3.2 Financial Statements

• What are financial statements defined as?

  Formal records summarizing financial activities
• The income statement reports revenues, expenses, and net income
• The balance sheet outlines assets, liabilities, and equity at a specific point in time.
• What does the cash flow statement track?

  Cash inflows and outflows
• Match the financial statement with its key components and purpose:

  Income Statement ↔️ Revenues, Expenses, Net Income ||| Shows profitability over a period

  Balance Sheet ↔️ Assets, Liabilities, Equity ||| Presents financial position at a point in time

  Cash Flow Statement ↔️ Operating, Investing, Financing Activities ||| Tracks cash movements
• What is the main purpose of financial statements for stakeholders?

  Aid informed decision-making
• The income statement reports revenues, expenses, and net income
• The balance sheet outlines assets, liabilities, and equity at a specific point in time.
• What primary activities are tracked by the cash flow statement?

  Operating, Investing, Financing
• Order the key components of the income statement as they appear in the statement:

  1️⃣ Revenue

  2️⃣ Cost of Goods Sold (COGS)

  3️⃣ Gross Profit

  4️⃣ Operating Expenses

  5️⃣ Operating Profit

  6️⃣ Net Income
• What does the revenue component of the income statement represent?

  Total sales of goods and services
• Cost of Goods Sold (COGS) is calculated using the formula: Beginning Inventory + Purchases - Ending Inventory
• Gross profit is calculated as revenue less COGS.
• The cash flow statement assesses a company's financial stability.
• What is the first step in preparing an income statement?

  List all revenue sources
• In a balance sheet, assets must equal liabilities plus equity
• Steps in preparing a cash flow statement

  1️⃣ Identify cash inflows and outflows for operating activities

  2️⃣ Record cash movements related to investing activities

  3️⃣ Document financing activities

  4️⃣ Determine net cash flow for each category and overall
• Key financial ratios are categorized by profitability, liquidity, solvency, and efficiency
• What does a high gross profit margin indicate?

  Efficient production
• What does a current ratio above 1.0 show?

  Ability to cover short-term liabilities
• Financial statements always accurately predict future financial health.

  False
• What is window dressing in financial statements?

  Intentional manipulation of financials
• A gross profit margin of 40% indicates a high level of efficiency
• What are operating expenses defined as?

  Costs to operate the business
• Operating profit is calculated as gross profit less operating expenses
• Net income is the profit after all expenses and taxes.
• Match the financial statement with its purpose:

  Income Statement ↔️ Shows profitability over a period

  Balance Sheet ↔️ Presents financial position at a specific time

  Cash Flow Statement ↔️ Tracks cash movements
• What does the balance sheet present?

  Financial position at a time
• The balance sheet equation is: Assets = Liabilities + Equity
• Current assets are expected to be converted to cash within one year.
• What is an example of a long-term liability?

  Mortgages
• The cash flow statement tracks cash inflows and outflows related to operating, investing, and financing activities
• What do operating activities in the cash flow statement involve?

  Core business operations
• Investing activities involve cash used to buy or sell long-term assets.
• What are the three primary business activities tracked in the cash flow statement?

  Operating, Investing, Financing
• Cash generated from core business operations is categorized as operating activities.
• What is an example of an investing outflow in the cash flow statement?

  Purchase of equipment
• The cash flow statement helps assess a company's liquidity and financial stability.
• What does the income statement show over a period?

  Profitability
• The balance sheet presents a company's financial position at a specific point in time.