Financial Statement Quiz
Questions: 16 · 10 minutes
1. A business reports $80,000 in revenue and $50,000 in expenses for the period. What is its net income?
$130,000
$30,000
$50,000
$80,000
2. A retailer buys $4,000 of inventory with cash. Immediately after the purchase, what is the effect on total assets?
Total assets remain unchanged because one asset replaces another
Total assets decrease by $4,000
Total assets increase by $4,000
Total assets increase by $8,000
3. How is gross profit generally calculated for a merchandising business?
Net sales minus cost of goods sold
Net income plus operating expenses
Total assets minus total liabilities
Operating cash flow minus investing cash flow
4. When the indirect method is used for operating cash flow, how is depreciation expense generally treated?
It is deducted from net income a second time
It is reported as an investing cash outflow
It is added back to net income because it is noncash
It is excluded from both the income statement and cash flow statement
5. Which formula correctly states the accounting equation underlying the balance sheet?
Assets plus liabilities equal owners’ equity
Assets equal liabilities plus owners’ equity
Assets minus revenue equal expenses
Liabilities equal cash plus net income
6. A company has $90,000 in current assets and $60,000 in current liabilities. What is its current ratio?
0.67
2.50
30,000
1.50
7. An analyst compares the same company’s revenue and operating expenses across three consecutive years. What is this comparison primarily designed to reveal?
Whether the accounting equation balances on each date
The market value of every asset and liability
Whether every transaction was authorized
Trends and changes in performance over time
8. Which transaction is normally reported as an operating cash inflow on the statement of cash flows?
Receiving cash from issuing shares
Receiving cash from selling equipment
Receiving proceeds from a long-term loan
Collecting cash from customers
9. A manufacturer purchases production equipment for cash. How is the payment normally classified on the statement of cash flows?
An operating cash outflow
A financing cash inflow
A financing cash outflow
An investing cash outflow
10. A company pays for a 12-month insurance policy in advance and initially records a prepaid asset. As one month of coverage is used, what should happen?
Cash increases and insurance expense decreases
Insurance expense increases and the prepaid asset decreases
The prepaid asset increases and equity increases
A liability decreases and revenue increases
11. A trial balance has equal total debits and credits. What can reasonably be concluded?
Every transaction was recorded in the correct account
The company earned a profit during the period
Debits equal credits, but some recording or classification errors may still exist
The financial statements contain no omissions
12. On a statement of cash flows, cash received from issuing common shares is normally classified as what?
An investing cash inflow
An operating cash inflow
A financing cash inflow
A noncash operating activity
13. Assuming no prior-period adjustments, which pair of events normally explains the main changes in retained earnings during a period?
Cash collections increase it, while credit sales decrease it
Asset purchases increase it, while loan proceeds decrease it
Net income increases it, while dividends decrease it
Share issuances increase it, while depreciation decreases it
14. Which financial statement reports a company’s assets, liabilities, and equity at a specific date?
Balance sheet
Income statement
Statement of cash flows
Statement of changes in equity
15. Under accrual accounting, a company receives and uses electricity in December but will pay the bill in January. What should it record in December?
A prepaid asset and a cash outflow
An expense and a payable
Only a cash outflow
Revenue and a receivable
16. A customer pays an amount that was previously recorded as accounts receivable. What happens at collection?
Cash increases, accounts receivable decreases, and revenue is unaffected
Cash increases and a liability decreases
Accounts receivable and revenue both decrease
Cash and revenue both increase