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Questions and Answers
What does the accrual accounting/matching principle ensure in financial statements?
What does the accrual accounting/matching principle ensure in financial statements?
What is the main purpose of preparing financial statements for specific periods?
What is the main purpose of preparing financial statements for specific periods?
Which of the following is an assumption made when preparing financial statements concerning the business's operations?
Which of the following is an assumption made when preparing financial statements concerning the business's operations?
What is the effect of the conservatism assumption in financial reporting?
What is the effect of the conservatism assumption in financial reporting?
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Which statement accurately describes the balance sheet?
Which statement accurately describes the balance sheet?
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Why is historical cost used to record assets and liabilities in financial statements?
Why is historical cost used to record assets and liabilities in financial statements?
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What does the income statement report?
What does the income statement report?
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Which of the following is considered a current asset?
Which of the following is considered a current asset?
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What distinguishes fixed assets from current assets?
What distinguishes fixed assets from current assets?
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Which of the following is a type of intangible asset?
Which of the following is a type of intangible asset?
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Which item typically represents the most liquid current asset?
Which item typically represents the most liquid current asset?
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Which of the following best describes prepaid expenses?
Which of the following best describes prepaid expenses?
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What is the first step in a firm’s operating cycle?
What is the first step in a firm’s operating cycle?
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Which of the following assets are not considered current assets?
Which of the following assets are not considered current assets?
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Which of these is NOT a type of current asset?
Which of these is NOT a type of current asset?
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What typically follows after selling goods on credit in the operating cycle?
What typically follows after selling goods on credit in the operating cycle?
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Which of the following best defines assets?
Which of the following best defines assets?
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What is indicated by a negative value in long-term deferred taxes in the cash flow formula?
What is indicated by a negative value in long-term deferred taxes in the cash flow formula?
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Which of the following actions would increase the change in equity as calculated in the financing cash flow formula?
Which of the following actions would increase the change in equity as calculated in the financing cash flow formula?
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How is the amount reinvested in the company determined?
How is the amount reinvested in the company determined?
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What sequence reflects the flow of cash according to the cash flow dynamic?
What sequence reflects the flow of cash according to the cash flow dynamic?
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Which of the following statements is true about the relationship between cash flows and the company’s liquidity?
Which of the following statements is true about the relationship between cash flows and the company’s liquidity?
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What does the Statement of Cash Flows primarily report?
What does the Statement of Cash Flows primarily report?
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Which statement best summarizes the Accounting Identity?
Which statement best summarizes the Accounting Identity?
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What distinguishes a balance sheet from an income statement?
What distinguishes a balance sheet from an income statement?
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What type of liabilities are included as current liabilities on a balance sheet?
What type of liabilities are included as current liabilities on a balance sheet?
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Which of the following best categorizes 'Prepaid Expenses'?
Which of the following best categorizes 'Prepaid Expenses'?
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How does equity represent a company's financial position?
How does equity represent a company's financial position?
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Which item would not be classified as a liability of the business?
Which item would not be classified as a liability of the business?
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Which of the following indicates a company's current financial health?
Which of the following indicates a company's current financial health?
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What does a positive Net Working Capital (NWC) indicate about a company's short-term financial position?
What does a positive Net Working Capital (NWC) indicate about a company's short-term financial position?
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What is the primary focus of Non-Cash Working Capital?
What is the primary focus of Non-Cash Working Capital?
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How is the Market-to-Book Ratio calculated?
How is the Market-to-Book Ratio calculated?
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What does Book Value per Share represent?
What does Book Value per Share represent?
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Which of the following best describes the Income Statement?
Which of the following best describes the Income Statement?
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What component is NOT included when calculating Current Operating Liabilities?
What component is NOT included when calculating Current Operating Liabilities?
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Which calculation would NOT help determine the company's short-term financial health?
Which calculation would NOT help determine the company's short-term financial health?
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What is typically excluded in the measurement of Non-Cash Working Capital?
What is typically excluded in the measurement of Non-Cash Working Capital?
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Which equation helps calculate Market Value per Share?
Which equation helps calculate Market Value per Share?
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Which of the following reflects a company’s ability to generate profits over time?
Which of the following reflects a company’s ability to generate profits over time?
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Study Notes
Financial Statements and Stakeholders
- Financial statements summarize a company's activities, focusing on operating, investment, and financing activities.
- Internal stakeholders include employees, managers, and board members; external stakeholders include investors, lenders, suppliers, customers, governments, unions, media, competitors, and the market.
- Financial statements use assumptions to interpret data: transactions are recorded at historical cost (original purchase price), statements are recorded over specific periods (e.g., quarterly or annually), statements comply with accrual accounting where revenues and expenses are recognized when incurred not when cash is exchanged, and the business is expected to continue operating in the foreseeable future.
- Statements are prepared with a conservative approach, recording potential expenses and liabilities as soon as reasonably expected, to avoid overstating profitability, should the business face a loss.
Basic Financial Statements
- Balance Sheet: reports a company's financial position at a specific point in time (usually the end of a fiscal period). It shows assets, liabilities, and equity.
- Assets: resources owned by the company.
- Liabilities: obligations owed by the company.
- Equity: owners' residual interest in the company's assets.
- Income Statement: reports a company's financial performance over a specific period of time. It shows revenues and expenses, leading to net income or net loss.
- Statement of Cash Flows: reports the flow of cash in and out of a company over a specific period of time. It shows cash flows from operating, investing, and financing activities.
Assets
- Current assets are typically converted to cash within one operating cycle or a year (whichever is longer), and are the most liquid assets. Examples include cash, marketable securities, accounts receivable, prepaid expenses, and inventory.
- Fixed assets are long-term investments that are not expected to be converted to cash within one operating cycle and often have a physical existence. Examples include plant, property, equipment, land, and goodwill.
- Intangible assets are non-physical assets that contribute to the value of a company. These include trademarks and patents.
Liabilities
- Current liabilities are obligations that are due within one year or one operating cycle, which are typically presented in order of their due date. Examples include accounts payable, accrued expenses, current portion of long term debt and short-term borrowings.
- Long-term liabilities are obligations that are due beyond one year. Examples include long term debt, bonds, and capital leases.
- Note: Goodwill is recognized when a company acquires another company for more than the fair value of the acquired assets' book value
Equity
- Equity represents the residual interest in the assets of the company after deducting all liabilities. A company's equity can grow through retained earnings or issuing new shares. Key components of company equity are: Par Value, Additional paid-in Capital, and Retained Earnings.
Working Capital and Liquidity Ratios
- Net working capital is calculated by subtracting current liabilities from current asssets. A positive working capital number indicates that the company has more assets that are expected to convert into cash in the near term than obligations that will come due.
- Liquidity ratios, including the current ratio and quick ratio, assess a company's ability to meet its short-term obligations.
- Market-to-book ratios compare the market value of a company's stock to its book value to reflect the company's perceived value in the market.
Profitability Ratios
- Profitability ratios, such as return on equity (ROE) and return on assets (ROA) evaluate company efficiency in creating profit given various factors including equity, assets, and sales.
- Return on sales (ROS) measures the proportion of revenue that becomes profit for each revenue dollar.
- Interest coverage ratios (TIE) evaluate a company's capacity to make interest payments on its debts.
Statement of Cash Flows
- The statement of cash flows summarizes the cash inflows and outflows of a company during a specific time period. It is divided into operating activities, investing activities, and financing activities, providing a detailed explanation of cash changes.
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Description
Test your knowledge on financial statements and their impact on both internal and external stakeholders. Explore concepts such as operating, investment, and financing activities while understanding the crucial assumptions used in preparing these statements. This quiz also highlights the importance of a conservative approach in financial reporting.