Questions 1. Why do businesses produce financial statements? 2. What are the four financial statements typically produced by a company? 3. On which financial statement would one find revenues and expenses? 4. What is a gain? 5. How does a gain differ from a revenue? 6. What is a loss? 7. How does a loss differ from an expense? 8. Why are revenues and expenses reported separately from gains and losses? 9. What three items are typically listed at the top of a financial statement? 10. Define "cost of goods sold." 11. Define "gross profit." 12. How do companies determine if a cost is an expense or an asset? 13. Define "conservatism." 14. Explain why dividends are not reported on the income statement. 15. What are retained earnings? 16. Define "capital stock." 17. On which statement would assets and liabilities be reported? 18. What differentiates a current asset from a noncurrent asset? 19. Give the accounting equation and explain why it is true. 20. What are the three categories of cash flows on the cash flow statement? 21. How do operating, investing and financing cash flows differ from one another? 3.5 ue or False 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. The income statement gives company's revenues and expenses for one particular day of the year. An increase in net assets of a business due to the sale of its inventory is a gain. Retained earnings represents amounts contributed to the business by its owners. Assets and liabilities can be broken down into the categories of current and noncurrent. Income tax expense is typically reported separately from other expenses. Conservatism helps companies look better to potential investors. Dividends paid are reported on the balance sheet. Companies receive money each time their stock is sold on a stock exchange. A balance sheet should always balance. The statement of cash flows is broken up into operating, investing, and financing activities. Notes are considered part of a complete set of financial statements. Sales revenue less cost of goods sold is referred to as net income. A gain is the amount of net income earned by a company over its life less any dividends it has paid. The purpose of the balance sheet is to report the assets and liabilities of a company on a specific date. 12. 13. 14