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Principles of Accounts: Financial Statements Flashcards

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  1. The Current Ratio is calculated as:

    Answer: Current Assets ÷ Current Liabilities

    Current Ratio = Current Assets ÷ Current Liabilities, measuring a business's ability to meet its short-term financial obligations.

  2. A Gross Profit Margin of 40% means:

    Answer: For every $100 of net sales, $40 is gross profit

    Gross Profit Margin = (Gross Profit ÷ Net Sales) × 100; a 40% margin means $40 gross profit is earned for every $100 in sales.

  3. The Net Profit Margin ratio is calculated as:

    Answer: (Net Profit ÷ Net Sales) × 100

    Net Profit Margin = (Net Profit ÷ Net Sales) × 100, showing what percentage of revenue remains as profit after all expenses are deducted.

  4. The Acid Test (Quick) Ratio differs from the Current Ratio because it excludes:

    Answer: Inventory (closing stock)

    The Acid Test Ratio excludes inventory because it is the least liquid current asset and cannot always be quickly converted to cash.

  5. The purpose of the Cash Flow Statement is to:

    Answer: Show cash inflows and outflows over a period

    The Cash Flow Statement tracks all cash received by and paid out by a business, showing the net change in the business's cash position.

  6. Which of the following would be recorded as a cash inflow in a Cash Flow Statement?

    Answer: Proceeds received from a bank loan

    Proceeds from a bank loan represent cash received by the business, making it a cash inflow under financing activities.

  7. Inventory Turnover ratio measures:

    Answer: How efficiently a business sells and replaces its inventory

    Inventory Turnover = Cost of Goods Sold ÷ Average Inventory, indicating how many times inventory is sold and replenished during the accounting period.