Chapter 3

Question 1

What are the three main financial statements?

Answer 1

The balance sheet, income statement, and cash flow statement.

Question 2

True or False: The income statement shows a company’s financial position at a specific point in time.

Answer 2

False.

Question 3

Fill in the blank: The balance sheet is also known as the ________ statement.

Answer 3

statement of financial position.

Question 4

What does the cash flow statement report?

Answer 4

The cash inflows and outflows of a company during a specific period.

Question 5

Which financial statement provides information about a company’s revenues and expenses?

Answer 5

The income statement.

Question 6

True or False: Depreciation is considered a cash flow in the cash flow statement.

Answer 6

False.

Question 7

What are the three sections of the cash flow statement?

Answer 7

Operating activities, investing activities, and financing activities.

Question 8

Which financial statement would you use to assess a company’s liquidity?

Answer 8

The balance sheet.

Question 9

Multiple Choice: Which of the following is NOT a component of the income statement? a) Revenues b) Assets c) Expenses d) Net Income

Answer 9

b) Assets.

Question 10

What is the formula for calculating net income?

Answer 10

Net Income = Revenues - Expenses.

Question 11

Fill in the blank: Cash flows from operating activities include cash received from ________.

Answer 11

customers.

Question 12

True or False: Financing activities include cash transactions related to loans and dividends.

Answer 12

True.

Question 13

What is working capital?

Answer 13

Current assets minus current liabilities.

Question 14

Multiple Choice: Which of the following is a non-cash expense? a) Rent b) Depreciation c) Salaries d) Utilities

Answer 14

b) Depreciation.

Question 15

True or False: The cash flow statement is prepared using the accrual basis of accounting.

Answer 15

False.

Question 16

What does EBITDA stand for?

Answer 16

Earnings Before Interest, Taxes, Depreciation, and Amortization.

Question 17

Fill in the blank: The ________ section of the cash flow statement reflects cash used for purchasing equipment.

Answer 17

investing activities.

Question 18

What is the main purpose of the balance sheet?

Answer 18

To provide a snapshot of a company’s assets, liabilities, and equity.

Question 19

True or False: Operating cash flows are the most important part of the cash flow statement.

Answer 19

True.

Question 20

What are retained earnings?

Answer 20

The cumulative amount of net income retained in the company after dividends are paid.

Question 21

Multiple Choice: Which statement is true? a) The income statement shows cash flows. b) The balance sheet shows revenues. c) The cash flow statement shows cash inflows and outflows. d) The statement of changes in equity shows liabilities.

Answer 21

c) The cash flow statement shows cash inflows and outflows.

Question 22

What is the purpose of the statement of cash flows?

Answer 22

To provide information on the cash inflows and outflows over a period.

Question 23

Fill in the blank: The ________ is used to assess a company’s ability to generate profit from its operations.

Answer 23

income statement.

Question 24

True or False: Cash flow from investing activities includes cash received from selling assets.

Answer 24

True.

Question 25

What is the main difference between cash flow and net income?

Answer 25

Cash flow reflects actual cash transactions, while net income includes non-cash items.

Question 26

Multiple Choice: Which of the following is considered an operating activity? a) Issuing stock b) Paying dividends c) Selling goods d) Buying equipment

Answer 26

c) Selling goods.

Question 27

What does the term 'liquidity' refer to?

Answer 27

A company's ability to meet its short-term obligations.

Question 28

Fill in the blank: The ________ section of the cash flow statement shows cash transactions related to the company’s financing.

Answer 28

financing activities.

Question 29

True or False: A high level of accounts receivable can indicate liquidity problems.

Answer 29

True.

Question 30

What does a negative cash flow from operations indicate?

Answer 30

The company is spending more cash than it is generating from its core business activities.

Question 31

Multiple Choice: Which of the following is NOT included in the current liabilities? a) Accounts payable b) Short-term debt c) Long-term debt d) Accrued expenses

Answer 31

c) Long-term debt.

Question 32

What is the accounting equation?

Answer 32

Assets = Liabilities + Equity.

Question 33

Fill in the blank: The ________ measures the profitability of a company relative to its revenue.

Answer 33

net profit margin.

Question 34

True or False: Cash flow statements can help in forecasting future cash flows.

Answer 34

True.

Question 35

What is the primary focus of financial statements?

Answer 35

To provide information about the financial performance and position of a company.

Question 36

Multiple Choice: Which financial statement would you refer to for information on a company's assets? a) Cash Flow Statement b) Income Statement c) Balance Sheet d) Statement of Changes in Equity

Answer 36

c) Balance Sheet.

Question 37

What does 'capital expenditures' refer to?

Answer 37

Money spent by a company to acquire or upgrade physical assets.

Question 38

Fill in the blank: The ________ shows the changes in equity from transactions with owners and comprehensive income.

Answer 38

statement of changes in equity.

Question 39

True or False: The statement of cash flows is mandatory for public companies.

Answer 39

True.

Question 40

What is the purpose of tax accounting?

Answer 40

To comply with tax laws and regulations for reporting income and expenses.

Question 41

Multiple Choice: Which of the following is a tax-deductible expense? a) Dividend payments b) Salaries c) Capital gains d) Shareholder distributions

Answer 41

b) Salaries.

Question 42

What is the effective tax rate?

Answer 42

The average rate at which a corporation's pre-tax profits are taxed.

Question 43

Fill in the blank: Taxable income is calculated as ________ minus allowable deductions.

Answer 43

gross income.

Question 44

True or False: Depreciation can reduce taxable income.

Answer 44

True.

Question 45

What is the difference between cash basis and accrual basis accounting?

Answer 45

Cash basis recognizes revenues and expenses when cash is exchanged, while accrual basis recognizes them when earned or incurred.

Question 46

Multiple Choice: Which of the following is NOT a goal of financial statements? a) To provide relevant information b) To mislead stakeholders c) To ensure accountability d) To assist in decision making

Answer 46

b) To mislead stakeholders.

Question 47

What is a deferred tax asset?

Answer 47

A tax benefit that will reduce future tax payments.

Question 48

Fill in the blank: A ________ is a tax that is levied on a company's profits.

Answer 48

corporate income tax.