CNA Financial Reporting and Analysis 1 — Questions and Answers
Question 1: Which financial statement reports a company's revenues, expenses, and net income over a specific period?
- Balance Sheet
- Income Statement (Correct answer)
- Statement of Cash Flows
- Statement of Retained Earnings
Correct answer: Income Statement
The Income Statement (also called Profit & Loss statement) summarizes revenues and expenses over an accounting period to show net income or net loss.
Question 2: Under US GAAP, which inventory costing method assumes that the most recently purchased goods are sold first?
- FIFO
- Weighted Average Cost
- LIFO (Correct answer)
- Specific Identification
Correct answer: LIFO
LIFO (Last-In, First-Out) assumes the most recently acquired inventory units are sold first, which can reduce taxable income during periods of rising prices.
Question 3: What does the current ratio measure?
- Long-term solvency
- A company's short-term liquidity (Correct answer)
- Profitability relative to equity
- Asset turnover efficiency
Correct answer: A company's short-term liquidity
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 concept requires that revenue be recognized when it is earned, regardless of when cash is received?
- Cash basis accounting
- Matching principle
- Revenue recognition principle (Correct answer)
- Conservatism principle
Correct answer: Revenue recognition principle
The revenue recognition principle (codified under ASC 606) states that revenue is recorded when performance obligations are satisfied, not necessarily when cash changes hands.
Question 5: On a classified balance sheet, which of the following is typically listed as a long-term asset?
- Accounts receivable
- Prepaid expenses
- Goodwill (Correct answer)
- Inventory
Correct answer: Goodwill
Goodwill is an intangible long-term asset recorded when a company acquires another business for more than the fair value of its net identifiable assets.
Question 6: Which financial ratio is calculated by dividing net income by total equity?
- Return on Assets (ROA)
- Return on Equity (ROE) (Correct answer)
- Debt-to-Equity Ratio
- Earnings Per Share (EPS)
Correct answer: Return on Equity (ROE)
Return on Equity (ROE) = Net Income ÷ Shareholders' Equity, measuring how effectively management generates profit from shareholders' investment.
Question 7: Which section of the Statement of Cash Flows includes cash received from customers and cash paid to suppliers?
- Investing Activities
- Financing Activities
- Operating Activities (Correct answer)
- Supplemental Disclosures
Correct answer: Operating Activities
Operating Activities captures cash flows from the company's core business operations, including collections from customers and payments to suppliers and employees.
CNA Financial Reporting and Analysis 1
Which financial statement reports a company's revenues, expenses, and net income over a specific period?