Understanding Financial Statements Flashcards
Expenses on the income Statement may be grouped by
A. nature, but not by function.
B. function, but not by nature.
C. either function or nature.
C is correct. IAS 1 states that expenses may be categorized by either nature or function.
An example of an expense classification by function is
A. tax expense.
B. interest expense.
C. cost of goods sold.
C is correct. Cost of goods sold is a classification by function. The other two expenses represent classifications by nature
Under IFS. income includes increases in economic benefits from
A. increases in owners’ equity related to owners’ contributions.
B. increases in liabilities not related to owners’ contributions.
C. enhancements of assets not related to owners’ contributions.
C is correct. Under IFS, income includes increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities.
Which of the following Statements best describes other comprehensive income?
A. Income earned from diverse geographic and segment activities.
B. Income earned from activities that are not part of the company’s ordinary business activities.
C. Income related to the sale of goods and delivery of services.
D. Income that changes stockholders equity but is not reflected as part of net income
D is correct.
Answers A and B are not correct because the do not specify
whether such income is reported as part of net income and shown in the income Statement.
Answer C is not correct because such activities would typically be reported as part of net income on the income statement.
Resources controlled by a company as a result of past events are
A. equity.
B. assets.
C. liabilities.
B is correct. Assets are resources controlled by a company as a result of past events.
Equity equals
A. Assets - Liabilities.
B. Liabilities - Assets.
C. Assets + Liabilities.
A is correct. Assets = Liabilities + Equity and, therefore, Assets - Liabilities = Equity.
Distinguishing between current and noncurrent items on the balance sheet and presenting a subtotal for current assets and liabilities is referred to as
A. the report format.
B. the account format.
C. a classified balance sheet.
C is correct. A classified balance sheet is one that classifies assets and liabilities as current or noncurrent and provides a subtotal for current assets and current liabilities.
All of the following are current assets except
A. cash
B. goodwill.
C. inventories.
B is correct. Goodwill is a long-term asset, and the others are all current assets.
Debt due within one year is considered
A. current.
B. preferred.
C. long term.
A is correct. Current liabilities are those liabilities, including debt, due within one year. Long-term liabilities are not due within the current year.
Money received from customers for products to be delivered in the future is recorded as
A. revenue and an asset.
B. an asset and a liability.
C. revenue and a liability,
B is correct. The cash received from customers represents an asset. The
obligation to provide a product in the future is a liability called ‘unearned
income” or “unearned revenue.” Once the product is delivered, the liability will be converted into revenue
When a company pays its rent in advance, its balance sheet will reflect a reduction in
A. assets and liabilities.
B. liabilities and shareholders’ equity.
C. one category of assets and an increase in another.
C is correct. Paying rent in advance will reduce cash and increase prepaid
expenses, both of which are assets.
Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company
will most likely result in an increase for that company in
A. the debt-to-equity ratio but not the total asset turnover.
B. the total asset turnover but not the debt-to-equity ratio.
C. both the debt-to-equity ratio and the total asset turnover.
C is correct. Impairment write-downs reduce equity in the denominator of the
debt-to-equity ratio but do not affect debt, so the debt-to-equity ratio is
expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.
Under IFS, the minority interest in consolidated subsidiaries is presented on the balance sheet as
A. a long-term liability.
B. separately, but as a part of shareholders’ equity.
C. a mezzanine item between liabilities and shareholders’ equity.
B is correct. IFS requires that minority interest in consolidated subsidiaries be classified as shareholders’ equity.
Retained earnings are a component of
A. liabilities.
B. minority interest.
C. owners’ equity.
C is correct. Retained earnings are a component of owners’ equity.
When a company buys shares of its own stock to be held in treasury, it
records a reduction in
A. both assets and liabilities.
B. both assets and shareholders’ equity.
C. assets and an increase in shareholders’ equity.
B is correct. Share repurchases reduce the company’s cash (an asset).
Shareholders’ equity is reduced because there are fewer shares outstanding and treasury stock is an offset to owners’ equity.
