CPB / BookKeeping Financial Statement Preparation 3 — Questions and Answers
Question 1: Which financial statement reconciles net income to retained earnings?
- Balance sheet
- Income statement
- Statement of retained earnings (Correct answer)
- Statement of cash flows
Correct 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.
Question 2: How are dividends declared reported on financial statements?
- As an expense on the income statement
- As a reduction of retained earnings on the equity statement
- As a liability only until paid
- Both B and C (Correct answer)
Correct 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.
Question 3: Which inventory cost flow assumption typically results in the lowest net income during a period of rising prices?
- FIFO
- LIFO (Correct answer)
- Weighted average
- Specific identification
Correct 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.
Question 4: On the balance sheet, how is accumulated depreciation presented?
- As a liability
- As a contra-asset reducing the cost of property, plant, and equipment (Correct answer)
- As an operating expense
- As a reduction of retained earnings
Correct 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.
Question 5: What does the current ratio measure?
- Profitability relative to equity
- A company's ability to pay short-term obligations with current assets (Correct answer)
- The proportion of debt in the capital structure
- Revenue growth from period to period
Correct 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.
Question 6: Which item would appear as a current liability on the balance sheet?
- Bonds payable due in 10 years
- Accrued wages payable (Correct answer)
- Equipment
- Patent with 5-year remaining life
Correct answer: Accrued wages payable
Accrued wages payable are obligations expected to be settled within one year, so they qualify as current liabilities.
Question 7: Gross profit is calculated as:
- Net sales minus operating expenses
- Net sales minus cost of goods sold (Correct answer)
- Revenue minus taxes
- Net income minus dividends
Correct 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.
CPB / BookKeeping Financial Statement Preparation 3
Which financial statement reconciles net income to retained earnings?