FA Financial Reporting and Analysis 1 — Questions and Answers
Question 1: Which financial statement summarizes a company's revenues and expenses over a specific period?
- Balance Sheet
- Income Statement (Correct answer)
- Cash Flow Statement
- Statement of Retained Earnings
Correct answer: Income Statement
The income statement reports revenues, expenses, and net income or loss for a defined accounting period.
Question 2: What does the current ratio measure?
- Long-term solvency
- Short-term liquidity (Correct answer)
- Asset profitability
- Revenue growth
Correct answer: Short-term liquidity
The current ratio (current assets ÷ current liabilities) measures a company's ability to pay short-term obligations.
Question 3: Under US GAAP, which inventory costing method assumes the most recently purchased items are sold first?
- FIFO
- LIFO (Correct answer)
- Weighted Average
- Specific Identification
Correct answer: LIFO
LIFO (Last-In, First-Out) assumes the newest inventory is sold first, which can reduce taxable income during periods of rising prices.
Question 4: Which ratio measures how efficiently a company collects receivables?
- Debt-to-Equity Ratio
- Accounts Receivable Turnover Ratio (Correct answer)
- Gross Profit Margin
- Return on Assets
Correct answer: Accounts Receivable Turnover Ratio
Accounts receivable turnover (net credit sales ÷ average accounts receivable) indicates how many times receivables are collected during a period.
Question 5: What is the primary purpose of a common-size income statement?
- To show absolute dollar changes year-over-year
- To express all line items as a percentage of net sales (Correct answer)
- To calculate earnings per share
- To summarize cash inflows and outflows
Correct answer: To express all line items as a percentage of net sales
A common-size income statement expresses each line item as a percentage of net revenues, facilitating comparison across companies or time periods.
Question 6: Which of the following is classified as a non-cash item that reduces net income but not operating cash flow?
- Interest expense
- Depreciation (Correct answer)
- Cost of goods sold
- Income tax expense
Correct answer: Depreciation
Depreciation is a non-cash charge that reduces net income but is added back in the operating section of the cash flow statement.
FA Financial Reporting and Analysis 1
Which financial statement summarizes a company's revenues and expenses over a specific period?