2. Understanding Financial Statements

Question 1

What is net income?

Answer 1

The profit earned by a company after all expenses and taxes have been deducted.

Question 2

What is OCI?

Answer 2

Other Comprehensive Income (OCI) includes revenues, expenses, gains, and losses that are excluded from net income.

Question 3

What is the purpose of a balance sheet?

Answer 3

It shows a company’s financial position at a specific point in time, detailing assets, liabilities, and equity.

Question 4

What are current assets?

Answer 4

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

Question 5

What are non-current assets?

Answer 5

Assets that are not expected to be converted into cash within one year, like property, equipment, or long-term investments.

Question 6

What are liabilities?

Answer 6

Financial obligations a company owes to others.

Question 7

What is equity?

Answer 7

The residual interest in the assets of the company after deducting liabilities.

Question 8

What are operating activities?

Answer 8

Business activities related to the primary operations of the company, such as selling goods or services.

Question 9

What are investing activities?

Answer 9

Activities related to the purchase or sale of long-term assets or investments.

Question 10

What are financing activities?

Answer 10

Activities that result in changes to the size and composition of the equity and borrowings of the company.

Question 11

What is a cash flow statement?

Answer 11

A financial statement that shows the cash inflows and outflows from operating, investing, and financing activities.

Question 12

What is revenue?

Answer 12

Income generated from normal business operations, such as sales of goods or services.

Question 13

What are expenses?

Answer 13

The costs incurred in the process of earning revenue, including rent, salaries, and utilities.

Question 14

What is gross profit?

Answer 14

The difference between revenue and the cost of goods sold (COGS).

Question 15

What is depreciation?

Answer 15

The allocation of the cost of a tangible asset over its useful life.

Question 16

What is amortization?

Answer 16

The process of expensing the cost of an intangible asset over its useful life.

Question 17

What is the income statement?

Answer 17

A financial statement that shows a company’s profitability over a specific period, detailing revenues, expenses, and net income.

Question 18

What is working capital?

Answer 18

The difference between a company’s current assets and current liabilities, used to measure liquidity.

Question 19

What are long-term liabilities?

Answer 19

Obligations that are due for payment beyond one year, such as bonds or long-term loans.

Question 20

What is retained earnings?

Answer 20

The portion of a company’s profit that is kept in the business rather than distributed to shareholders as dividends.

Question 21

What is the purpose of financial statements?

Answer 21

To provide information about a company’s financial performance, position, and cash flows to stakeholders.

Question 22

What are intangible assets?

Answer 22

Non-physical assets such as patents, trademarks, and goodwill.

Question 23

What is liquidity?

Answer 23

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

Question 24

What is solvency?

Answer 24

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

Question 25

What is a contingent liability?

Answer 25

A potential liability that may occur depending on the outcome of a future event.

Question 26

What is goodwill?

Answer 26

An intangible asset that arises when a company acquires another for more than its identifiable net assets.

Question 27

What is the matching principle?

Answer 27

An accounting principle where expenses are matched with the revenues they generate in the same period.

Question 28

What is accrual accounting?

Answer 28

Accounting method where revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.

Question 29

What is historical cost?

Answer 29

The original purchase price of an asset, recorded on the balance sheet.

Question 30

What is market value?

Answer 30

The current value at which an asset can be sold or exchanged in the marketplace.

Question 31

What is the accounting equation?

Answer 31

Assets = Liabilities + Equity.

Question 32

What are accounts receivable?

Answer 32

Money owed to a company by its customers for goods or services delivered but not yet paid for.

Question 33

What are accounts payable?

Answer 33

Money a company owes to its suppliers for goods or services received but not yet paid for.

Question 34

What is the cost of goods sold (COGS)?

Answer 34

The direct costs associated with producing or purchasing the goods sold by a company.

Question 35

What is a fiscal year?

Answer 35

A one-year period that companies use for financial reporting and budgeting, which may not align with the calendar year.

Question 36

What is a trial balance?

Answer 36

A summary of all ledger accounts with their balances to ensure that debits equal credits.

Question 37

What is inventory?

Answer 37

The goods and materials a company holds for the purpose of resale.

Question 38

What is shareholder equity?

Answer 38

The owners' claim on the assets of the company after all liabilities have been paid off.

Question 39

What is a dividend?

Answer 39

A distribution of a portion of a company's earnings to its shareholders, usually in the form of cash or additional shares.

Question 40

What are prepaid expenses?

Answer 40

Payments made in advance for goods or services to be received in the future, recorded as assets until used.

Question 41

What is a classified balance sheet?

Answer 41

A balance sheet that organizes assets and liabilities into current and non-current categories.

Question 42

What is a current liability?

Answer 42

A liability that is expected to be settled within one year.

Question 43

What is accumulated depreciation?

Answer 43

The total amount of depreciation that has been recorded against an asset over its useful life.

Question 44

What is book value?

Answer 44

The value of an asset or company as recorded on the balance sheet, calculated as cost minus accumulated depreciation.

Question 45

What is par value of a stock?

Answer 45

The nominal or face value of a share of stock as stated in the corporate charter.

Question 46

What is treasury stock?

Answer 46

Shares that were issued by the company and later reacquired, reducing shareholders' equity.

Question 47

What is a credit in accounting?

Answer 47

An entry on the right side of a ledger that decreases assets or increases liabilities and equity.

Question 48

What is a debit in accounting?

Answer 48

An entry on the left side of a ledger that increases assets or decreases liabilities and equity.

Question 49

What is an audit?

Answer 49

An independent examination of financial statements to ensure accuracy and compliance with accounting standards.

Question 50

What is a cash equivalent?

Answer 50

Short-term, highly liquid investments that are easily convertible to known amounts of cash, such as treasury bills.