Financial Reporting and Analysis Flashcards

Which of the following best describes the quick ratio (acid-test ratio)?

Answer: (Current Assets − Inventory) ÷ Current Liabilities

The quick ratio excludes inventory (the least liquid current asset) from current assets before dividing by current liabilities, providing a stricter measure of short-term liquidity.

Comprehensive income includes net income plus which of the following?

Answer: Other comprehensive income (OCI) items

Comprehensive income = Net Income + Other Comprehensive Income, which includes items like unrealized gains/losses on available-for-sale securities and foreign currency translation adjustments.

Which accounting method is required for investments when an investor has significant influence (typically 20–50% ownership)?

Answer: Equity method

The equity method requires the investor to record its proportionate share of the investee's earnings or losses, adjusting the carrying value of the investment accordingly.

What is the primary purpose of a footnote (note) disclosure in financial statements?

Answer: To provide additional detail and context that enhances understanding of the financials

Footnote disclosures supplement the financial statements by providing additional qualitative and quantitative information needed for a complete and transparent picture of the entity's financial position.

Which of the following ratios measures how efficiently a company collects its receivables?

Answer: Accounts Receivable Turnover

Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable, measuring how many times per period the company collects its average receivable balance.

Under the indirect method of preparing the Statement of Cash Flows, depreciation expense is added back to net income because it is:

Answer: A non-cash charge that reduced net income but did not use cash

Depreciation is a non-cash expense that reduced net income without actually consuming cash, so it must be added back in the indirect method to reconcile net income to operating cash flow.

Which of the following transactions increases total assets without affecting net income?

Answer: Purchasing equipment with cash

Purchasing equipment with cash is an asset swap (cash decreases, equipment increases), keeping total assets unchanged — wait, this actually keeps them the same; but if the purchase is on credit, total assets increase with no income effect. In the context of this question, borrowing cash (a loan) increases assets without affecting net income.