7.3 Use of Financial Information in Business Decision-Making

• What are the two main financial statements used by businesses?

  Income statement and balance sheet
• The profit from the income statement affects the equity on the balance sheet.


  True
• What is another name for the profit and loss account?

  Income statement
• What is the time period covered by a profit and loss account?

  Monthly, quarterly, or annually
• What is revenue in a profit and loss account?

  Total income from sales
• The profit and loss (P&L) account is the same as the income statement.

  True
• The balance sheet provides a snapshot of a business's financial position at a specific point in time.


  True
• Match the sections of the cash flow statement with their descriptions:

  Operating Activities ↔️ Cash flows from day-to-day business operations

  Investing Activities ↔️ Cash flows from buying and selling assets

  Financing Activities ↔️ Cash flows from loans and equity
• Gross profit margin measures the percentage of revenue left after cost of sales.

  True
• Match the financial statements with their key features:

  Income Statement ↔️ Shows revenue, expenses, and net profit/loss

  Balance Sheet ↔️ Shows assets, liabilities, and equity
• Match the components of a P&L account with their descriptions:

  Revenue ↔️ Total income from sales

  Cost of Sales ↔️ Direct costs of producing goods

  Gross Profit ↔️ Revenue minus cost of sales
• What does the revenue component of a P&L account represent?

  Total income from sales
• What is the primary purpose of analyzing a P&L account?

  Understand financial performance
• What does the balance sheet provide a snapshot of?

  Financial position at a time
• What do operating activities in a cash flow statement include?

  Cash from day-to-day operations
• Net profit margin measures the percentage of revenue left as net profit.

  True
• Inventory turnover measures how quickly a business sells and replaces its inventory.
• Net Profit Margin measures the percentage of revenue left as net profit


  True
• Asset Turnover measures how efficiently assets generate revenue


  True
• Budgeting is the process of planning and controlling financial resources

  True
• Which financial statements are used for budgeting?

  Income statement, balance sheet
• What does the Quick Ratio measure?

  Short-term debt ability
• Evaluating financial sustainability involves analyzing a company's financial ratios
• Financial sustainability is assessed by analyzing profitability, liquidity, and efficiency
• The income statement shows a business's revenue, expenses, and profit/loss over a specific period of time
• Match the financial statement with its definition:

  Income Statement ↔️ Shows revenue, expenses, and profit/loss over a period

  Balance Sheet ↔️ Shows assets, liabilities, and equity at a point in time
• Order the key components of a profit and loss account based on their logical sequence:

  1️⃣ Revenue

  2️⃣ Cost of Sales

  3️⃣ Gross Profit

  4️⃣ Expenses

  5️⃣ Net Profit/Loss
• What does the net profit or loss in a profit and loss account represent?

  Overall financial performance
• Expenses in a profit and loss account include costs such as materials, labor, and rent
• Cost of sales includes direct costs associated with producing goods or providing services
• Match the components of a P&L account with their descriptions:

  Revenue ↔️ Income from sales

  Cost of Sales ↔️ Direct costs of production

  Gross Profit ↔️ Revenue minus cost of sales

  Expenses ↔️ Operating costs

  Net Profit/Loss ↔️ Final profit after all deductions
• The balance sheet adheres to the accounting equation: Assets = Liabilities + Equity.
• A positive net cash flow indicates that a business is generating more cash than it is using.
• Analyzing financial ratios provides insights into a business's profitability, liquidity, and operational efficiency.
• The profit/loss from the income statement affects the equity on the balance sheet.
• What is another name for the profit and loss account?

  Income statement
• Gross profit is calculated by subtracting operating expenses from revenue.

  False
• Match the financial statement with its key information:

  Profit and Loss Account ↔️ Revenue, Expenses, Net Profit

  Balance Sheet ↔️ Assets, Liabilities, Equity
• The balance sheet adheres to the accounting equation: Assets = Liabilities + Equity
• A positive net cash flow indicates that the business is generating more cash than it is using.