Quiz 13: Understanding Financial Statements

Business

a.Income statement: Income statement is one of the financial statements of firms. It shows all revenues received from the sales of products and service and expenses occurred during a particular period. Hence, income statement of a firm is considered as an important financial report to measure the quality of earnings. b.Balance sheet: Balance sheet is one of the financial statements which show the summary of financial balances of the firm including details of assets, liabilities and owner's equity. Hence, balance sheet represe nts i ncome ea rned b y t he f irm in pas t years t hat h as not bee n p aid o ut as d ividends. c.Cash flow statement: Cash flow statement known is a financial statement shows the in and out flow of cash of a firm during a particular period. Hence, the cash flow statement is designed to show how a firm's operations have affected its cash position by providing actual net cash flows in or out of the firm during some specified period. d. c.Categories of firm's cash flow statement: Cash flow statement is a financial statement showing in and out flow of cash of a firm during a particular period. A firm's cash flow statement has been categorized in to three activities as explained below: • Operating activities : activities like productions, sales and delivery of the product of a firm and payment collections from customers are the operating activities in cash flow statement of a firm. • Investing activities : activities like purchase and sale of assets like, land building etc, loans made for suppliers and payments to mergers are investing activities in cash flow statement of a firm. • Financing activities : activities in the form of cash inflow from investors like banks, shareholders and cash outflows from the firm to shareholders in the form of dividends are financing activities. e. Capital account: Capital account is one of the components of balance of payment. It reflects the net change in ownership of national assets. Surplus in capital account refers to the money inflow to the country and deficit in capital account refers to the money out flow from the country. Hence, when a stock is issued, the m oney r aised b eyond t he p ar v alue i s s hown in th e capital account i n the ba lance-shee t s tatement.

The financial reports give the financial status of the businesses and help in decision making.The balance sheet tells the firm's financial position at the end of the reporting period. It states items under categories: assets, liabilities and stockholders' equity. Assets show the amount of dollars that the firm owns during the reporting period. The liabilities show the amount of money that firm owes, and stockholders equity tells the portion of assets that is invested by owners of the firm. Therefore, statement (a) is correct. The income statement summarizes the net income of the firm during a stated period rather than at a specific date. Thus, statement (b) is not correct. The cash flow statement also includes financing and investing activities of the firm in addition to net income. The cash flow statement not only shows how the firm generated cash during the operating period but also how it used it during the period.Thus, statement (c) is not correct.

Earnings per share: Investor buy share of a company based on the earnings per share. Hence, earnings per share which reflect as price/earnings ratio will affect the market price. Thus, the correct option for the first fill in the blank is 'Earning per share'. Price/earnings ratio: Whether a stock is relatively cheap or expensive in relation to current earning can be observed based on the price/earnings ratio. Thus, the correct option for the second fill in the blank is 'Price/earning ratio'. Book value per share: The book value per share shows the amount the holder of common stock would get if all assets were sold at the amount stated in the balance sheet. Thus, the correct option for the third fill in the blank is 'book value per share'. Account receivable turn over: The number of times a company's accounts receivable turn in to cash during a year can be roughly measured as account receivable turn over. Thus, the correct option for the fourth fill in the blank is 'account receivable turn over'. Debt to equity ratio: Amount of assets provided by creditor for each dollar of assets provided by the stock holder can be measured as the debt to equity ratio. Thus, the correct option for the fifth fill in the blank is 'debt to equity ratio'. Return to total assets: Better utilization of asset that is usage of assets by the management in a best way can be judged from the return to total assets. Thus, the correct option for the sixth fill in the blank is 'return to total asset.

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