Understanding Financial Statements

What is the primary purpose of financial statements?

• To calculate tax liabilities

• To predict future stock prices

• To summarize a business's activities and financial performance

• To provide a detailed history of a company's transactions

What does the balance sheet primarily show?

• The market value of a company's stock

• A business's revenues and expenses over time

• A snapshot of a business's assets, liabilities, and equity

• The cash inflows and outflows of a business

Why must a balance sheet always balance?

• Because it shows the company's profit

• Because it reflects the company's market value

• Because it follows the accounting equation

• Because it is required by law

What does the income statement reveal about a business?

• Its equity and retained earnings

• Its revenues and expenses over a period

• Its assets and liabilities

• Its cash inflows and outflows

What is another name for the income statement?

• Statement of Cash Flows

• Statement of Financial Position

• Statement of Profit and Loss

• Statement of Equity

What is the main difference between cash and accrual accounting?

• Cash accounting records transactions when cash is exchanged, accrual when they occur

• Cash accounting records transactions when they occur, accrual when cash is exchanged

• Cash accounting is used by large businesses, accrual by small businesses

• Cash accounting is more accurate than accrual accounting

Which section of the cash flow statement includes cash from regular business activities?

• Financing activities

• Equity activities

• Investing activities

• Operating activities

How are cash inflows and outflows categorized in the cash flow statement?

• By operating, investing, and financing activities

• By assets and liabilities

• By revenue and expenses

• By profit and loss

What does the cash flow statement reconcile back to?

• The income statement

• The balance sheet

• The statement of equity

• The profit and loss statement

What is the key takeaway from the recap of financial statements?

• They are not interconnected

• They are primarily used for tax purposes

• They provide a comprehensive view of a business's financial health

• They are only useful for large businesses