Financial Management for Project Managers Financial Reporting and Statements 1 — Questions and Answers
Question 1: Which financial statement shows a company's assets, liabilities, and shareholders' equity at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Statement of retained earnings
Correct answer: Balance sheet
The balance sheet (statement of financial position) is a snapshot of what a company owns, owes, and the residual equity belonging to shareholders at a given date.
Question 2: The income statement primarily reports:
- The company's cash position at year end
- Revenues, expenses, and net income over a reporting period (Correct answer)
- Changes in stockholders' equity accounts
- All assets owned and liabilities owed
Correct answer: Revenues, expenses, and net income over a reporting period
The income statement (profit and loss statement) summarizes revenues earned and expenses incurred over a specific accounting period to show net income or loss.
Question 3: Gross profit on an income statement is calculated as:
- Net sales minus operating expenses
- Net sales minus cost of goods sold (Correct answer)
- Operating income minus interest expense
- Revenue minus all taxes and interest
Correct answer: Net sales minus cost of goods sold
Gross profit represents net sales revenue less the direct cost of goods sold, before deducting operating expenses.
Question 4: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is used primarily to measure:
- A company's net profit after all deductions
- Operating profitability and cash-generating ability (Correct answer)
- Total equity available to shareholders
- The company's tax liability for the period
Correct answer: Operating profitability and cash-generating ability
EBITDA approximates operating cash flow and is widely used to compare profitability across companies and capital structures without financing or accounting differences.
Question 5: On the balance sheet, current liabilities are obligations expected to be settled within:
- Five years
- Three years
- Two years
- One year or the operating cycle, whichever is longer (Correct answer)
Correct answer: One year or the operating cycle, whichever is longer
Current liabilities are debts or obligations due within one year or the operating cycle (whichever is longer), distinguishing them from long-term liabilities.
Question 6: Which accounting principle requires that revenues be recognized when earned, regardless of when cash is received?
- Matching principle
- Cost principle
- Accrual accounting principle (Correct answer)
- Conservatism principle
Correct answer: Accrual accounting principle
The accrual accounting principle recognizes revenue when it is earned and expenses when incurred, not when cash changes hands.
Financial Management for Project Managers Financial Reporting and Statements 1
Which financial statement shows a company's assets, liabilities, and shareholders' equity at a specific point in time?