CFA Practice Question

There are 86 practice questions for this study session.

CFA Practice Question

Which of the following is (are) true about the balance sheet and income statement?

I. The income statement reflects a summary of activity that occurs over some period of time while the balance sheet is a snapshot taken at a single point in time.
II. Both represent a summary of activity that occurs over some period of time.
III. The two, combined, give a reasonable estimate of the firm's cash flows.
A. I only
B. I and III
C. I, II and III

User Contributed Comments 9

User Comment
kyhooney With closer look on the BS,IS and footnotes, I can get some rough ideas on what happened during the period but not the market values.
shasha for answer II, can't say it's wrong. B/S got beginning figures and ending figures, from the differences between those figures, you'd have ideas on what happened in the reported period. do not like this question. confused...
danlan III is saying an estimate, so it is correct.
tony balance sheet is often referred to as a snapshot of a company: it represents a "point", not a period. Although you may have beginning balance of some accounts, you don't know what's going on during the period so the answer is correct.
gizi The B/S is an "as at position". For instance you would see in a company's financial statements "B/S as at the 31st Dec 2006" The income statement would however be headed as "I/S for the period ending 31st Dec 2006" Therefore II is incorrect.
treakj A B/S is just a snapshot. The sentence II states that B/S would represent an activity over a period of time, which is not true. If you compare 2 B/S you can estimate the activity, nevertheless it still does not represent an act. over a period of time.
achu Reasonable estimate- even though CF statement will be better.
RCapistrano III. The two, combined, give a reasonable estimate of the firm's cash flows.

This makes sense since to derive the CF Statement both B/S & I/S items are used.
AllieBarrell Does any one else disagree with this. It does not always give a reasonable estimate of cash flows. What if all your revenue is not in cash??? to get a reasonable estimate, you would have to compare not the two, but the BS and IS across two years at least. If the two gave a reasonable estimate, the CFS would be redundant!
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