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Click on each question to check your answer.
1. List the 4 major financial statements for reporting accounting information.
The 4 major financial statements are as follows: balance sheet, income statement, the statement of retained earnings and the statement for cash flows. (pp. 53-58)
2. How would you calculate operating cash flows if you are provided with the balance sheet and income statements?
Operating cash flows is based on the earnings before interest and taxes (from income statement) plus depreciation (from balance sheet) minus taxes (from income statement). (pp. 53-58)
3. What is the major problem that a firm may face if the current ratio is less than 1?
Liquidity crisis may be the major problem if the firm’s current ratio is less than 1. It’s because the firm’s current assets are not able to meet the obligations of current abilities. (p. 55)
4. What is the balance sheet equation?
The balance sheet equation refers to the firm’s total assets equal to its total liabilities and equity. (p. 53)
5. Differentiate between accounting profit and economic profit.
Accounting profit is generally higher than economic profit. It is because the former means total revenue minus total explicit cost, while the latter refers to total revenue minus explicit and implicit costs. (pp. 55-57)