CSC Corporate Financial Statements 3 — Questions and Answers
Question 1: Which of the following is classified as an intangible asset on the balance sheet?
- Accounts receivable
- Machinery and equipment
- Patent rights (Correct answer)
- Prepaid expenses
Correct answer: Patent rights
Patents are intangible assets — non-physical assets with economic value, such as patents, trademarks, copyrights, and goodwill.
Question 2: A company uses straight-line depreciation for a $100,000 asset with a 10-year useful life and no residual value. What is the annual depreciation expense?
- $5,000
- $10,000 (Correct answer)
- $20,000
- $100,000
Correct answer: $10,000
Straight-line depreciation = (Cost − Residual value) ÷ Useful life = $100,000 ÷ 10 = $10,000 per year.
Question 3: On the income statement, gross profit is calculated as:
- Revenue minus all operating expenses
- Revenue minus cost of goods sold (Correct answer)
- Net income plus interest expense
- EBIT minus depreciation
Correct answer: Revenue minus cost of goods sold
Gross profit = Revenue − Cost of goods sold (COGS), measuring profitability before operating expenses.
Question 4: Which of the following would be classified as a current liability on the balance sheet?
- Bonds payable due in 5 years
- Deferred tax liability (long-term)
- Accounts payable (Correct answer)
- Common shares issued
Correct answer: Accounts payable
Accounts payable are obligations due within one year and are therefore classified as current liabilities.
Question 5: When a company reports comprehensive income, it includes:
- Only net income from operations
- Net income plus other comprehensive income items (Correct answer)
- Revenue minus expenses before tax
- Cash flow from operating activities
Correct answer: Net income plus other comprehensive income items
Comprehensive income equals net income plus other comprehensive income (OCI) items such as unrealized gains/losses on certain investments and foreign currency translation adjustments.
Question 6: Retained earnings on the balance sheet represent:
- Cash held in reserve for dividends
- Cumulative net income less dividends paid since the company's inception (Correct answer)
- The par value of shares issued
- Total equity raised from investors
Correct answer: Cumulative net income less dividends paid since the company's inception
Retained earnings are the accumulated profits kept in the business after distributing dividends to shareholders over the company's history.
Question 7: Which financial ratio uses information from BOTH the income statement and the balance sheet?
- Current ratio
- Return on equity (ROE) (Correct answer)
- Quick ratio
- Debt-to-equity ratio
Correct answer: Return on equity (ROE)
ROE = Net income (income statement) ÷ Shareholders' equity (balance sheet), making it a cross-statement ratio.
CSC Corporate Financial Statements 3
Which of the following is classified as an intangible asset on the balance sheet?