CFM CFM Financial Reporting & Analysis 1 — Questions and Answers
Question 1: Which financial statement shows a company's revenues, expenses, and net income over a specific period?
- Balance Sheet
- Income Statement (Correct answer)
- Cash Flow Statement
- Statement of Equity
Correct answer: Income Statement
The income statement (also called profit and loss statement) summarizes revenues and expenses to show net income or loss over a reporting period.
Question 2: 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 most recently acquired inventory is sold first, which is permitted under US GAAP but prohibited under IFRS.
Question 3: What does the current ratio measure?
- Profitability relative to equity
- Short-term liquidity by comparing current assets to current liabilities (Correct answer)
- Long-term debt coverage
- Asset turnover efficiency
Correct answer: Short-term liquidity by comparing current assets to current liabilities
The current ratio (current assets ÷ current liabilities) measures a company's ability to meet its short-term obligations with its short-term assets.
Question 4: Which accounting principle requires expenses to be recorded in the same period as the revenues they helped generate?
- Conservatism principle
- Matching principle (Correct answer)
- Revenue recognition principle
- Going concern principle
Correct answer: Matching principle
The matching principle dictates that expenses must be recognized in the same period as the revenues they are associated with, ensuring accurate profit reporting.
Question 5: What is the formula for Return on Assets (ROA)?
- Net Income / Total Equity
- Net Income / Total Assets (Correct answer)
- EBIT / Total Assets
- Revenue / Total Assets
Correct answer: Net Income / Total Assets
ROA = Net Income / Total Assets, measuring how efficiently a company uses its assets to generate profit.
Question 6: Goodwill appears on which financial statement under US GAAP?
- Income Statement as an annual expense
- Balance Sheet as an intangible asset (Correct answer)
- Cash Flow Statement as an investing activity
- Statement of Equity as retained earnings
Correct answer: Balance Sheet as an intangible asset
Under US GAAP, goodwill is recorded on the balance sheet as an intangible asset and is subject to annual impairment testing rather than amortization.
CFM CFM Financial Reporting & Analysis 1
Which financial statement shows a company's revenues, expenses, and net income over a specific period?