CCA Financial Reporting & Analysis 1 — Questions and Answers
Question 1: What is the purpose of the income statement?
- To track cash flow
- To record equity changes
- To assess net income (Correct answer)
- To list assets and liabilities
Correct answer: To assess net income
The income statement shows a company’s revenues and expenses over a specific period to determine profit or loss.
Question 2: What does the balance sheet represent?
- Cash inflows and outflows
- Profit margins
- Financial position at a point in time (Correct answer)
- Expense breakdown
Correct answer: Financial position at a point in time
The balance sheet provides a snapshot of a company's financial position, including assets, liabilities, and equity at a specific date.
Question 3: Which financial ratio is used to evaluate liquidity?
- Debt-to-equity ratio
- Current ratio (Correct answer)
- Return on equity
- Gross margin ratio
Correct answer: Current ratio
The current ratio compares current assets to current liabilities and measures a firm’s ability to pay short-term obligations.
Question 4: Why is the statement of cash flows important?
- It replaces the balance sheet
- It includes tax returns
- It shows cash inflows and outflows (Correct answer)
- It tracks inventory levels
Correct answer: It shows cash inflows and outflows
It helps assess a company’s liquidity and financial flexibility by showing how cash is generated and used.
Question 5: What does horizontal analysis compare?
- Different companies
- Industry benchmarks
- Financial results over time (Correct answer)
- Departmental budgets
Correct answer: Financial results over time
Horizontal analysis evaluates financial data across time periods to identify trends and growth patterns.
Question 6: Which section of the cash flow statement includes buying equipment?
- Operating activities
- Financing activities
- Investing activities (Correct answer)
- Marketing activities
Correct answer: Investing activities
Investing activities in the cash flow statement include purchases of long-term assets like equipment and property.
CCA Financial Reporting & Analysis 1
What is the purpose of the income statement?