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UNDERSTANDING CORPORATE FINANCE
QUESTIONS WITH SOLUTIONS
Financial Statements - correct-answer - information used to assess the financial
position and results of operations of corporations
GAAP- a collection of rules and procedures which are overseen by authorities like
the FASB and SEC - correct-answer - Generally Accepted Accounting Principles
FASB - correct-answer - Financial Accounting Standards Board; explicit authority
from SEC to monitor accounting standards
SEC - correct-answer - Securities and Exchange Commission
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accounting period - correct-answer - goal of GAAP - financial reports should be
prepared periodically an over periods of equal length; must be at least annually;
period determined by company
conservatism - correct-answer - goal of GAAP - if certain situations lead to
different likely profit figures, the firm should use the lowest measurement; firms
must anticipate all expenses and not report revenues until realized. Deliberate
understatement is forbidden.
consistency - correct-answer - goal of GAAP - firms should strive to use consistent
accounting methods so that their statements can be compared over time
matching - correct-answer - goal of GAAP - in financial statements, companies
should include all expenses incurred to realize the revenues that they report
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understandability - correct-answer - goal of GAAP - information in reports should
be written at a level that a reader with reasonable comprehension of business
principles can understand
reliability - correct-answer - goal of GAAP - information that is provided must be
complete and verifiable
Required Statements - correct-answer - balance sheet, income sheet, statement
of owner's equity, statement of cash flows
balance sheet - correct-answer - statement of financial position describing a point
in time (even 1 day) the assets, liabilities and owner's equity
income statement - correct-answer - shows all sources of revenues and expenses
incurred for the period (range) in question and uses accrual accounting
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accrual accounting - correct-answer - revenue that is recognized when earned and
expenses that are realized when incurred
statement of owners' equity - correct-answer - reports investments by
stockholders into the firm and distributions (dividends) paid to those stockholders
statement of cash flows - correct-answer - reveals a company's sources and uses
of cash and generally is used to isolate the changed in balance sheets from period
to period
ratio analysis - correct-answer - tool used for analyzing financial statements
UNDERSTANDING CORPORATE FINANCE
QUESTIONS WITH SOLUTIONS
Financial Statements - correct-answer - information used to assess the financial
position and results of operations of corporations
GAAP- a collection of rules and procedures which are overseen by authorities like
the FASB and SEC - correct-answer - Generally Accepted Accounting Principles
FASB - correct-answer - Financial Accounting Standards Board; explicit authority
from SEC to monitor accounting standards
SEC - correct-answer - Securities and Exchange Commission
,2|Page
accounting period - correct-answer - goal of GAAP - financial reports should be
prepared periodically an over periods of equal length; must be at least annually;
period determined by company
conservatism - correct-answer - goal of GAAP - if certain situations lead to
different likely profit figures, the firm should use the lowest measurement; firms
must anticipate all expenses and not report revenues until realized. Deliberate
understatement is forbidden.
consistency - correct-answer - goal of GAAP - firms should strive to use consistent
accounting methods so that their statements can be compared over time
matching - correct-answer - goal of GAAP - in financial statements, companies
should include all expenses incurred to realize the revenues that they report
,3|Page
understandability - correct-answer - goal of GAAP - information in reports should
be written at a level that a reader with reasonable comprehension of business
principles can understand
reliability - correct-answer - goal of GAAP - information that is provided must be
complete and verifiable
Required Statements - correct-answer - balance sheet, income sheet, statement
of owner's equity, statement of cash flows
balance sheet - correct-answer - statement of financial position describing a point
in time (even 1 day) the assets, liabilities and owner's equity
income statement - correct-answer - shows all sources of revenues and expenses
incurred for the period (range) in question and uses accrual accounting
, 4|Page
accrual accounting - correct-answer - revenue that is recognized when earned and
expenses that are realized when incurred
statement of owners' equity - correct-answer - reports investments by
stockholders into the firm and distributions (dividends) paid to those stockholders
statement of cash flows - correct-answer - reveals a company's sources and uses
of cash and generally is used to isolate the changed in balance sheets from period
to period
ratio analysis - correct-answer - tool used for analyzing financial statements
