II. Comprehension exercises

1. Review Questions

A Balance Sheet

1. What does the balance sheet show? Identify its three main sections.

2. What do businesses’ assets consist of? Differentiate between current

assets and fixed assets

3. Give the definition of liquidity

4. Characterize the liabilities section of the balance sheet.

5. What is owners’ equity? What does it include?

7. Explain the basic accounting equation. What does it show?

8. What is the purpose of double-entry bookkeeping?

9. Why do we call a balance sheet a snapshot?

10. What information about the company one can get by reading its balance

sheet?

B Income Statement

1. What does the income statement show? Why do we compare it with a

movie?

2. What does the income statement summarize?

3. What is the bottom line? What does this figure show?

4. Give definitions of gross sales, net sales, and the cost of goods sold.

5. Differentiate between selling and general expenses.

6. How is net income or loss computed?

7. What information about the company one can get by reviewing its income

statement?

8. Why should revenue be greater than expenditure?

C Statement of Cash Flows

1. What does the statement of cash flows show? Give examples of its

alternative names.

2. What is the difference between the balance sheet and the statement of

cash flows in relation to cash?

3. Characterize cash and its equivalents. What do sources of cash include?

4. Explain the applications of cash funds.

5. Identify three areas in which a company’s cash flows.

2. Complete the statements:

1. The balance sheet is also known as

1. the operating statement

2. the statement of financial position

3. the statement of changes in financial position

2. The balance sheet shows

1. how profitable the organization has been over one year

2. how a company’s cash was received and spent

3. the financial situation of the company on a particular date

3. Current assets include

1. marketable securities, accounts receivable, and inventory

2. intangible assets, such as “goodwill”, patents, and trademarks

3. share capital and retained earnings

4. Buildings, equipment, and furniture would all be examples of

1. current assets

2. fixed assets

3. liabilities

5. Patents, copyrights, trademarks, and goodwill are all examples of

1. current assets

2. fixed assets

3. liabilities

6. Fixed assets have a useful life of

a. one year

b. less than one year

c. more than one year

7. The level of ease with which an asset can be converted into cash is called

a. mobility

b. flexibility

c. liquidity

8. Current liabilities include

1. share capital and the company’s reserves

2. accounts payable, notes payable, and accrued expenses

3. long-term notes

9. The accounting equation can be expressed as follows:

1. liabilities equal assets plus owners’ equity

2. assets equal liabilities plus owners’ equity

3. assets plus owners’ equity equal profits

10. To keep the accounting equation in balance, companies use

1. the help of forensic accountants

b. single-entry bookkeeping

c. double-entry bookkeeping

11. If a firm has assets of $500,000 and liabilities of $200,000, then the

owners’ equity must be

1. $700,000

2. $300,000

3. $500,000

12. If a firm has liabilities of $400.000 and owners’ equity of $300,000, then

the assets must be

1. $400,000

2. $100,000

3. $700,000

13. If a firm has assets of $800,000 and owners’ equity is$600,000, then its

liabilities must be

1. $1,400,000

2. $600,000

3. $200,000

14. A change on one side of the balance sheet means

a. change on the other side of the balance sheet

b. no other changes

c. changes elsewhere

15. The income statement is a financial report that shows

a. an organization’s profitability over a period of time, typically one

year

b. an organization’s financial position on a particular date, like

December 31, 2010

c. how the company’s cash changed from the beginning of the

accounting period to the end

16. The actual profit or loss of a company after expenses and taxes have

been subtracted from revenues is called

a. net value

b. net sales

c. net income

17. The statement of cash flow shows

a. the flow of cash in and out of the business between income

statement dates

b. the flow of cash in and out of the business between balance

sheet dates

c. an excess of income over expenditure