Financial Statements

Q1. (4 marks — 1 each)

• (a) Revenue: Total income earned from selling goods/services, before any costs. (top line)
• (b) COGS: Cost of Goods Sold — direct costs of producing the goods/services sold (materials, direct labour).
• (c) Gross Profit: Revenue − COGS; profit after direct production costs.
• (d) Net Income: The bottom-line profit after ALL expenses (operating, interest, tax) are deducted.

Why: Tests recall of core income statement line items and their order.

Q2. (3 marks)

• Equation: Assets = Liabilities + Equity (1 mark)
• Assets: What the company owns/controls (resources with future economic benefit). (⅔)
• Liabilities: What the company owes to outsiders (obligations). (⅔)
• Equity: Owners' residual claim = Assets − Liabilities. (⅔)

Why: Foundation of the balance sheet; must always balance.

Q3. (6 marks — 2 each)

• (a) Gross Profit = Revenue − COGS = $500 - 300 = \mathbf{200}$
• (b) Operating Income = Gross Profit − Operating Expenses = $200 - 80 = \mathbf{120}$
• (c) Net Income = Operating Income − Interest − Tax = $120 - 20 - 30 = \mathbf{70}$

Why: Tests the standard top-to-bottom income statement flow. Award 1 mark for correct formula, 1 for correct value.

Q4. (6 marks — 2 each: 1 for section, 1 for example)

1. Operating Activities — cash from core business, e.g., cash received from customers / paid to suppliers.
2. Investing Activities — cash from buying/selling long-term assets, e.g., purchase of machinery / sale of equipment.
3. Financing Activities — cash from raising/repaying capital, e.g., issuing shares, raising loans, paying dividends.

Why: Recall of the three-section structure and correct classification.

Q5. (4 marks)

• Current items: Expected to be converted to cash / settled within one year (or operating cycle). (1)
• Non-current items: Held/owed for more than one year (long-term). (1)
• Current asset example: Cash, inventory, or accounts receivable. (1)
• Non-current asset example: Property, plant & equipment (or goodwill). (1)

Q6. (4 marks)

• Profit is an accounting measure (Revenue − Expenses on accrual basis); recorded when earned/incurred. (1.5)
• Cash flow is actual money moving in/out of the business. (1.5)
• Reason a profitable firm runs out of cash: Sales made on credit (receivables not yet collected), heavy inventory build-up, large capex, or debt repayments — profit exists on paper but cash is tied up. (1)

Why: Core distinction between accrual accounting and liquidity.

Q7. (4 marks)

• Working Capital: Capital available to fund day-to-day operations. (1)
• Formula: Working Capital = Current Assets − Current Liabilities (1)
• Computation: $150 - 90 = \mathbf{60}$ (2)

Why: Tests definition + simple derivation.

Q8. (4 marks — 2 each)

• Depreciation: Systematic allocation of the cost of a tangible fixed asset over its useful life (e.g., machinery, buildings, vehicles). (2)
• Amortization: Same concept applied to intangible assets (e.g., patents, trademarks, goodwill, software). (2)

Why: Both spread cost over time; difference is asset type.

Q9. (5 marks — 1 per valid red flag) Any five of:

1. Rising revenue but falling / negative operating cash flow.
2. Receivables growing much faster than sales.
3. Frequent one-time / "exceptional" items.
4. Rising debt with declining profitability.
5. Auditor's qualified opinion or frequent auditor changes.
6. Aggressive revenue recognition / channel stuffing.
7. Large gap between net income and cash from operations.
8. Complex related-party transactions.
9. Inventory piling up faster than sales.
10. Frequent changes in accounting policies/estimates.

Why: Recall of common warning signs from footnotes and statement analysis.

[
  {"claim":"Gross Profit = 500 - 300 = 200","code":"result = (500-300)==200"},
  {"claim":"Operating Income = 200 - 80 = 120","code":"gp=500-300; oi=gp-80; result = oi==120"},
  {"claim":"Net Income = 120 - 20 - 30 = 70","code":"gp=500-300; oi=gp-80; ni=oi-20-30; result = ni==70"},
  {"claim":"Working Capital = 150 - 90 = 60","code":"result = (150-90)==60"}
]