CPB / BookKeeping Financial Statement Preparation 2 — 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)
- Statement of cash flows
- Statement of retained earnings
Correct answer: Income statement
The income statement (profit and loss statement) reports revenues, expenses, and net income or loss over an accounting period.
Question 2: Under accrual accounting, when should revenue be recognized on a financial statement?
- When cash is received
- When goods or services are delivered (Correct answer)
- When the invoice is issued
- When the contract is signed
Correct answer: When goods or services are delivered
Under accrual accounting, revenue is recognized when goods or services are delivered to the customer, regardless of when cash is received.
Question 3: Which section of the statement of cash flows includes payments for equipment purchases?
- Operating activities
- Investing activities (Correct answer)
- Financing activities
- Non-cash activities
Correct answer: Investing activities
Purchases of long-term assets like equipment are classified under investing activities on the statement of cash flows.
Question 4: What is the correct order for listing assets on a balance sheet under US GAAP?
- Non-current assets first, then current assets
- Current assets first, then non-current assets (Correct answer)
- Assets listed alphabetically
- Assets listed by dollar amount, largest first
Correct answer: Current assets first, then non-current assets
Under US GAAP, assets are listed in order of liquidity, with current assets (most liquid) appearing before non-current assets.
Question 5: Which of the following is classified as an operating activity on the statement of cash flows using the indirect method?
- Issuance of common stock
- Repayment of long-term debt
- Depreciation expense added back to net income (Correct answer)
- Purchase of a building
Correct answer: Depreciation expense added back to net income
Under the indirect method, depreciation—a non-cash expense—is added back to net income to arrive at cash from operations.
Question 6: Where does treasury stock appear on the balance sheet?
- As an asset under investments
- As a liability under long-term debt
- As a contra-equity account reducing stockholders' equity (Correct answer)
- As an expense on the income statement
Correct answer: As a contra-equity account reducing stockholders' equity
Treasury stock represents shares repurchased by the company and is reported as a contra-equity account that reduces total stockholders' equity.
Question 7: A company has total assets of $500,000 and total liabilities of $320,000. What is the stockholders' equity?
- $820,000
- $180,000 (Correct answer)
- $320,000
- $500,000
Correct answer: $180,000
Using the accounting equation (Assets = Liabilities + Equity), equity equals $500,000 − $320,000 = $180,000.
CPB / BookKeeping Financial Statement Preparation 2
Which financial statement shows a company's revenues and expenses over a specific period?