AIFA Financial Statement Analysis & Accounting 1 — Questions and Answers
Question 1: Which financial statement provides a snapshot of a company's assets, liabilities, and equity at a specific point in time?
- Income Statement
- Balance Sheet (Correct answer)
- Cash Flow Statement
- Statement of Retained Earnings
Correct answer: Balance Sheet
The Balance Sheet (also called Statement of Financial Position) reports a company's financial position at a single date, organized by assets, liabilities, and shareholders' equity.
Question 2: Under GAAP, when a company sells goods on credit, revenue should generally be recognized when:
- Cash is collected from the customer
- The goods are ordered by the customer
- Control of the goods has transferred to the buyer (Correct answer)
- The invoice is issued to the customer
Correct answer: Control of the goods has transferred to the buyer
Under ASC 606 (GAAP revenue recognition standard), revenue is recognized when control of the promised goods or services transfers to the customer, regardless of when cash is received.
Question 3: A company reports net income of $500,000, depreciation of $80,000, and an increase in accounts receivable of $30,000. What is the operating cash flow using the indirect method?
- $550,000 (Correct answer)
- $580,000
- $450,000
- $530,000
Correct answer: $550,000
Operating cash flow = Net income + Depreciation (non-cash) – Increase in AR = $500,000 + $80,000 – $30,000 = $550,000.
Question 4: Which depreciation method results in the highest depreciation expense in the early years of an asset's life?
- Straight-line depreciation
- Units-of-production depreciation
- Double-declining balance depreciation (Correct answer)
- Sum-of-the-years'-digits depreciation
Correct answer: Double-declining balance depreciation
Double-declining balance is an accelerated depreciation method that applies double the straight-line rate to the declining book value, producing the largest expense in the earliest years.
Question 5: The current ratio is calculated as:
- Total Assets / Total Liabilities
- Current Assets / Current Liabilities (Correct answer)
- (Current Assets – Inventory) / Current Liabilities
- Net Income / Total Equity
Correct answer: Current Assets / Current Liabilities
The current ratio equals current assets divided by current liabilities, measuring a company's short-term liquidity and ability to pay near-term obligations.
Question 6: Working capital is defined as:
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Cash and equivalents plus short-term investments
- Operating income divided by revenue
Correct answer: Current assets minus current liabilities
Working capital = Current Assets – Current Liabilities, representing the net short-term resources available to fund day-to-day operations.
Question 7: Which line item on the income statement represents revenue minus cost of goods sold?
- Operating income
- Net income
- Gross profit (Correct answer)
- EBITDA
Correct answer: Gross profit
Gross profit = Revenue – Cost of Goods Sold (COGS), representing profit before operating expenses, interest, and taxes are deducted.
AIFA Financial Statement Analysis & Accounting 1
Which financial statement provides a snapshot of a company's assets, liabilities, and equity at a specific point in time?