet). Specifically, if the investments are classified as “available-for-sale” or “fair value through other comprehensive income”, the unrealized gains or losses are captured in other comprehensive income and reflected in the equity section of the balance sheet. They affect the net worth or value of the company without impacting the company’s reported profit or loss until they are realized.

B.8 Financial statements

Question 14

XYZ Corporation recently published its financial statements for the year ending December 31, 2022. As an analyst, you are reviewing the company’s income statement. Which of the following items would typically be found on an income statement?

A. Accounts receivable
B. Retained earnings
C. Cash flows from financing activities
D. Net income

Answer 14

D. Net income

Net income represents the final profitability of a company and is a key item reported on the income statement. It is calculated by deducting all expenses, including taxes, from the total revenue generated by the company during a specific period. Therefore, net income is a crucial indicator of a company’s financial performance and is reported on the income statement.

B.8 Financial statements

Question 15

ABC Corporation has just released its annual financial statements. As a potential investor, you are analyzing the company’s balance sheet. Which of the following items would typically be found on a balance sheet?

A. Gross profit
B. Operating expenses
C. Accounts payable
D. Sales revenue

Answer 15

C. Accounts payable

Accounts payable represents the amount owed by a company to its suppliers or vendors for goods or services received on credit. It is a liability that is reported on the balance sheet and represents the company’s short-term obligations. Accounts payable provides insight into the company’s liquidity and its ability to meet its short-term financial obligations.

B.8 Financial statements

Question 16

You are reviewing the financial statements of DEF Corporation and notice a line item labeled “depreciation expense.” What does depreciation expense represent?

A. The decrease in market value of the company’s inventory
B. The cost of borrowing funds from financial institutions
C. The reduction in the carrying value of long-term assets over time
D. The amount of income tax paid by the company

Answer 16

C. The reduction in the carrying value of long-term assets over time

Depreciation expense is an accounting method used to allocate the cost of a long-term asset over its useful life. It represents the reduction in the carrying value of the asset due to wear and tear, obsolescence, or other factors. By recognizing depreciation expense, the company accounts for the gradual consumption of the asset’s value and ensures that its financial statements reflect the asset’s diminishing worth over time.

B.8 Financial statements

Question 17

GHI Corporation is preparing its statement of cash flows. Which of the following activities would be classified as an operating activity?

A. Purchasing new equipment for the company’s production facility
B. Issuing new shares of common stock to raise capital
C. Paying interest on a long-term loan
D. Collecting cash from customers for product sales

Answer 17

D. Collecting cash from customers for product sales

Operating activities in the statement of cash flows involve transactions related to the company’s primary business operations, such as the buying and selling of inventory or providing services. Collecting cash from customers for product sales is an example of an operating activity because it represents the cash inflow generated by the company’s core operations.

B.8 Financial statements

Question 18

JKLM Corporation wants to assess its long-term financial leverage. Which of the following ratios would be most helpful for this purpose?

A. Current ratio
B. Return on investment (ROI)
C. Debt-to-equity ratio
D. Gross profit margin

Answer 18

C. Debt-to-equity ratio

The debt-to-equity ratio measures the proportion of a company’s financing that comes from debt compared to equity. It provides insights into the company’s financial leverage and its ability to meet its long-term obligations. By calculating the ratio, JKLM Corporation can evaluate the level of risk associated with its capital structure and make informed decisions regarding its debt management and equity financing.

B.8 Financial statements

Question 19

Tom is evaluating whether to invest in a diversified stock portfolio or purchase a rental property. He has a detailed personal financial statement showing a net worth of $250,000, annual income of $100,000, and existing investment assets totaling $150,000. His liabilities include a student loan of $25,000 and a car loan of $10,000.

Question:
Given Tom’s financial statements, which of the following best describes the impact of adding a rental property to his portfolio?

A. Decrease liquidity and potentially increase cash flow, depending on rental income
B. Increase in total assets with no change in net cash flow
C. Decrease in net worth due to increased liabilities
D. Increase in diversification and reduction in risk exposure

Answer 19

A. Decrease liquidity and potentially increase cash flow, depending on rental income

Purchasing a rental property typically involves significant upfront costs and potentially taking on additional debt, which decreases liquidity. However, if the rental income is stable and exceeds the operating expenses and financing costs, it can increase cash flow, providing more income on a regular basis. While it may increase asset diversification, the inherent risks associated with real estate, such as market fluctuations and tenant issues, do not necessarily reduce overall risk exposure without considering other factors in his portfolio.

B.8 Financial statements

Question 20

John, a potential client, is considering strategies to improve his financial situation. He has come to you for advice on how to manage his debts. John’s financial statement reveals that he has total assets of $120,000 (including a car valued at $20,000 and investments of $50,000), and he has total liabilities of $80,000 (including a mortgage of $40,000 and credit card debt of $10,000). His annual income is $60,000.

Question:
Based on John’s financial statements, which ratio would provide the most useful information for assessing his debt management and why?

A. Asset-to-liability ratio
B. Debt service coverage ratio (DSCR)
C. Debt-to-income ratio
D. Credit utilization ratio

Answer 20

C. Debt-to-income ratio

The debt-to-income ratio is a crucial indicator of an individual’s debt management efficiency. It measures the percentage of John’s gross monthly income that goes towards paying his total debt. This ratio helps to assess whether his debts are manageable relative to his income. With a total annual income of $60,000 and significant debts including a mortgage and credit card debt, knowing his debt-to-income ratio will help determine if he can afford his current debt levels or if he needs to explore debt reduction strategies. This is essential for personal financial planning, especially if he is considering future borrowing or needs to adjust his budget to improve his financial health.

B.8 Financial statements