Here are 50 multiple-choice questions (MCQs) based on Unit 2, "Understanding Financial

Statements":

### 1-10

1. Which of the following is a financial statement that shows the financial position of a business at
the end of a period?

- a) Income Statement

- b) Cash Flow Statement

- c) Balance Sheet

- d) Equity Statement

2. Financial statements are typically prepared for what period?

- a) One month

- b) One quarter

- c) One year

- d) One decade

3. What is the accounting equation used in the Balance Sheet?

- a) Assets = Liabilities - Shareholder's Equity

- b) Assets = Liabilities + Shareholder's Equity

- c) Liabilities = Assets + Shareholder's Equity

- d) Assets - Liabilities = Shareholder's Equity

4. Which of the following is classified as a non-current asset?

- a) Accounts receivable

- b) Inventory

- c) Buildings

- d) Cash

5. Current liabilities are typically settled within:

- a) 1 month

- b) 6 months
 - c) 1 year

- d) 3 years

6. Which of the following is NOT included in a company's Balance Sheet?

- a) Liabilities

- b) Shareholder’s equity

- c) Income tax expenses

- d) Assets

7. The purpose of the income statement is to:

- a) Show the financial position at a specific point in time

- b) Summarize revenues and expenses for a period

- c) Record cash flows

- d) Reconcile equity accounts

8. Which of the following shows the inflows and outflows of cash in a firm?

- a) Income statement

- b) Balance Sheet

- c) Cash Flow Statement

- d) Equity Statement

9. Profit on the sale of machinery is classified as:

- a) Operating income

- b) Non-operating income

- c) Other income

- d) Business income

10. Which financial statement shows the net profit or loss of a company?

- a) Cash flow statement

- b) Balance Sheet

- c) Profit & Loss Account

 - d) Statement of Shareholder's Equity

### 11-20

11. Which of the following is considered a current asset?

- a) Land

- b) Inventory

- c) Machinery

- d) Buildings

12. What are liabilities?

- a) Company’s equity

- b) What the company owes to outsiders

- c) What the company owns

- d) Revenue from operations

13. The cash flow statement classifies cash flows into which categories?

- a) Operating, Investing, Financing

- b) Sales, Expenses, Taxes

- c) Assets, Liabilities, Equity

- d) Revenue, Profit, Tax

14. Which of the following are NOT current liabilities?

- a) Accounts Payable

- b) Short-term loans

- c) Prepaid expenses

- d) Accrued expenses

15. Which of the following refers to financial obligations a company must pay back in the future?

- a) Assets

- b) Liabilities

- c) Shareholder’s Equity
 - d) Income

16. A cash flow statement helps to analyze:

- a) The profit or loss of the firm

- b) The financial position

- c) The cash inflows and outflows

- d) The change in shareholder’s equity

17. Dividends paid to shareholders are shown in which part of the cash flow statement?

- a) Operating activities

- b) Investing activities

- c) Financing activities

- d) Non-operating activities

18. Which financial statement gives a snapshot of a company’s financial position at a specific point in
time?

- a) Income statement

- b) Statement of Cash Flows

- c) Balance Sheet

- d) Profit & Loss Statement

19. Which of the following is included in the shareholder's equity section of the balance sheet?

- a) Loans

- b) Retained earnings

- c) Inventory

- d) Current liabilities

20. Rent received by a company is classified under:

- a) Operating income

- b) Other income

- c) Non-operating expenses
 - d) Current liabilities

### 21-30

21. Which of the following is NOT considered an intangible asset?

- a) Goodwill

- b) Patents

- c) Trademarks

- d) Cash

22. Revenues earned but not yet received are recorded as:

- a) Deferred revenues

- b) Accrued revenues

- c) Unearned income

- d) Cash income

23. Prepaid insurance is classified under:

- a) Non-current assets

- b) Current liabilities

- c) Current assets

- d) Long-term liabilities

24. Which of the following accounts reflects ownership interest in a company?

- a) Liabilities

- b) Equity

- c) Assets

- d) Revenues

25. The cost of goods sold (COGS) is deducted from:

- a) Operating expenses

- b) Gross sales

- c) Net income
 - d) Total assets

26. Which of the following reflects a company’s profitability?

- a) Balance Sheet

- b) Cash Flow Statement

- c) Income Statement

- d) Statement of Changes in Equity

27. The “statement of changes in equity” shows:

- a) A company's profit or loss

- b) Changes in shareholder’s equity

- c) Changes in assets

- d) Cash inflows and outflows

28. Which of the following is considered a financing activity in the cash flow statement?

- a) Purchase of equipment

- b) Repayment of bank loans

- c) Sale of goods

- d) Dividend income

29. What is the purpose of depreciation in the income statement?

- a) Record cash flow changes

- b) Allocate the cost of an asset over its useful life

- c) Adjust for inflation

- d) Calculate net assets

30. Which of the following best describes shareholders’ equity?

- a) Assets minus liabilities

- b) Assets minus expenses

- c) Assets plus liabilities

- d) Liabilities minus assets

### 31-40

31. Liabilities due within one year are classified as:

- a) Long-term liabilities

- b) Current liabilities

- c) Non-current liabilities

- d) Deferred liabilities

32. Interest expense is classified under which category in the income statement?

- a) Revenue

- b) Operating expenses

- c) Other incomex

- d) Finance cost

33. What does a high current ratio indicate?

- a) High profitability

- b) Strong liquidity

- c) High debt levels

- d) Strong equity position

34. Earnings per share (EPS) is calculated by dividing net income by:

- a) Number of shareholders

- b) Number of equity shares outstanding

- c) Total liabilities

- d) Total assets

35. Shareholder dividends are reflected in which statement?

- a) Income statement

- b) Balance Sheet

- c) Cash Flow Statement

- d) Statement of changes in equity

36. A negative cash flow from operating activities indicates:

- a) Losses from operations

- b) Profits from operations

- c) Poor cash management

- d) Positive investment activities

37. What is a common size financial statement?

- a) Statement using actual numbers

- b) Statement where items are expressed as a percentage of a base figure

- c) Statement without footnotes

- d) Statement for a single accounting period

38. Goodwill is shown on which side of the balance sheet?

- a) Liability

- b) Equity

- c) Asset

- d) Expense

39. If assets increase and liabilities decrease, what happens to equity?

- a) Equity increases

- b) Equity decreases

- c) Equity stays the same

- d) No effect

40. A company’s inventory turnover ratio measures:

- a) Liquidity

- b) Efficiency in selling inventory

- c) Ability to repay debt

- d) Profitability from assets

### 41-50

41. What is the impact of issuing new shares on equity?

- a) Decreases equity

- b) Increases equity

- c) No effect

- d) Reduces liabilities

42. A higher return on assets (ROA) indicates:

- a) Inefficient use of assets

- b) Efficient use of assets

- c) High liabilities

- d) Strong equity position

43. Which financial statement is primarily used to assess the solvency of a company?

- a) Income statement

- b) Balance sheet

- c) Cash Flow Statement

- d) Statement of Changes in Equity

44. The term “net working capital” refers to

- a) Current assets minus current liabilities

- b) Total assets minus total liabilities

- c) Equity plus liabilities

- d) Cash minus liabilities

45. Which of the following is an investing activity?

- a) Sale of goods

- b) Purchase of a new plant

- c) Dividend distribution
 - d) Issuing bonds

46. Which of the following is NOT shown in the equity statement?

- a) Net income

- b) Dividends paid

- c) Additional capital raised

- d) Cash flows from operations

47. What does the price-to-earnings (P/E) ratio measure?

- a) Debt levels

- b) Dividend yield

- c) Market price per share relative to earnings per share

- d) Interest expense

48. Which of the following is NOT included in a company's profit and loss statement?

- a) Revenue from sales

- b) Cost of goods sold

- c) Dividend payments

- d) Operating expenses

49. Which of the following describes a company’s liquidity?

- a) Ability to generate profit

- b) Ability to meet short-term obligations

- c) Ability to pay dividends

- d) Ability to increase equity

50. What is the formula for the quick ratio?

- a) Current assets / Current liabilities

- b) (Current assets - Inventory) / Current liabilities

- c) Total liabilities / Total assets

- d) Cash flow / Equity

Here are the answers to the 50 MCQs:

1. c

2. c

3. b

4. c

5. c

6. c

7. b

8. c

9. b

10. c

11. b

12. b

13. a

14. c

15. b

16. c

17. c

18. c

19. b

20. b

21. d

22. b

23. c

24. b

25. b

26. c

27. b
28. b

29. b

30. a

31. b

32. d

33. b

34. b

35. d

36. a

37. b

38. c

39. a

40. b

41. b

42. b

43. b

44. a

45. b

46. d

47. c

48. c

49. b

50. b