37 Lecture - Components of Financial Statements

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37 Lecture

MGT101

Midterm & Final Term Short Notes

Components of Financial Statements

Components of financial statements refer to the essential elements that are included in financial reports. The main components are the balance sheet, income statement, statement of cash flows, and statement of changes in equity. These components


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  1. Which of the following financial statements shows a company's financial position at a specific point in time? a) Income statement b) Statement of cash flows c) Balance sheet d) Statement of changes in equity Answer: c) Balance sheet

  2. Which of the following is a component of the income statement? a) Cash flows from operating activities b) Retained earnings c) Gross profit d) Beginning balance of cash Answer: c) Gross profit

  3. Which financial statement reports a company's cash inflows and outflows during a specific period? a) Balance sheet b) Income statement c) Statement of cash flows d) Statement of changes in equity Answer: c) Statement of cash flows

  4. Which financial statement shows changes in a company's equity over a period of time? a) Balance sheet b) Income statement c) Statement of cash flows d) Statement of changes in equity Answer: d) Statement of changes in equity

  5. What does the income statement report? a) The company's financial position at a specific point in time b) The company's cash inflows and outflows during a specific period c) The company's revenues, expenses, and net income or loss for a specific period d) The changes in the company's equity over a period of time Answer: c) The company's revenues, expenses, and net income or loss for a specific period

  6. Which of the following is a current asset? a) Building b) Inventory c) Patent d) Trademark Answer: b) Inventory

  7. Which of the following is a component of the statement of cash flows? a) Net income b) Retained earnings c) Depreciation expense d) Beginning balance of accounts payable Answer: c) Depreciation expense

  8. Which of the following is a long-term liability? a) Accounts payable b) Notes payable due within one year c) Salaries payable d) Bonds payable Answer: d) Bonds payable

  9. Which financial statement reports the changes in a company's cash balance during a specific period? a) Balance sheet b) Income statement c) Statement of cash flows d) Statement of changes in equity Answer: c) Statement of cash flows

  10. What is the formula for calculating net income? a) Total assets minus total liabilities b) Total revenues minus total expenses c) Beginning balance plus ending balance divided by 2 d) Total cash inflows minus total cash outflows Answer: b) Total revenues minus total expenses



Subjective Short Notes
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  1. What is the purpose of the balance sheet? Answer: The balance sheet provides information about a company's financial position at a specific point in time, including its assets, liabilities, and equity.

  2. What is the purpose of the income statement? Answer: The income statement reports a company's revenues, expenses, and net income or loss for a specific period.

  3. What is the difference between gross profit and net profit? Answer: Gross profit is the difference between a company's revenue and the cost of goods sold. Net profit is the revenue minus all expenses, including the cost of goods sold.

  4. What are some examples of current assets? Answer: Examples of current assets include cash, accounts receivable, inventory, and prepaid expenses.

  5. What are some examples of long-term assets? Answer: Examples of long-term assets include property, plant, and equipment, investments, and intangible assets.

  6. What are some examples of current liabilities? Answer: Examples of current liabilities include accounts payable, short-term loans, and accrued expenses.

  7. What are some examples of long-term liabilities? Answer: Examples of long-term liabilities include long-term loans, bonds payable, and deferred taxes.

  8. What is the statement of cash flows used for? Answer: The statement of cash flows reports a company's cash inflows and outflows during a specific period and is used to evaluate a company's liquidity and ability to meet its financial obligations.

  9. What is the difference between operating, investing, and financing activities on the statement of cash flows? Answer: Operating activities include cash flows related to the day-to-day operations of a business, investing activities include cash flows related to the purchase or sale of long-term assets, and financing activities include cash flows related to the issuance or repayment of debt or equity.

  10. What is the purpose of the statement of changes in equity? Answer: The statement of changes in equity reports the changes in a company's equity over a period of time and is used to understand the factors that contributed to changes in equity, such as net income, dividends, and stock issuances.

Components of financial statements are essential to understanding a company's financial health. The three primary financial statements are the balance sheet, income statement, and statement of cash flows. The balance sheet reports a company's financial position at a specific point in time and includes assets, liabilities, and equity. Assets are resources that a company owns, such as cash, accounts receivable, inventory, and property, plant, and equipment. Liabilities are obligations that a company owes, such as accounts payable, loans, and taxes payable. Equity represents the residual interest in the assets of a company after deducting liabilities. The income statement reports a company's revenues, expenses, and net income or loss for a specific period. Revenue is the income earned from the sale of goods or services, while expenses are the costs incurred to generate revenue. Gross profit is revenue minus the cost of goods sold, and net income is revenue minus all expenses. The statement of cash flows reports a company's cash inflows and outflows during a specific period and is divided into three categories: operating activities, investing activities, and financing activities. Operating activities include cash flows related to the day-to-day operations of a business, investing activities include cash flows related to the purchase or sale of long-term assets, and financing activities include cash flows related to the issuance or repayment of debt or equity. In addition to these primary financial statements, the statement of changes in equity reports the changes in a company's equity over a period of time. This statement includes information such as net income, dividends, and stock issuances. Understanding the components of financial statements is essential for investors, creditors, and other stakeholders to evaluate a company's financial performance and make informed decisions about their investments.

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