Introduction to entrepreneurship/IENT103/Statements/Quiz

The questions which follow provide a basic knowledge test of selected concepts covered in this learning pathway: Understanding financial statements.

The questions published at the end of each learning pathway are re-used for the knowledge test for learners interested in earning a digital badge or certificate of participation for the Financing a business start-up (IENT103) micro-course. Please consult the Certify participation page for more information.

True - false questions

Indicate whether the following statements are true or false:

• An income statement is based on the profit and loss account.
  • True
    • Yes, that’s correct.
  • False
    • No, the statement is true. It can also be called a profit and loss statement.
• A balance sheet is like a photo of a company at a particular point in time.
  • True
    • Yes, this is true.
  • False
    • Incorrect. A balance sheet is often described as a ‘snapshot’ of a company’s financial position.
• A profit and loss statement shows how much cash (or cash equivalents) enters and leaves a company.
  • True
    • Incorrect. A profit and loss statement shows a company’s income and expenditure over a specified period of time.
  • False
    • Yes, that’s correct.
• Cash flow statements help you determine the net worth of a company.
  • True
    • No, a cash flow statement shows the cash coming in and leaving the company during a particular period of time; it shows the cash position of the company, but does not reflect net worth or profitability.
  • False
    • Yes, that’s correct.

Multiple choice questions

• An income statement is based on which ONE of the following equations?
  • Profit = Fixed assets + Current assets
    • No, try again.
  • Profit = Income - Expenses
    • Yes, this is correct.
  • Income = Sales - Salary expenses
    • No, try again.
  • Income = Sales + Assets
    • No, try again.
• Which ONE of the following statements about a Profit and Loss Account is NOT correct?
  • A Profit and Loss Account shows how much money the business will make after all expenses are taken into consideration
    • This statement is correct.
  • A Profit and Loss Account can help business owners identify cash flow problems
    • Well done! This statement is NOT correct. A Profit and Loss account does not reveal cash flow problems.
  • A Profit and Loss Account shows the net profit of a company
    • This statement is correct; it does show the net profit of a company, or the difference between income and expenses.
  • A Profit and Loss Account shows sales and expenses over a period of time, rather than at a point in time
    • This statement is correct. A Profit and Loss Account shows sales and expenses over a period of time, while a Balance Sheet shows the financial condition of a company at a point in time.
• Indicate which ONE of the following statements about a Balance Sheet is FALSE:
  • A Balance Sheet is the same thing as a statement of net worth
    • This statement is true. It is also sometimes called a statement of financial position.
  • An up-to-date Balance Sheet is essential if a business owner wants to arrange additional finance
    • This statement is true.
  • In a Balance Sheet, total assets must be the same as total liabilities plus equity
    • This statement is true. The Balance Sheet must balance.
  • A Balance Sheet gives the most complete picture possible of a company’s financial position
    • This statement is false. A Balance Sheet does provide valuable information, but should be looked at alongside the Income Statement and Cash Flow Statement, to give the fullest picture possible.
• Indicate which ONE of the following statements about a Cash Flow Statement is INCORRECT:
  • A Cash Flow Statement shows the actual amount of money a company receives from its operations
    • This statement is correct. It shows the cash coming in and going out of a company over a certain period of time.
  • A Cash Flow Statement does not indicate whether a company is profitable or not
    • This statement is correct. It shows the cash position of a company at a given point in time, not the profit (or loss).
  • In a Cash Flow Statement, costs are included in the month that they are incurred, rather than spreading annual amounts equally over 12 months
    • This statement is true.
  • A Cash Flow Statement is always for historical performance (i.e. it reports on what has happened)
    • Well done! This statement is incorrect. A Cash Flow Statement can also be used to forecast what is likely to happen in the future and is therefore a powerful tool for start-up businesses.