Financial Statement Preparation Flashcards

Which financial statement reconciles net income to retained earnings?

Answer: Statement of retained earnings

The statement of retained earnings shows the beginning balance, adds net income, subtracts dividends, and arrives at the ending retained earnings balance.

How are dividends declared reported on financial statements?

Answer: Both B and C

When dividends are declared, they create a dividends payable liability and reduce retained earnings; they are not an expense on the income statement.

Which inventory cost flow assumption typically results in the lowest net income during a period of rising prices?

Answer: LIFO

LIFO assigns the most recent (higher) costs to cost of goods sold first, resulting in higher COGS and lower net income during periods of rising prices.

On the balance sheet, how is accumulated depreciation presented?

Answer: As a contra-asset reducing the cost of property, plant, and equipment

Accumulated depreciation is a contra-asset account that offsets the gross cost of property, plant, and equipment to show net book value.

What does the current ratio measure?

Answer: A company's ability to pay short-term obligations with current assets

The current ratio (current assets ÷ current liabilities) measures a company's short-term liquidity and ability to cover near-term obligations.

Which item would appear as a current liability on the balance sheet?

Answer: Accrued wages payable

Accrued wages payable are obligations expected to be settled within one year, so they qualify as current liabilities.

Gross profit is calculated as:

Answer: Net sales minus cost of goods sold

Gross profit equals net sales minus cost of goods sold, representing profit before operating expenses are deducted.