Financial Statements
Chapter: 2.4 Financial Statements Level: 1 — Recognition (MCQ + Matching + True/False with justification) Time Limit: 20 minutes Total Marks: 30
Section A — Multiple Choice (1 mark each) — 10 marks
Choose the single best answer.
Q1. Gross profit is calculated as:
- A) Revenue − Operating Expenses
- B) Revenue − COGS
- C) Revenue − Net Income
- D) Operating Income − Taxes
Q2. Which statement shows a company's financial position at a single point in time?
- A) Income Statement
- B) Cash Flow Statement
- C) Balance Sheet
- D) Statement of Retained Earnings
Q3. The accounting equation is:
- A) Assets = Liabilities − Equity
- B) Assets = Liabilities + Equity
- C) Equity = Assets + Liabilities
- D) Liabilities = Assets + Equity
Q4. Which of the following is a non-current asset?
- A) Accounts Receivable
- B) Inventory
- C) Plant & Machinery
- D) Cash
Q5. The three sections of the cash flow statement are:
- A) Revenue, Expenses, Profit
- B) Operating, Investing, Financing
- C) Assets, Liabilities, Equity
- D) Current, Non-current, Deferred
Q6. Net income differs from operating income because net income:
- A) Excludes COGS
- B) Includes interest and taxes
- C) Ignores depreciation
- D) Equals gross profit
Q7. Purchasing new equipment appears in which cash flow section?
- A) Operating
- B) Investing
- C) Financing
- D) None
Q8. Working capital is defined as:
- A) Total Assets − Total Liabilities
- B) Current Assets − Current Liabilities
- C) Equity − Debt
- D) Revenue − COGS
Q9. Depreciation applies to ________ while amortization applies to ________.
- A) intangible assets; tangible assets
- B) tangible assets; intangible assets
- C) current assets; liabilities
- D) equity; debt
Q10. Which is a common accounting red flag?
- A) Rising cash flow matching rising profit
- B) Consistent revenue recognition policy
- C) Net profit rising while operating cash flow falls sharply
- D) Stable inventory turnover
Section B — Matching (1 mark each) — 8 marks
Match each item in Column X to the correct category in Column Y.
| # | Column X (Item) | Column Y (Category) | |
|---|---|---|---|
| Q11 | Dividends paid | P) Operating activity | |
| Q12 | Cash from customers | Q) Investing activity | |
| Q13 | Sale of a factory building | R) Financing activity | |
| Q14 | Repayment of a bank loan | (categories may repeat) |
| # | Column X (Balance Sheet item) | Column Y (Classification) | |
|---|---|---|---|
| Q15 | Accounts Payable | P) Current Asset | |
| Q16 | Long-term Debt | Q) Current Liability | |
| Q17 | Prepaid Insurance (3 months) | R) Non-current Liability | |
| Q18 | Goodwill | S) Non-current Asset |
Section C — True/False with Justification (2 marks each) — 12 marks
State True or False (1 mark) and give a one-line justification (1 mark).
Q19. "A profitable company can still run out of cash."
Q20. "Depreciation is a cash outflow that reduces the bank balance each period."
Q21. "Notes to accounts (footnotes) can be ignored because the main statements contain all necessary information."
Q22. "Retained earnings are part of shareholders' equity on the balance sheet."
Q23. "An increase in accounts receivable increases cash flow from operations."
Q24. "Operating income is calculated before deducting interest expense."
Answer keyMark scheme & solutions
Section A — MCQ (1 mark each)
Q1 — B. Gross profit = Revenue − COGS; it measures profit before operating expenses. (1)
Q2 — C. The balance sheet is a snapshot at a point in time; income & cash flow cover a period. (1)
Q3 — B. Assets = Liabilities + Equity — the fundamental balance identity. (1)
Q4 — C. Plant & Machinery is a long-lived (non-current) asset; the others are current. (1)
Q5 — B. Operating, Investing, Financing are the three CFS sections. (1)
Q6 — B. Net income = operating income − interest − taxes (± other items). (1)
Q7 — B. Buying equipment is a capital expenditure = investing activity. (1)
Q8 — B. Working capital = Current Assets − Current Liabilities. (1)
Q9 — B. Depreciation = tangible assets; amortization = intangible assets. (1)
Q10 — C. Profit rising while operating cash falls signals possible earnings quality issues. (1)
Section B — Matching (1 mark each)
| Q | Answer | Why |
|---|---|---|
| Q11 | R (Financing) | Dividends to owners = financing outflow |
| Q12 | P (Operating) | Cash from customers = core operations |
| Q13 | Q (Investing) | Selling long-term asset = investing |
| Q14 | R (Financing) | Loan repayment = financing |
| Q15 | Q (Current Liability) | Payables due within a year |
| Q16 | R (Non-current Liability) | Debt due beyond one year |
| Q17 | P (Current Asset) | Prepaid <1 yr = current asset |
| Q18 | S (Non-current Asset) | Goodwill is an intangible long-term asset |
Section C — True/False + Justification (2 marks each)
Q19 — TRUE (1). Profit is accrual-based; cash can be tied in receivables/inventory or debt repayment, causing a liquidity crunch. (1)
Q20 — FALSE (1). Depreciation is a non-cash expense; the cash was spent when the asset was purchased. (1)
Q21 — FALSE (1). Footnotes disclose accounting policies, contingencies, and details essential for correct interpretation. (1)
Q22 — TRUE (1). Retained earnings accumulate undistributed profits and form part of equity. (1)
Q23 — FALSE (1). A rise in receivables means sales recorded but cash not yet collected, so it reduces operating cash flow. (1)
Q24 — TRUE (1). Operating income (EBIT) is computed before interest and tax deductions. (1)
[
{"claim":"Gross profit = Revenue - COGS = 1000 - 600 = 400","code":"revenue=1000; cogs=600; gross=revenue-cogs; result = (gross==400)"},
{"claim":"Working capital = CA - CL = 500 - 300 = 200","code":"ca=500; cl=300; wc=ca-cl; result = (wc==200)"},
{"claim":"Net income = operating income - interest - tax = 400 - 50 - 90 = 260","code":"op=400; interest=50; tax=90; ni=op-interest-tax; result = (ni==260)"},
{"claim":"Accounting equation holds: Assets 900 = Liabilities 500 + Equity 400","code":"assets=900; liab=500; equity=400; result = (assets == liab+equity)"}
]