FAR CIA 1

Who are the primary users of financial statements?

• Employees

• Investors

• Competitors

• Employees

Answer explanation

Investors are the primary users of financial statements because they need to assess the financial health, performance, and future prospects of a company to make informed investment decisions.

Which of the following is a financial statement?

• Marketing Plan

• Income Statement

• Business Proposal

• Sales Forecast

Answer explanation

The Income Statement is one of the main financial statements, along with the Balance Sheet and Cash Flow Statement. It reports a company's revenues and expenses over a specific period, showing profit or loss.

What is capital maintenance?

• Reducing operating expenses

• Maintaining the physical condition of capital assets

• Investing in new capital

• Ensuring a company's capital remains intact over time

Answer explanation

Capital maintenance is an accounting concept that ensures a company’s capital (financial or physical) is preserved or maintained over time, allowing for accurate profit calculation and financial stability.

Which financial statement provides information about a company's financial position at a specific point in time?

• Balance Sheet

• Income Statement

• Cash Flow Statement

• Statement of Changes in Equity

Answer explanation

The Balance Sheet provides a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and shareholders' equity.

Which user of financial statements is primarily concerned with a company’s ability to repay its debts?

• Investors

• Employees

• Creditors

• Customers

Answer explanation

Creditors, such as banks and suppliers, are primarily concerned with a company's ability to repay its debts. They use financial statements to assess the company’s creditworthiness and risk of default.

The concept of capital maintenance can be evaluated using both the physical and financial capital maintenance approaches.

• TRUE

• FALSE

Answer explanation

Capital maintenance can be evaluated using two approaches: physical capital maintenance, which focuses on maintaining operating capacity, and financial capital maintenance, which focuses on maintaining the purchasing power of capital.

How does the income statement relate to capital maintenance?

• It shows the company's assets and liabilities

• It reports the company’s revenues and expenses, which affects retained earnings and overall capital

• It provides cash flow information

• It details changes in equity

Answer explanation

The Income Statement shows the company's revenues and expenses, which impact net income. Net income contributes to retained earnings, affecting the overall capital available for maintaining and growing the business.

Which of the following best describes the physical capital maintenance approach?

• Maintaining the operating capacity of the capital

• Maintaining the purchasing power of the capital

• Maintaining the market value of the capital

• Maintaining the historical cost of the capital

Answer explanation

Physical capital maintenance ensures that a company's physical productive capacity or operating capacity is preserved. This approach focuses on the ability to continue production at the same level.

What impact does inflation have on financial capital maintenance?

• It decreases the need for capital maintenance

• It has no impact

• It increases the operating capacity of the capital

• It requires adjustments to the historical cost of capital

Answer explanation

Inflation affects the purchasing power of money. To maintain financial capital, adjustments to the historical cost of capital are needed to reflect changes in the value of money over time, ensuring the capital's real value is preserved.

Which user of financial statements would be most concerned with dividend payments and why?

• Creditors, because they want to ensure loan repayments

• Customers, because it affects product pricing

• Shareholders, because they receive a portion of profits as dividends

• Employees, because they want to ensure job security

Answer explanation

Shareholders are owners of the company and receive dividends, which are a share of the company’s profits. They are concerned with dividend payments as they directly impact their returns on investment.