Jc2 -Understanding Financial Statements

What is the primary purpose of an income statement?

• To calculate the company's total assets and liabilities.

• To provide a summary of a company's revenues and expenses to determine profit or loss.

• To provide a detailed analysis of market trends and forecasts.

• To outline the company's cash flow for the year.

Identify the main components of a balance sheet.

• Assets, Liabilities, Equity

• Revenue, Expenses, Cash Flow

• Liabilities, Cash Flow, Profit

• Assets, Revenue, Expenses

What does the cash flow statement indicate about a business?

• It shows the company's market share.

• The cash flow statement indicates the liquidity and financial health of a business.

• It details the business's employee satisfaction levels.

• It reflects the company's stock price changes.

How do you calculate the current ratio?

• Current Ratio = Current Assets / Current Liabilities

• Current Ratio = Total Assets / Total Liabilities

• Current Ratio = Current Liabilities / Current Assets

• Current Ratio = Current Assets + Current Liabilities

What is the formula for calculating net profit margin?

• Net Profit Margin = (Total Revenue - Net Profit) x 100

• Net Profit Margin = (Net Profit / Total Revenue) x 100

• Net Profit Margin = (Net Profit / Total Assets) x 100

• Net Profit Margin = (Net Profit + Total Revenue) / 100

Explain the concept of depreciation in financial terms.

• Depreciation is the increase in the value of an asset over time.

• Depreciation refers to the cash flow generated by an asset.

• Depreciation is the systematic reduction in the recorded cost of a fixed asset, reflecting its usage and wear over time.

• Depreciation is the total cost of purchasing a fixed asset.

What is the significance of net realizable value in accounting?

• Net realizable value determines the interest rates for loans.

• Net realizable value is a measure of a company's profitability.

• Net realizable value is used to calculate tax liabilities.

• Net realizable value is important for accurately valuing assets and ensuring they are not overstated on financial statements.

How do you determine the gross profit from an income statement?

• Gross Profit = Total Revenue - Operating Expenses

• Gross Profit = Cost of Goods Sold - Total Revenue

• Gross Profit = Total Revenue - Cost of Goods Sold

• Gross Profit = Total Revenue + Cost of Goods Sold

List three key financial ratios used in business analysis.

• Operating Margin

• Price-to-Earnings Ratio

• Gross Profit Margin

• Current Ratio, Debt-to-Equity Ratio, Return on Equity (ROE)

What is the difference between operating cash flow and net cash flow?

• Operating cash flow is the total cash available at the end of the year.

• Net cash flow only considers cash from financing activities.

• Operating cash flow includes all cash inflows and outflows.

• Operating cash flow focuses on cash from operations; net cash flow includes all cash inflows and outflows.