1 Understanding Financial Statements Free Online FlashCards

Which statements cover a period, and which shows position at a date?

The income statement and statement of cash flows cover a period; the balance sheet shows financial position at one specific date.

What does an income statement summarize?

It summarizes revenue and expenses over a period, progressing from revenue through costs and expenses to net income or net loss.

What equation organizes the balance sheet?

Assets equal liabilities plus shareholders’ equity: $\text{Assets} = \text{Liabilities} + \text{Shareholders’ Equity}$.

What does shareholders’ equity represent?

Shareholders’ equity is the residual interest after liabilities are subtracted from assets.

How are current balance-sheet items distinguished from noncurrent ones?

Current items are expected to be used, collected, or settled within the operating cycle or roughly one year; other items are noncurrent.

What do operating cash flows include?

Operating activities report cash related to core business operations. Under the indirect method, net income is adjusted for noncash expenses and changes in operating assets and liabilities.

What transactions belong in investing activities?

They cover purchases and sales of long-term assets and investments; buying equipment is usually a cash outflow in this section.

What transactions belong in financing activities?

They include borrowing, repaying loan principal, issuing shares, and paying dividends.

Why can net income differ from cash flow?

Net income includes items that may not involve cash in the same period. A sale may be recorded before payment is collected, and depreciation is a noncash expense.

How is the current ratio calculated, and what does it assess?

Current ratio equals current assets divided by current liabilities: $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$. It helps assess short-term ability to cover obligations.

How does the quick ratio assess short-term coverage?

Quick ratio equals cash, short-term investments, and receivables divided by current liabilities: $\text{Quick Ratio} = \frac{\text{Cash} + \text{Short-term Investments} + \text{Receivables}}{\text{Current Liabilities}}$. It excludes reliance on selling inventory.

What does gross margin measure?

Gross margin is gross profit divided by revenue: $\text{Gross Margin} = \frac{\text{Gross Profit}}{\text{Revenue}}$. It measures the share of sales remaining after direct production or purchase costs.