4.1 Preparation of Financial Statements

• What are financial statements?

  Reports on financial performance
• Financial statements provide a comprehensive overview of a company's financial performance and position over a specific period
• Financial statements help stakeholders make informed decisions.
• What is the formula for profit in an income statement?

  $Profit =$$Revenue - Expenses$
• The balance sheet shows assets, liabilities, and equity at a specific point in time
• Order the key components of financial statements:

  1️⃣ Income Statement

  2️⃣ Balance Sheet

  3️⃣ Cash Flow Statement
• Assets are recorded at their market value in financial statements.

  False
• What does an income statement present?

  Financial performance over time
• Net profit is calculated after all deductions
• Match the financial statement with its description:

  Income Statement ↔️ Presents revenue and expenses

  Balance Sheet ↔️ Shows assets and liabilities

  Cash Flow Statement ↔️ Summarizes cash inflows and outflows
• What are financial statements used for?

  Overview of financial performance
• The Income Statement is also known as the Profit and Loss Statement.
• The balance sheet follows the equation Assets = Liabilities + Equity.
• Match the purpose of financial statements with its description:

  Decision-Making ↔️ Helps stakeholders make informed decisions

  Performance Evaluation ↔️ Measures and tracks financial performance

  Investment Analysis ↔️ Assesses the viability of investments

  Creditworthiness ↔️ Determines ability to repay debts
• Order the key components of financial statements based on their primary function:

  1️⃣ Income Statement

  2️⃣ Balance Sheet

  3️⃣ Cash Flow Statement
• What is the accrual basis of accounting?

  Revenue when earned
• Under the historical cost principle, assets are recorded at their original purchase price.
• The going concern principle assumes a company will continue operating indefinitely.
• Match the income statement element with its description:

  Revenue ↔️ Income earned from sales

  COGS ↔️ Direct costs of production

  Gross Profit ↔️ Revenue minus COGS

  Net Profit ↔️ Final profit after all expenses
• How is gross profit calculated?

  Revenue minus COGS
• Operating income is calculated as gross profit minus operating expenses.
• The balance sheet provides a snapshot of a company's financial position at a specific point in time.
• What are liabilities in a balance sheet?

  Obligations to transfer resources
• Equity represents the owners' residual interest in the assets after deducting liabilities.
• Order the categories of cash flow activities in a cash flow statement:

  1️⃣ Operating Activities

  2️⃣ Investing Activities

  3️⃣ Financing Activities
• Cash flow from operating activities includes customer receipts and supplier payments.
• What does cash flow from investing activities summarize?

  Purchase and sale of assets
• Understanding the difference between cash inflows and outflows is crucial for analyzing cash flow.
• The basic accounting equation is: Assets = Liabilities + Equity
• Match the component of the balance sheet with its description:

  Assets ↔️ Economic resources controlled by the company

  Liabilities ↔️ Obligations to transfer economic resources

  Equity ↔️ Owners' residual interest in assets
• What does a statement of cash flows summarize?

  Cash inflows and outflows
• Cash flows from daily operations are categorized under Operating activities.
• Customer receipts are an example of cash flow from Operating activities.
• What is the formula for cash flow from operations?

  Revenue - Operating Expenses
• Proceeds from asset sales are included in cash flow from investing activities.
• Repaying loans is an example of cash flow from Financing activities.
• Order the three main categories of cash flows in a statement of cash flows:

  1️⃣ Operating Activities

  2️⃣ Investing Activities

  3️⃣ Financing Activities
• Cash flow from financing is calculated as proceeds from financing minus repayments of debt.
• What is the formula for cash flow from operations?

  Revenue - Operating Expenses
• Cash flow from operations is calculated as Revenue minus Operating Expenses.