Chapter 4

Question 1

What is a balance sheet?

Answer 1

A financial statement that reports a company’s assets, liabilities, and equity at a specific point in time.

Question 2

True or False: The balance sheet follows the accounting equation Assets = Liabilities + Equity.

Answer 2

True

Question 3

Fill in the blank: The three main components of a balance sheet are __________, liabilities, and equity.

Answer 3

assets

Question 4

What does ‘current assets’ refer to?

Answer 4

Assets that are expected to be converted into cash or used up within one year.

Question 5

List two examples of current assets.

Answer 5

Cash and accounts receivable.

Question 6

What are non-current assets?

Answer 6

Assets that are not expected to be converted into cash or used up within one year.

Question 7

Which of the following is a non-current asset? a) Cash b) Inventory c) Property, plant, and equipment

Answer 7

c) Property, plant, and equipment

Question 8

True or False: Liabilities are obligations that the company needs to settle in the future.

Answer 8

True

Question 9

What is the difference between current liabilities and non-current liabilities?

Answer 9

Current liabilities are due within one year, while non-current liabilities are due after one year.

Question 10

Fill in the blank: Shareholders’ equity represents the __________ of the owners in the company.

Answer 10

residual interest

Question 11

What is retained earnings?

Answer 11

The cumulative amount of net income that has been retained in the company rather than distributed as dividends.

Question 12

What is the purpose of the balance sheet?

Answer 12

To provide a snapshot of a company’s financial position at a specific point in time.

Question 13

True or False: The balance sheet is prepared on a cash basis.

Answer 13

False

Question 14

What accounting principle requires that the balance sheet reflects the company’s financial position?

Answer 14

The going concern principle.

Question 15

What is the formula for calculating working capital?

Answer 15

Working Capital = Current Assets - Current Liabilities.

Question 16

What does a negative working capital indicate?

Answer 16

It indicates that a company may have liquidity issues.

Question 17

What is the significance of the balance sheet date?

Answer 17

It is the specific date for which the financial position is reported.

Question 18

What type of information is typically found in the notes to the balance sheet?

Answer 18

Additional details and explanations about the amounts reported in the balance sheet.

Question 19

True or False: The balance sheet provides information about a company’s profitability.

Answer 19

False

Question 20

What is the role of the auditor regarding the balance sheet?

Answer 20

To provide an independent opinion on the fairness and accuracy of the financial statements.

Question 21

What does the term ‘liquidity’ refer to?

Answer 21

The ability of a company to meet its short-term obligations.

Question 22

Fill in the blank: A balance sheet is also known as a __________ statement.

Answer 22

position

Question 23

What is the difference between book value and market value?

Answer 23

Book value is the value of an asset according to its balance sheet, while market value is the price it would fetch in the market.

Question 24

What does the term ‘current ratio’ measure?

Answer 24

It measures a company’s ability to pay its short-term liabilities with its short-term assets.

Question 25

Fill in the blank: The current ratio is calculated as __________ divided by current liabilities.

Answer 25

current assets

Question 26

What does a current ratio of less than 1 indicate?

Answer 26

It indicates that the company may not have enough assets to cover its current liabilities.

Question 27

What is meant by 'long-term investments' in the context of a balance sheet?

Answer 27

Investments that a company intends to hold for more than one year.

Question 28

What is the primary purpose of the statement of cash flows?

Answer 28

To provide information about a company's cash inflows and outflows during a specific period.

Question 29

True or False: The statement of cash flows includes cash transactions from operating, investing, and financing activities.

Answer 29

True

Question 30

What are operating activities in the context of the statement of cash flows?

Answer 30

Activities that generate cash from the core business operations.

Question 31

What are investing activities?

Answer 31

Cash transactions for the purchase and sale of physical and financial investments.

Question 32

What are financing activities?

Answer 32

Cash transactions related to borrowing and repaying debt, and transactions with the company's owners.

Question 33

Fill in the blank: The cash flow statement provides insights into a company's __________.

Answer 33

liquidity

Question 34

What is free cash flow?

Answer 34

Cash generated by the company that is available for distribution to investors after capital expenditures.

Question 35

What is the primary difference between the direct and indirect methods of preparing the cash flow statement?

Answer 35

The direct method lists cash receipts and payments, while the indirect method adjusts net income for non-cash transactions.

Question 36

True or False: Non-cash transactions are included in the statement of cash flows.

Answer 36

False

Question 37

What is the significance of the cash flow from operations?

Answer 37

It indicates how well a company can generate cash from its core business activities.

Question 38

What does a positive cash flow from financing activities indicate?

Answer 38

It indicates that a company is raising funds through borrowing or issuing equity.

Question 39

Fill in the blank: Cash flows from __________ activities include cash received from customers.

Answer 39

operating

Question 40

What does the term 'net cash provided by operating activities' mean?

Answer 40

The total cash inflows from operating activities minus the total cash outflows.

Question 41

What is the relationship between the balance sheet and statement of cash flows?

Answer 41

The statement of cash flows explains changes in cash reported on the balance sheet between two reporting periods.

Question 42

What is the significance of the cash flow statement in financial analysis?

Answer 42

It helps assess a company's liquidity, solvency, and financial flexibility.

Question 43

True or False: The balance sheet and the statement of cash flows must be prepared at the same time.

Answer 43

False