Lesson 5: Stock Market Quiz Questions on Understanding the financial statements of companies

b) A statement that shows a company’s assets, liabilities, and equity

A balance sheet is a financial statement that reports a company’s assets, liabilities, and equity at a specific point in time. The purpose of a balance sheet is to provide a snapshot of a company’s financial position and show how its resources are financed. Assets represent what the company owns or controls, liabilities represent what the company owes to others, and equity represents what remains after liabilities are deducted from assets. The balance sheet is one of the primary financial statements used by investors, analysts, and lenders to evaluate a company’s financial health.

a) Assets – Liabilities

The formula for calculating a company’s equity is: Equity = Assets – Liabilities. It represents the portion of a company’s assets that is owned by shareholders. Assets are the economic resources a company owns, while liabilities are the obligations or debts that the company owes to creditors. By subtracting the liabilities from the assets, the equity represents the net worth or book value of the company.

a) A statement that shows a company’s revenues and expenses

The income statement is a financial statement that reports a company’s revenues, expenses, gains, and losses over a specific period of time, typically a quarter or a year. It provides valuable information about a company’s profitability and financial performance, including its revenue sources, cost of goods sold, operating expenses, and net income. The income statement is important for investors and stakeholders in evaluating a company’s financial health and future growth prospects.

a) Revenues – Expenses

The formula for calculating a company’s net income is Revenues – Expenses. Net income is also commonly referred to as “profit” or “earnings”.

c) A statement that shows a company’s cash flow over a period of time

The cash flow statement is a financial statement that shows the cash inflows and outflows of a company over a specific period of time. It includes three sections: operating activities, investing activities, and financing activities. The operating activities section shows the cash flow from the company’s core business operations, while the investing activities section shows cash flow from investments in assets such as property, plant, and equipment. The financing activities section shows cash flow from sources such as issuance of stock or debt, and payment of dividends or debt.

a) Operating, investing, and financing

Operating cash flows refer to the cash generated or used in the company’s day-to-day operations; investing cash flows refer to the cash used or generated from investments, such as property, plant, and equipment; and financing cash flows refer to the cash used or generated from financing activities, such as issuing or repurchasing stock, paying dividends, or obtaining or repaying loans.

b) To show a company’s assets, liabilities, and equity

The purpose of a balance sheet is to provide a snapshot of a company’s financial position at a given point in time by presenting a summary of its assets, liabilities, and equity. The balance sheet helps investors, analysts, and other stakeholders evaluate the financial health and performance of the company. By comparing the assets and liabilities, one can determine the net worth or equity of the company. The balance sheet is an important component of a company’s financial statements and is used in conjunction with the income statement and cash flow statement.

a) Current assets are assets that are expected to be converted into cash within a year, while non-current assets are assets that are expected to be held for longer than a year.

Current assets are considered short-term assets and include items such as cash, accounts receivable, and inventory. Non-current assets, on the other hand, are long-term assets and include items such as property, plant, and equipment, as well as investments and intangible assets. The distinction between current and non-current assets is important for understanding a company’s liquidity and ability to meet short-term obligations.

c) To show a company’s cash flow over a period of time.

The purpose of a cash flow statement is to provide information about a company’s cash inflows and outflows during a specific period. It shows the sources and uses of cash, including operating activities (such as sales and expenses), investing activities (such as capital expenditures and acquisitions), and financing activities (such as borrowing and repaying debt). The cash flow statement helps investors and analysts evaluate a company’s liquidity, solvency, and ability to generate cash.

b) Operating activities, investing activities, and financing activities

The three sections of a cash flow statement are:

1. Operating activities: This section shows the cash inflows and outflows resulting from a company’s normal business operations, such as revenue and expenses.
2. Investing activities: This section shows the cash inflows and outflows resulting from a company’s investments, such as the purchase or sale of property, plant, and equipment.
3. Financing activities: This section shows the cash inflows and outflows resulting from a company’s financing, such as issuing or repurchasing stocks, borrowing or repaying loans, and paying dividends.