Question

1. What is a “classified” balance sheet ?

1. A balance sheet that classifies its year-end as 12/31.
2. A balance sheet that only displays total assets.
3. A balance sheet that separates assets and liabilities into current and non-current sections.
4. A balance sheet that has a restricted audience.

2. Why doesn’t Cash Flow from Operations equal Net Income?

1. The income statement includes non-cash items
2. The income statement is based on accruals
3. All of the above
4. None of the above

Answer 1

1.

In a classified balance sheet, assets and liabilities of the business are categorized according to their liquidity i.e. assets and liabilities are divided into current and non current sections. In such a balance sheet, on the assets side, current assets are shown in the order of liquidity and then non current assets are shown. In the same way, on the liabilities side, first current liabilities are shown in the liquidity order and then non current liabilities are shown.

Thus a balance sheet is termed as a classified balance sheet when it separates assets and liabilities into current and non current sections.

Hence, correct option is (c)

2.

While calculating cash flow from operations, several adjustments are made to the net income. Such adjustments relate to non cash items like depreciation expense, loss on sale of assets etc. Changes in the current assets and current liabilities over the reporting period are also considered while calculating cash flow from operations.  Net income is the result of accrual assumption. While preparing income statement, accrual assumption is followed.

Thus, cash flows from operations is not same as net income.

Hence, correct option is (c)

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