CFM Financial Statements & Reporting 1 — Questions and Answers
Question 1: Which financial statement shows a company's revenues and expenses over a specific period?
- Balance Sheet
- Income Statement (Correct answer)
- Cash Flow Statement
- Statement of Stockholders' Equity
Correct answer: Income Statement
The income statement, also called the profit and loss statement, reports revenues, expenses, and net income over a reporting period.
Question 2: Under US GAAP, which inventory costing method assumes the most recently purchased items are sold first?
- FIFO
- Weighted Average
- LIFO (Correct answer)
- Specific Identification
Correct answer: LIFO
LIFO (Last-In, First-Out) assumes the most recently purchased inventory is sold first, which is permitted under US GAAP but not IFRS.
Question 3: What is the accounting equation that forms the foundation of the balance sheet?
- Revenue − Expenses = Net Income
- Assets = Liabilities + Equity (Correct answer)
- Cash + Receivables = Total Assets
- Gross Profit − COGS = Operating Income
Correct answer: Assets = Liabilities + Equity
The fundamental accounting equation states that Assets equal Liabilities plus Shareholders' Equity, ensuring the balance sheet always balances.
Question 4: Which depreciation method results in higher depreciation expense in the early years of an asset's life?
- Straight-line
- Double declining balance (Correct answer)
- Units of production
- Sum-of-years digits only
Correct answer: Double declining balance
Double declining balance is an accelerated depreciation method that front-loads depreciation expense, resulting in higher charges in early years.
Question 5: What does the term 'accrual basis accounting' mean?
- Revenue and expenses are recorded when cash is received or paid
- Revenue is recorded when earned and expenses when incurred, regardless of cash flow (Correct answer)
- Only cash transactions are recorded
- Expenses are deferred until the next period
Correct answer: Revenue is recorded when earned and expenses when incurred, regardless of cash flow
Accrual basis accounting records revenues when earned and expenses when incurred, regardless of when cash actually changes hands.
Question 6: Which line item on the income statement represents revenue minus cost of goods sold?
- Operating income
- Net income
- Gross profit (Correct answer)
- EBITDA
Correct answer: Gross profit
Gross profit is calculated as revenue minus cost of goods sold (COGS), before deducting operating expenses such as SG&A.
CFM Financial Statements & Reporting 1
Which financial statement shows a company's revenues and expenses over a specific period?