Financial Statement Modeling Final – Higher
Education Finance Curriculum
SECTION I: FINANCIAL STATEMENT FUNDAMENTALS
Questions 1-20
Question 1
Which of the following best describes the fundamental accounting equation?
A) Assets = Liabilities - Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Assets × Equity = Liabilities
Correct Answer: C
Rationale: The fundamental accounting equation states that Assets =
Liabilities + Equity. This equation must always balance and forms the foundation
of double-entry bookkeeping. Option A incorrectly subtracts liabilities, Option B
incorrectly adds assets and liabilities, and Option D incorrectly multiplies assets by
equity. This equation is the basis for the balance sheet and ensures that every
transaction has equal debits and credits.
Question 2
A company reports the following information for the fiscal year:
• Net Income: $500,000
• Depreciation Expense: $75,000
• Increase in Accounts Receivable: $30,000
• Decrease in Inventory: $15,000
• Increase in Accounts Payable: $10,000
, • Purchase of Equipment: $100,000
What is the cash flow from operating activities using the indirect method?
A) $570,000
B) $540,000
C) $620,000
D) $470,000
Correct Answer: A
Rationale: Using the indirect method, start with Net Income ($500,000) and
adjust for non-cash items and changes in working capital:
• Add back Depreciation: +$75,000
• Subtract increase in AR: -$30,000 (cash not collected)
• Add decrease in Inventory: +$15,000 (cash freed up)
• Add increase in AP: +$10,000 (cash not paid)
• Purchase of equipment is an investing activity, not operating
Calculation: $500,000 + $75,000 - $30,000 + $15,000 + $10,000 = $570,000
Question 3
Which of the following transactions would MOST likely cause both assets and
liabilities to increase?
A) Collecting accounts receivable
B) Purchasing inventory on credit
C) Paying off a bank loan
D) Issuing common stock for cash
Correct Answer: B
Rationale: Purchasing inventory on credit increases inventory (asset) and
increases accounts payable (liability). This is a classic example of a transaction
affecting both sides of the balance sheet. Option A is an asset exchange (AR
,decreases, cash increases). Option C decreases both assets and liabilities. Option
D increases assets and equity.
Question 4
A company has the following information:
• Current Assets: $750,000
• Current Liabilities: $500,000
• Inventory: $200,000
• Prepaid Expenses: $50,000
What is the quick ratio?
A) 1.50
B) 1.00
C) 1.10
D) 1.30
Correct Answer: B
Rationale: The quick ratio = (Current Assets - Inventory - Prepaid Expenses) /
Current Liabilities
= ($750,000 - $200,000 - $50,000) / $500,000
= $500,000 / $500,000 = 1.00
The quick ratio (acid-test ratio) measures a company's ability to meet short-term
obligations using its most liquid assets, excluding inventory and prepaids which
may not be easily convertible to cash.
Question 5
Which of the following is NOT considered a non-current asset?
A) Property, Plant, and Equipment
B) Intangible Assets
, C) Accounts Receivable
D) Long-term Investments
Correct Answer: C
Rationale: Accounts Receivable is classified as a current asset because it is
expected to be collected within one year or one operating cycle. PP&E, intangible
assets, and long-term investments are all non-current assets with useful lives
extending beyond one year.
Question 6
A company recognizes revenue when:
A) Cash is received
B) The product is manufactured
C) The performance obligation is satisfied
D) The customer places an order
Correct Answer: C
Rationale: Under ASC 606 (Revenue from Contracts with Customers), revenue
is recognized when a performance obligation is satisfied by transferring control of
a good or service to a customer. Cash receipt (A) may occur before or after
revenue recognition. Manufacturing (B) does not constitute delivery or transfer of
control. Order placement (D) does not establish that the performance obligation
has been fulfilled.
Question 7
Select all that apply: Which of the following are considered operating expenses on
the income statement?
A) Cost of Goods Sold
B) Selling, General & Administrative Expenses
C) Interest Expense
D) Research & Development Costs
E) Income Tax Expense
Education Finance Curriculum
SECTION I: FINANCIAL STATEMENT FUNDAMENTALS
Questions 1-20
Question 1
Which of the following best describes the fundamental accounting equation?
A) Assets = Liabilities - Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities + Equity
D) Assets × Equity = Liabilities
Correct Answer: C
Rationale: The fundamental accounting equation states that Assets =
Liabilities + Equity. This equation must always balance and forms the foundation
of double-entry bookkeeping. Option A incorrectly subtracts liabilities, Option B
incorrectly adds assets and liabilities, and Option D incorrectly multiplies assets by
equity. This equation is the basis for the balance sheet and ensures that every
transaction has equal debits and credits.
Question 2
A company reports the following information for the fiscal year:
• Net Income: $500,000
• Depreciation Expense: $75,000
• Increase in Accounts Receivable: $30,000
• Decrease in Inventory: $15,000
• Increase in Accounts Payable: $10,000
, • Purchase of Equipment: $100,000
What is the cash flow from operating activities using the indirect method?
A) $570,000
B) $540,000
C) $620,000
D) $470,000
Correct Answer: A
Rationale: Using the indirect method, start with Net Income ($500,000) and
adjust for non-cash items and changes in working capital:
• Add back Depreciation: +$75,000
• Subtract increase in AR: -$30,000 (cash not collected)
• Add decrease in Inventory: +$15,000 (cash freed up)
• Add increase in AP: +$10,000 (cash not paid)
• Purchase of equipment is an investing activity, not operating
Calculation: $500,000 + $75,000 - $30,000 + $15,000 + $10,000 = $570,000
Question 3
Which of the following transactions would MOST likely cause both assets and
liabilities to increase?
A) Collecting accounts receivable
B) Purchasing inventory on credit
C) Paying off a bank loan
D) Issuing common stock for cash
Correct Answer: B
Rationale: Purchasing inventory on credit increases inventory (asset) and
increases accounts payable (liability). This is a classic example of a transaction
affecting both sides of the balance sheet. Option A is an asset exchange (AR
,decreases, cash increases). Option C decreases both assets and liabilities. Option
D increases assets and equity.
Question 4
A company has the following information:
• Current Assets: $750,000
• Current Liabilities: $500,000
• Inventory: $200,000
• Prepaid Expenses: $50,000
What is the quick ratio?
A) 1.50
B) 1.00
C) 1.10
D) 1.30
Correct Answer: B
Rationale: The quick ratio = (Current Assets - Inventory - Prepaid Expenses) /
Current Liabilities
= ($750,000 - $200,000 - $50,000) / $500,000
= $500,000 / $500,000 = 1.00
The quick ratio (acid-test ratio) measures a company's ability to meet short-term
obligations using its most liquid assets, excluding inventory and prepaids which
may not be easily convertible to cash.
Question 5
Which of the following is NOT considered a non-current asset?
A) Property, Plant, and Equipment
B) Intangible Assets
, C) Accounts Receivable
D) Long-term Investments
Correct Answer: C
Rationale: Accounts Receivable is classified as a current asset because it is
expected to be collected within one year or one operating cycle. PP&E, intangible
assets, and long-term investments are all non-current assets with useful lives
extending beyond one year.
Question 6
A company recognizes revenue when:
A) Cash is received
B) The product is manufactured
C) The performance obligation is satisfied
D) The customer places an order
Correct Answer: C
Rationale: Under ASC 606 (Revenue from Contracts with Customers), revenue
is recognized when a performance obligation is satisfied by transferring control of
a good or service to a customer. Cash receipt (A) may occur before or after
revenue recognition. Manufacturing (B) does not constitute delivery or transfer of
control. Order placement (D) does not establish that the performance obligation
has been fulfilled.
Question 7
Select all that apply: Which of the following are considered operating expenses on
the income statement?
A) Cost of Goods Sold
B) Selling, General & Administrative Expenses
C) Interest Expense
D) Research & Development Costs
E) Income Tax Expense
