Chapter 4

Question 1

What are the three main financial statements?

Answer 1

Income Statement, Balance Sheet, 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

What does the Balance Sheet represent?

Answer 3

A company’s financial position at a specific point in time.

Question 4

Fill in the blank: The formula for the Balance Sheet is _____ = Assets - Liabilities.

Answer 4

Equity

Question 5

What does the Cash Flow Statement track?

Answer 5

The inflow and outflow of cash within a company.

Question 6

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

Answer 6

Income Statement

Question 7

True or False: Depreciation is a non-cash expense that affects the Income Statement.

Answer 7

True

Question 8

What is the purpose of financial statement analysis?

Answer 8

To evaluate a company’s financial performance and make informed decisions.

Question 9

What is the key equation for the Income Statement?

Answer 9

Revenue - Expenses = Net Income

Question 10

What does EBITDA stand for?

Answer 10

Earnings Before Interest, Taxes, Depreciation, and Amortization

Question 11

True or False: Liquidity ratios measure a company’s ability to meet short-term obligations.

Answer 11

True

Question 12

What is a common liquidity ratio?

Answer 12

Current Ratio

Question 13

Fill in the blank: The _____ Ratio is calculated as Current Assets divided by Current Liabilities.

Answer 13

Current

Question 14

What is the formula for the Quick Ratio?

Answer 14

(Current Assets - Inventory) / Current Liabilities

Question 15

What does the Debt to Equity Ratio indicate?

Answer 15

The relative proportion of shareholder’s equity and debt used to finance a company’s assets.

Question 16

True or False: A high Debt to Equity Ratio indicates a company is less leveraged.

Answer 16

False

Question 17

What is the purpose of profitability ratios?

Answer 17

To assess a company’s ability to generate profit relative to its revenue, assets, or equity.

Question 18

What is the formula for Return on Equity (ROE)?

Answer 18

Net Income / Shareholder’s Equity

Question 19

Fill in the blank: The _____ Ratio measures how efficiently a company uses its assets to generate sales.

Answer 19

Asset Turnover

Question 20

What does the Price to Earnings (P/E) Ratio indicate?

Answer 20

The market’s valuation of a company’s earnings.

Question 21

True or False: A higher P/E Ratio generally indicates that investors expect higher growth in the future.

Answer 21

True

Question 22

What is the formula for the Gross Profit Margin?

Answer 22

(Gross Profit / Revenue) x 100

Question 23

What does a low Gross Profit Margin suggest?

Answer 23

The company may have high costs of goods sold or low pricing power.

Question 24

What is meant by ‘working capital’?

Answer 24

Current Assets minus Current Liabilities.

Question 25

Fill in the blank: Working capital is a measure of a company's _____.

Answer 25

Liquidity

Question 26

What does the Return on Assets (ROA) measure?

Answer 26

How efficiently a company uses its assets to generate profit.

Question 27

True or False: The Cash Flow Statement is divided into three sections: operating, investing, and financing activities.

Answer 27

True

Question 28

What type of activities does the operating section of the Cash Flow Statement include?

Answer 28

Cash flows from primary business operations.

Question 29

What are investing activities?

Answer 29

Cash flows related to the purchase and sale of physical and financial investments.

Question 30

Fill in the blank: Financing activities include cash flows related to _____ and dividends.

Answer 30

Debt and Equity

Question 31

What is a common method for analyzing financial statements?

Answer 31

Vertical and Horizontal analysis

Question 32

True or False: Horizontal analysis compares financial data over multiple periods.

Answer 32

True

Question 33

What does vertical analysis show?

Answer 33

Each line item as a percentage of a base figure within the same period.

Question 34

What is the significance of trend analysis?

Answer 34

It helps identify patterns and trends over time in financial performance.

Question 35

Fill in the blank: The _____ Analysis method focuses on the relationships between financial statement items.

Answer 35

Ratio

Question 36

What does the term 'financial leverage' refer to?

Answer 36

The use of borrowed funds to increase the potential return on investment.

Question 37

True or False: A company with high financial leverage has lower risk.

Answer 37

False

Question 38

What is the main purpose of the Statement of Shareholders' Equity?

Answer 38

To outline changes in equity accounts over a period.

Question 39

What does comprehensive income include?

Answer 39

All changes in equity during a period except those resulting from investments by owners and distributions to owners.

Question 40

Fill in the blank: _____ analysis is used to evaluate the performance of a company over time.

Answer 40

Trend

Question 41

What is the difference between cash accounting and accrual accounting?

Answer 41

Cash accounting records transactions when cash changes hands, while accrual accounting records when revenues and expenses are incurred.

Question 42

True or False: Accrual accounting provides a more accurate picture of a company's financial position than cash accounting.

Answer 42

True

Question 43

What is the purpose of auditing financial statements?

Answer 43

To verify the accuracy and fairness of financial reporting.

Question 44

What is a qualified opinion in an audit report?

Answer 44

An opinion that indicates some limitations in the audit or that financial statements are not in conformity with GAAP.

Question 45

Fill in the blank: An unqualified opinion indicates that the financial statements present a true and fair view in accordance with _____ principles.

Answer 45

Generally Accepted Accounting

Question 46

What does the term 'materiality' refer to in financial reporting?

Answer 46

The significance of financial information that could influence the economic decisions of users.