Question 1

Assets that can be converted to cash relatively quickly are said to be liquid.

Accepted Answer

This is true.

Question 2

The statement of financial position shows a business's assets, liabilities and equity at a specific point in time.

Accepted Answer

The statement of financial position, also known as the balance sheet, shows a snapshot of a business's assets, liabilities, and equity at a specific point in time. It is used to provide information about a company's financial health and financial standing.

Question 3

The cash flow statement answers the questions "From where did the cash come?' and "Where did the cash go?"

Accepted Answer

The cash flow statement provides information on the sources and uses of cash during a specific period of time, answering questions such as where the cash came from and where it was spent.

Question 4

A profitable company will always have positive cash flows.

Accepted Answer

This statement is false. A profitable company may still have negative cash flows if it is investing heavily in its business, paying off debt, or distributing dividends to shareholders. Cash flows can fluctuate for a variety of reasons, even if a company is overall profitable.

Question 5

Equity represents the owner's investment in the company, which can be either his/her cash invested in the company or money borrowed from a bank to purchase fixed assets.

Accepted Answer

Equity represents the owner's investment in the company, typically in the form of cash or assets contributed by the owner, not money borrowed from a bank.

Question 6

A new business needs to manage cash flows carefully because if a business runs out of cash, it is out of business.

Accepted Answer

Cash is the lifeblood of any business and without proper management, a business can quickly run out of cash and fail. Therefore, it is important for a new business to manage its cash flows carefully.

Question 7

The major difference between cash-basis accounting and accrual-basis accounting is when the business recognises revenue and profits.

Accepted Answer

Cash-basis accounting recognises revenue and profits when cash is received or paid, while accrual-basis accounting recognises revenue and profits when they are earned or incurred, regardless of when cash is received or paid.

Question 8

Depreciation is the cost of a business's land and building allocated over its useful life.

Accepted Answer

Depreciation applies to tangible assets like buildings and equipment, but not to land, as land does not lose value over time.

Question 9

The three activities that explain the cash inflows and outflows of a business are the operating, selling and financing activities.

Accepted Answer

The three activities that explain the cash inflows and outflows of a business are the operating, investing, and financing activities.

Question 10

The terms earnings, profits and income refer to different amounts on the statement of profit or loss and other comprehensive income.

Accepted Answer

The answer of The terms earnings, profits and income refer...

Question 11

Profits reward owners for investing in a company, but they do little to promote future growth.

Accepted Answer

Profits can be reinvested back into the company to promote future growth through initiatives such as research and development, marketing, and expanding operations.

Question 12

Total assets less current liabilities equal ownership equity.

Accepted Answer

Total assets less current liabilities equal working capital, not ownership equity. Ownership equity is calculated as total assets minus total liabilities.

Question 13

Jane is determining the overall financial situation for her business.Since she has to report to a group of investors, she should just give them the statement of profit or loss and other comprehensive income.

Accepted Answer

Jane should present her investors with a comprehensive financial report including the statement of financial position (balance sheet), statement of profit or loss and other comprehensive income, and statement of cash flows. This will give a complete picture of the business's financial situation.

Question 14

Jane's bank has asked her to show them how her business's financial position has changed in the past year.She should provide the company's statement of financial position.

Accepted Answer

A statement of financial position, also known as a balance sheet, shows a company's financial position at a specific point in time, not changes over a period. To show changes, she should provide financial statements like the income statement or cash flow statement.

Question 15

The statement of profit or loss and other comprehensive income answers the question: "How profitable is the business?"

Accepted Answer

The statement of profit or loss and other comprehensive income, also known as income statement, shows the revenue, expenses, gains, and losses of a business during a specific period, and ultimately shows whether the business made a profit or loss. Therefore, it answers the question of how profitable the business is.

Question 16

Dividends to a business's owners are not considered an expense in the statement of profit or loss and other comprehensive income.

Accepted Answer

Dividends are not considered an expense, as they are a distribution of profits to the owners and do not impact the business's operating activities. They are typically shown in the statement of changes in equity.

Question 17

Trade and other payables, accrued expenses, two-year notes payable, and 90-day notes are all current liabilities.

Accepted Answer

Two-year notes payable are not current liabilities; they are considered long-term liabilities because they are due beyond one year.

Question 18

The statement of profit or loss and other comprehensive income shows a business's financial position on a specific date.

Accepted Answer

The statement of profit or loss and other comprehensive income shows the business's financial performance over a specific period, typically a year, and not its financial position on a specific date. The statement of financial position (also known as the balance sheet) shows the financial position of the business on a specific date.

Question 19

Trade receivables consist of payments due from a business to its suppliers.

Accepted Answer

Trade receivables consist of payments due from a business's customers or clients, not its suppliers.

Question 20

In order to determine the cash flows from day-to-day operations, the business must convert the company's statement of profit and loss and other comprehensive income from a cash basis to an accrual basis.

Accepted Answer

Converting the company's statement of profit and loss and other comprehensive income from accrual basis to cash basis is required to determine the cash flows from day-to-day operations.

Quiz 10: Understanding a Firms Financial Statements