🔁 Review🛠️ Skill BuilderMultiple choice sections are Review. Case study sections are Skill Builders.
A self-grading practice test for Unit 3 — Business and Personal Finance, Tasks 6–10: 50 questions on the income statement and profit margins, the balance sheet and net worth, the cash flow statement, ethics and financial reporting, and the Startup Finance Summit. Tap an answer to see instantly whether you're right, with an explanation. These are practice questions (not the ones on your real test), so focus on understanding each idea and checking your math.
1. Larkspur Pet Grooming reported these results for last year: taxes $11,000; general and administrative expenses $45,000; revenue $200,000; interest expense $5,000; cost of sales $80,000; selling expenses $15,000. What was Larkspur's net profit margin?
Answer: A. In income statement order: revenue $200,000 − cost of sales $80,000 = gross profit $120,000; − operating expenses ($15,000 selling + $45,000 general and administrative) = operating profit $60,000; − interest $5,000 = pre-tax income $55,000; − taxes $11,000 = net profit $44,000. Net profit margin = $44,000 ÷ $200,000 = 22%. 27.5% stops at pre-tax income and forgets taxes, 30% is the operating profit margin (it forgets interest and taxes), and 60% is the gross profit margin.
2. Oakhaven Furniture builds and sells custom sofas. Which of its costs is a general and administrative expense?
Answer: B. General and administrative expenses are the costs of running daily operations, such as office salaries, office rent, and insurance, so the bookkeeper's salary fits. Sales commissions and delivery costs are selling expenses (marketing, sales, and delivery). Lumber and fabric go into the product itself, so they're cost of goods sold, not an operating expense at all.
3. Two sandwich shops have the same revenue, cost of goods sold, and operating expenses. Shop A was started with a $100,000 bank loan; Shop B was started with the owner's savings. How will their income statements most likely differ?
Answer: C. The two shops match all the way down to operating profit. Shop A then subtracts interest expense, the cost of borrowing, so its pre-tax income (and its net profit) is lower. Interest comes after operating profit, so it doesn't change operating profit. Repaying the loan's principal isn't an expense, but the interest is, so the loan does show up on the income statement. Borrowed money must be repaid, so it isn't revenue.
4. Bluebird Escape Rooms' revenue rose from $250,000 in 2025 to $300,000 in 2026, and its net profit rose from $25,000 to $36,000. Which statement is accurate?
Answer: D. Percent change = (new − old) ÷ old. Revenue: $50,000 ÷ $250,000 = 20%. Net profit: $11,000 ÷ $25,000 = 44%. Because profit grew faster than revenue, net profit margin rose from 10% ($25,000 ÷ $250,000) to 12% ($36,000 ÷ $300,000), so neither choice that says the margin fell can be right. The 31% and 17% figures come from dividing by the 2026 values instead of the 2025 values. Comparing the dollar changes ($11,000 vs. $50,000) ignores that profit and revenue started at very different sizes.
5. Corner Market, a neighborhood grocery store, has a net profit margin of 2%. Its owner reads that a local software company earns a 25% net profit margin. What is the best way for her to judge whether her store's 2% margin is healthy?
Answer: B. Margins differ a lot from one industry to another, so the useful comparison is an industry benchmark: other grocery stores, which typically run on thin margins. A 2% margin is still a profit (2 cents of every sales dollar), not a loss. Comparing net profit dollars with a business in a different industry and of a different size says little, and revenue growth alone can hide shrinking profit.
6. Wren and Wick sells 2,000 candles a month at $20 each, and each candle costs $8 to make. The owner raises the price to $22, and monthly sales drop to 1,800 candles. The cost per candle stays $8. What is the new monthly gross profit?
Answer: B. Per-unit gross profit = price − cost per unit = $22 − $8 = $14, and 1,800 × $14 = $25,200, up from 2,000 × $12 = $24,000 before the price change. $28,000 assumes sales stay at 2,000 candles after the price rise, $21,600 uses the old $12 per-unit gross profit with the new sales volume, and $39,600 is the new revenue (1,800 × $22) before subtracting cost of goods sold.
7. Marisol is projecting first-year revenue for her empanada stand. Market research suggests customers would buy 1,500 empanadas a month at $4 each, but her kitchen can make only 1,200 a month. Each empanada costs her $1.50 to make. What is the most reasonable projected revenue for her first 12 months?
Answer: C. Revenue projection = projected units × price. She can't sell more than she can make, so projected units = 1,200 a month × 12 months = 14,400, and 14,400 × $4 = $57,600. $72,000 uses demand (1,500 a month) and ignores her capacity limit. $36,000 subtracts the $1.50 cost from each sale, which makes it projected gross profit, not revenue. $4,800 is only one month of revenue.
8. Owen's projected income statement for his new gym shows a net profit of $22,000 in his realistic scenario, $40,000 in his optimistic scenario, and a loss of $8,000 in his conservative scenario. What is the best way for him to use the conservative scenario?
Answer: D. Scenarios show how results change if sales or costs come in worse or better than expected. The conservative case is there so Owen can plan for uncertainty, for example by keeping a cash cushion, planning cost cuts, or arranging funding ahead of time. Dropping it throws away the warning, changing its numbers until it looks good defeats its purpose, and an average of three estimates is still only an estimate.
9. Nadia writes a budget that splits her $2,600 monthly take-home pay among rent, food, a car payment, and savings. Her brother writes a projected income statement for his food truck's next quarter. What do the two documents have in common?
Answer: B. A budget plans an individual's income, spending, and saving; a projected income statement forecasts a business's revenue, costs, and profit. Both look ahead, and both have to allow for uncertainty, such as reduced work hours or rising food prices. Neither records past results (an actual income statement does that) or lists what is owned and owed (a balance sheet does that). GAAP sets the rules for how publicly traded companies report their actual results, not for personal budgets or a small owner's forecast.
10. Theo plans to sell handmade dog treats, but his business has no sales history yet. Which would give him the most credible basis for projecting his first-year revenue?
Answer: A. With no history, Theo needs market research, and actual sales at his planned price (a demand test) show what real customers will pay. A personal income goal is a wish, not a projection. A national company's revenue reflects a far bigger business than his. Friends' guesses about what they might buy come from a small, friendly sample and cost them nothing to say.
11. Silver Creek Kennels reports total assets of $210,000. Its owners have contributed $90,000, and its retained earnings are $35,000. What are its total liabilities?
Answer: A. Assets = liabilities + owners' equity, and owners' equity = contributed capital + retained earnings = $90,000 + $35,000 = $125,000. So liabilities = $210,000 − $125,000 = $85,000. $120,000 leaves out retained earnings, $175,000 leaves out the owners' contributed capital, and $335,000 adds equity to assets instead of subtracting it.
12. Mesa Print Shop's employees worked the last week of December, but they won't be paid for that week until January 6. How should the unpaid wages appear on the shop's December 31 balance sheet?
Answer: D.Accrued expenses are costs a business has already incurred but hasn't yet paid or been billed for, such as wages employees have earned. They're due within a year, so they're a current liability. Accounts receivable is money customers owe the business. “Next year” here is only days away; long-term liabilities are due more than a year from now. And the shop owes the wages on December 31 whether or not cash has changed hands.
13. Larkhill Therapeutics, a small drug company, paid $400,000 for a patent on a new allergy medicine and expects the patent to be valuable for 15 years. How should Larkhill classify the patent on its balance sheet?
Answer: B. A patent is a nonphysical asset, so it's an intangible asset, and because it will be useful for many years it's listed with the long-term assets. Fixed assets are long-term too, but they're tangible: buildings, land, vehicles, machinery, and equipment. Long-term investments are stocks, bonds, mutual funds, or real estate held for more than a year, and current assets are cash and items expected to be used or turned into cash within a year.
14. At the start of the year, Juniper Dental Lab had retained earnings of $70,000. During the year it earned a net profit of $45,000 and paid its owners $20,000 in dividends. What were its retained earnings at the end of the year?
Answer: C. Retained earnings are the cumulative profit kept in the business rather than paid out. Ending retained earnings = $70,000 + $45,000 net profit − $20,000 dividends = $95,000. $115,000 forgets that dividends reduce retained earnings, $50,000 subtracts the dividends but leaves out this year's profit, and $25,000 counts only this year's kept profit ($45,000 − $20,000) and leaves out the $70,000 kept from earlier years.
15. The Lindqvist family farm owns land and equipment worth $1,200,000 and owes $40,000 on a loan that isn't due for five years. It has $15,000 in cash and receivables, and $60,000 in bills due within the next year. Which best describes the farm's financial position?
Answer: A. Net worth = $1,215,000 in assets − $100,000 in liabilities = $1,115,000, which is high. But working capital = $15,000 in current assets − $60,000 in current liabilities = −$45,000. The farm has high net worth but negative working capital: its wealth is tied up in land and equipment, which aren't liquid, so it may struggle to pay this year's bills. Comparing total assets with total debts measures net worth, not working capital or liquidity.
16. The Okafor household has $9,000 in checking and savings, $41,000 in a retirement account, a car worth $14,000, and a home worth $260,000. They owe $190,000 on their mortgage, $8,000 on a car loan, $3,000 on a credit card, and $22,000 in student loans. What is the household's net worth?
Answer: C. Net worth = assets − liabilities. Assets: $9,000 + $41,000 + $14,000 + $260,000 = $324,000. Liabilities: $190,000 + $8,000 + $3,000 + $22,000 = $223,000. Net worth = $324,000 − $223,000 = $101,000. $123,000 leaves out the student loans, $60,000 leaves out the retirement account (it's still an asset even though they can't spend it yet), and $70,000 is only their home equity ($260,000 − $190,000).
17. Caleb, 23, just finished college. He has $3,000 in savings and a car worth $7,000, and he owes $26,000 in student loans and $1,000 on a credit card. Which statement about his net worth is most accurate?
Answer: B. Net worth = assets − liabilities = ($3,000 + $7,000) − ($26,000 + $1,000) = −$17,000. Negative net worth is common for recent graduates with student loans, and tracking it over time shows progress as the debt is paid down. A negative number doesn't by itself mean borrowing for school was a mistake. $10,000 is his total assets; net worth subtracts what he owes. And a car he owns is an asset, so leaving it out (−$24,000) is also wrong.
18. Tidewater Surf Shop buys $5,000 of new surfboards from a supplier and agrees to pay in 30 days. How does this purchase affect the shop's balance sheet?
Answer: A. Every transaction affects at least two parts of the balance sheet so that assets = liabilities + owners' equity. Buying on credit adds an asset (inventory) and an equal liability (accounts payable). Cash won't fall until the bill is paid in 30 days. The surfboards aren't an expense yet, so owners' equity doesn't fall, and the owners didn't invest anything, so it doesn't rise either.
19. Rivera Plumbing owes Halvorsen Pipe Supply $3,000 for pipe it received last week. On Halvorsen's balance sheet, this $3,000 is:
Answer: D. Halvorsen has already delivered the pipe and is waiting to be paid, so the $3,000 is accounts receivable: money customers owe for goods already provided, a current asset. On Rivera's balance sheet, the same $3,000 is accounts payable. The pipe left Halvorsen's inventory when it was delivered, and no cash has arrived yet.
20. In May, Sunrise Bagel Co. made its monthly loan payment of $2,500: $2,200 of it repaid principal, and $300 was interest. How do these appear on May's cash flow statement?
Answer: B. Repaying loan principal is a financing activity (borrowing and repaying loans). Cash paid for interest is a cost of running the business, so it goes in operating activities, and it's also the only part of the payment that is an expense on the income statement. Putting the whole payment in one section misses that split, and investing activities are for buying and selling long-term assets, not paying lenders.
21. In April, Greenway Lawn Care Inc. collected $20,000 from customers, paid $8,000 in wages, paid $3,000 for fuel and supplies, bought a new mower for $7,000, sold an old trailer for $2,000, and paid its owners a $4,000 dividend. What was its net cash flow from operating activities?
Answer: D. Operating activities are cash from customers and cash paid to run the business: $20,000 − $8,000 − $3,000 = $9,000. Buying the mower and selling the trailer are investing activities (long-term assets); counting them gives $4,000. The dividend is a financing activity; counting it gives $5,000. $0 is the net change in cash from all three sections combined.
22. Toybox Junction, a toy store, reported net income of $30,000 for July through September, but its cash flow from operating activities for the same three months was −$20,000. Which is the most likely explanation?
Answer: D. Cash paid to suppliers is an operating outflow, but toys still on the shelf aren't an expense yet; they become cost of goods sold only when they sell. Building up inventory is a classic reason profit is positive while operating cash flow is negative. The van is an investing outflow and the loan repayment is a financing outflow, so neither one changes the operating section. Revenue exceeding expenses explains the positive net income, not the cash gap.
23. Alder Cabinetry's customers usually pay about 60 days after delivery, so the business often runs short of cash. Which change would most directly bring in cash sooner from its existing sales?
Answer: A. An early-payment discount gives customers a reason to pay sooner, which speeds up collections and turns accounts receivable into cash faster. Changing when sales are recorded changes the income statement, not when cash arrives. A loan does add cash, but through financing rather than from its sales, and it adds interest costs without fixing slow collections. A cheaper supplier lowers costs and helps profit, but customers would still pay 60 days after delivery.
24. Brightline Fitness, a 2-year-old chain, had net cash flow of −$400,000 last year after opening five new gyms. Millbrook Hardware, in business for 30 years, had net cash flow of −$60,000, and its operating cash flow has been negative for three straight years. Both companies reported a profit last year. Which situation is more concerning?
Answer: B. A growing business often has negative cash flow because it's investing in new locations, equipment, or inventory, which isn't necessarily a problem. But operating cash flow that stays negative in a mature business is a warning sign even when the business reports a profit, because its everyday operations aren't producing the cash it needs to pay its bills. The cause of a cash drop matters more than its size, and a profit on the income statement doesn't guarantee cash.
25. Splash Zone Pool Supply earns most of its cash from May through August, but it must buy its summer inventory in March and April, which leaves it short of cash every spring. Which is the best way to manage this gap?
Answer: D. A line of credit lets a business borrow as needed and repay when cash comes in, which fits a gap that opens every spring and closes every summer (it does add some interest). A 10-year loan charges interest for years on money needed only a few months at a time. Selling and rebuying a truck every year is costly and disruptive, and waiting to buy inventory would leave the shelves empty when customers arrive.
26. Northside Food Pantry, a nonprofit, receives about 60% of its yearly donations in November and December, but it pays its staff the same salaries every month. Which approach best manages its cash flow?
Answer: A. Nonprofits need cash flow planning too. Donations arrive unevenly but salaries are steady, so the pantry should build a cash reserve from year-end giving to carry it through the slower months. Spending it all at once leaves nothing for spring, laying off and rehiring staff every year is costly and disruptive, and a grant earmarked for one program can't properly be used to pay general salaries.
27. Larch Street Urgent Care's cash flow statement for the year shows operating activities +$120,000, investing activities −$300,000, and financing activities +$200,000. Which conclusion fits these numbers best?
Answer: B. Operating +$120,000 means day-to-day operations brought in cash. Investing −$300,000 means it spent cash buying long-term assets such as new clinics or equipment, a sign of investing in growth. Financing +$200,000 means it raised cash by borrowing or selling stock. Selling equipment would make investing positive, and paying back loans would make financing negative. Overall, cash rose by $20,000.
28. Which situation is the clearest example of embezzlement?
Answer: D.Embezzlement is the intentional theft of money or assets someone was trusted to manage, like a treasurer taking club funds. Using a company car for personal errands is misuse of funds: inappropriate use of something that isn't yours, without taking it. Choosing a supplier in exchange for a gift is bribery, and inflating sales to deceive a lender is fraud.
29. Which action is tax evasion rather than legal tax planning?
Answer: C.Tax evasion is an illegal attempt to avoid or reduce taxes, such as hiding income by leaving cash payments off a tax return. Saving in a tax-advantaged retirement plan, deducting real business costs, and keeping records to claim deductions you qualify for are all legal tax planning: following the rules as written to owe less.
30. Calloway Foods' CEO will receive a $2 million bonus only if the company reports at least $50 million in profit this year. With one month left, profit is on track for $48 million. What kind of incentive for unethical reporting does this create?
Answer: A. Tying a big reward to reported profit creates pressure to hit the target. With profit just short, the CEO has a personal reason to make results look better than they are, such as by recording sales early or delaying expenses. Authority without oversight describes the opportunity that weak controls create, rationalization is the excuse someone tells themselves, and a tax justification claims a personal cost is deductible.
31. Shares of Redfield Outdoor Gear trade on a national stock exchange. Which requirement does Redfield face because its stock is publicly traded?
Answer: D. The SEC requires public companies to file their income statement, balance sheet, and cash flow statement quarterly and make them available to investors, and to have annual audits done by independent accounting firms. An audit by the company's own staff isn't independent. All investors get access, not just the largest, and public companies must report negative results as well as positive ones so investors aren't misled. (Congress tightened these rules with the Sarbanes-Oxley Act of 2002, after the Enron scandal.)
32. At Pine Hill Animal Shelter, one office manager orders supplies, approves the bills, and signs the checks. Over two years, she paid $11,000 to a supply company she secretly owned, for supplies that were never delivered. Which control would most directly have prevented this?
Answer: A. One person controlling a whole transaction (ordering, approving, and paying) is authority without oversight. Separation of duties splits those steps among different people, so no one can both approve and pay a fake bill. A raise doesn't remove the opportunity, online payments change the method but not who controls it, and records kept by the same person can be faked by that person.
33. A client asks Jalen, a CPA, to list $15,000 of the client's family vacation as a business expense. How does his profession's code of ethics apply?
Answer: B. Professional organizations hold their members to codes of ethics that require honesty and integrity, so a CPA must refuse to report a personal vacation as a business expense, even if the client takes their business elsewhere. The code applies to all members and all of their work, not just audits of public companies. The client signing the return doesn't remove Jalen's own duty to be honest, and paying a fee doesn't buy permission to break the code.
34. Amara is asking a lender for $40,000 to open a pottery studio. Which sentence in her pitch best explains her use of funds?
Answer: C.Use of funds tells funders exactly what their money will buy, with amounts that add up to the request ($24,000 + $10,000 + $6,000 = $40,000). “Grow fast” is vague, and what other studios borrow doesn't show what this studio needs. A repayment plan belongs in a loan pitch too, but it answers a different question: how the lender gets paid back.
35. Ravi is pitching a bank for a $30,000 loan to start a mobile phone-repair van. Which addition to his pitch would do the most to reduce the bank's risk?
Answer: A. A lender's main risk is default. Evidence of real demand (signed contracts) and collateral the bank can claim if he doesn't repay both lower that risk. Raising a projection without new evidence makes the pitch less believable, not less risky; honest numbers beat optimistic ones. Borrowing more raises the amount at risk, and a strong hook holds attention but doesn't make repayment more likely.
Questions 36–40 refer to the following.Golden Hour Popcorn makes small-batch gourmet popcorn and sells it online and at sports arenas. In 2026 it launched three new flavors and took out a bigger bank loan to buy a second popping kettle. Its simplified income statements for the last two years are below.
2025
2026
Revenue
$400,000
$500,000
Cost of goods sold
$150,000
$240,000
Operating expenses
$170,000
$190,000
Interest expense
$5,000
$10,000
Taxes
$15,000
$12,000
36. What was Golden Hour's operating profit in 2026?
Answer: C. Operating profit = revenue − cost of goods sold − operating expenses = $500,000 − $240,000 − $190,000 = $70,000. $260,000 is gross profit, before operating expenses. $60,000 also subtracts the $10,000 of interest, which comes after operating profit (that's pre-tax income), and $48,000 subtracts interest and taxes too, which makes it net profit.
37. What was Golden Hour's gross profit margin in 2026?
Answer: D. Gross profit = $500,000 − $240,000 = $260,000, and gross profit margin = $260,000 ÷ $500,000 = 52%. 48% is cost of goods sold as a share of revenue ($240,000 ÷ $500,000), 14% is the operating profit margin ($70,000 ÷ $500,000), and 9.6% is the net profit margin ($48,000 ÷ $500,000), which also subtracts operating expenses, interest, and taxes.
38. By what percent did Golden Hour's net profit decrease from 2025 to 2026?
Answer: C. Net profit 2025 = $400,000 − $150,000 − $170,000 − $5,000 − $15,000 = $60,000. Net profit 2026 = $500,000 − $240,000 − $190,000 − $10,000 − $12,000 = $48,000. Percent change = ($48,000 − $60,000) ÷ $60,000 = −0.20, a 20% decrease. 25% divides the $12,000 drop by the 2026 value instead of the 2025 value. 12.5% is the drop in operating profit ($80,000 to $70,000). 5.4% is the change in net profit margin (from 15% to 9.6%), which is a change in percentage points, not the percent change in profit.
39. Revenue rose 25% from 2025 to 2026. Which best explains why Golden Hour's gross profit margin still fell?
Answer: A. Gross profit margin depends only on revenue and cost of goods sold. COGS rose ($240,000 − $150,000) ÷ $150,000 = 60%, far faster than revenue's 25%, so each sales dollar kept less gross profit. Operating expenses and interest did rise, but they're subtracted after gross profit, so they can't change the gross margin. Revenue did not grow faster than COGS; that would have raised the gross margin.
40. Golden Hour's owner says, “Revenue and gross profit both went up, so 2026 was a more profitable year.” Which response is best supported by the statements?
Answer: C. Margins show how much of each sales dollar a business keeps. Net profit margin fell from $60,000 ÷ $400,000 = 15% to $48,000 ÷ $500,000 = 9.6%, so 2026 was less profitable per dollar of sales, and net profit itself fell. Revenue isn't profit, and gross profit isn't the bottom line; net profit is. Golden Hour still earned $48,000 in 2026, so it did not have a net loss.
Questions 41–45 refer to the following.Hartwell Bike Works sells and repairs bicycles in a rented storefront. Its assets and liabilities on December 31, 2026, are listed below. (The owners' equity section is not shown.)
Assets
Amount
Liabilities
Amount
Cash
$18,000
Accounts payable
$9,000
Accounts receivable
$4,000
Business credit card balance
$2,000
Inventory (bikes and parts)
$16,000
Bank loan, due within 12 months
$6,000
Repair equipment and tools
$30,000
Bank loan, due after 12 months
$24,000
Delivery van
$18,000
41. What is Hartwell's working capital?
Answer: C. Current assets = cash $18,000 + accounts receivable $4,000 + inventory $16,000 = $38,000. Current liabilities = accounts payable $9,000 + credit card balance $2,000 + the $6,000 of the loan due within 12 months = $17,000. Working capital = $38,000 − $17,000 = $21,000. $27,000 leaves out the part of the loan due this year, which is a current liability. $17,000 leaves out accounts receivable, which counts even though the cash hasn't arrived yet, and $5,000 leaves out inventory, which is also a current asset.
42. What is Hartwell's total owners' equity?
Answer: A. Total assets = $18,000 + $4,000 + $16,000 + $30,000 + $18,000 = $86,000. Total liabilities = $9,000 + $2,000 + $6,000 + $24,000 = $41,000. Owners' equity = assets − liabilities = $45,000. $69,000 subtracts only the current liabilities, $56,000 counts only the bank loan as a liability, and $127,000 adds liabilities to assets instead of subtracting them.
43. Hartwell's owner thinks the delivery van should count as a current asset because the shop uses it every day. Is she right?
Answer: B. Vehicles, equipment, and buildings are fixed assets, which are long-term because they're useful for more than a year and aren't meant to be turned into cash soon. Nearly everything a business owns gets used in its daily operations; what makes an asset current is that it's highly liquid or will be used up or converted to cash within a year (cash, receivables, inventory). Intangible assets are nonphysical, like patents and trademarks.
44. On January 2, Hartwell pays $10,000 in cash for a new repair machine. Right after this purchase, which statement is true?
Answer: A. Cash (a current asset) falls $10,000 and equipment (a long-term asset) rises $10,000, so total assets don't change and the equation still balances. But working capital = current assets − current liabilities, and current assets just fell by $10,000, so working capital falls by $10,000. Buying equipment isn't an expense, so owners' equity doesn't change.
45. Hartwell's owner asks a bank for a new 5-year, $60,000 loan to open a second shop. Based on the balance sheet, which is the bank's most reasonable concern?
Answer: D. Hartwell's liabilities are $41,000 and its owners' equity is $45,000. Adding a $60,000 loan would raise liabilities to $101,000, more than twice the owners' stake. Lenders look at debt levels, not just whether a business is stable today, because heavy debt means large required payments even in slow months. The other choices misread the balance sheet: working capital is a positive $21,000, the van and equipment ($48,000) could serve as collateral, and liabilities ($41,000) are well below assets ($86,000).
Questions 46–50 refer to the following.Saffron Table Catering began April with $12,000 in cash, and clients owed it $4,000 (accounts receivable) for March events. Its April transactions are listed below. Ignore taxes and depreciation.
#
April transaction
Amount
1
Borrowed from a bank, to be repaid over 3 years
$7,000
2
Bought a commercial oven, paying cash
$6,000
3
Catered weddings and parties, paid in cash at each event
$6,000
4
Received a client’s payment for a March event
$2,000
5
Catered office lunches, billed to companies that will pay in May
$14,000
6
Paid for food and supplies used in April events
$3,500
7
Paid kitchen staff wages for April
$6,500
8
Paid April rent for its kitchen
$2,000
46. What was Saffron Table's net income for April?
Answer: B. Net income counts all revenue earned in April, including the lunches billed on credit, minus April's expenses. Revenue = $6,000 + $14,000 = $20,000. Expenses = $3,500 food and supplies + $6,500 wages + $2,000 rent = $12,000. Net income = $8,000. The oven is a long-term asset that will be used for years, not an April expense; subtracting it gives $2,000. The $2,000 collected was earned (and counted as revenue) in March, so adding it gives $10,000. A loan must be repaid, so it isn't revenue; counting it gives $15,000.
47. What was Saffron Table's cash balance at the end of April?
Answer: B. Cash inflows: $7,000 loan + $6,000 cash sales + $2,000 collected = $15,000. Cash outflows: $6,000 oven + $3,500 + $6,500 + $2,000 = $18,000. Net change in cash = −$3,000, so ending cash = $12,000 − $3,000 = $9,000. Counting the $14,000 of billed lunches as cash gives $23,000. Leaving out the oven (a cash outflow even though it isn't an expense) gives $15,000, and leaving out the loan (a cash inflow even though it isn't revenue) gives $2,000.
48. What were Saffron Table's accounts receivable at the end of April?
Answer: C. Ending accounts receivable = beginning balance + new sales on credit − collections = $4,000 + $14,000 − $2,000 = $16,000. $18,000 forgets to subtract the $2,000 collected, $14,000 counts only April's billed lunches, and $12,000 leaves out the $4,000 clients already owed at the start of April.
49. Which April transaction belongs in the financing activities section of the cash flow statement?
Answer: C.Financing activities are borrowing and repaying loans, issuing stock, owner investments, and dividends, so the bank loan is a financing inflow. The oven is a long-term asset, so buying it is an investing outflow. Collecting from a client is cash from customers, an operating inflow. Billing companies brings in no cash yet, so it doesn't appear on April's cash flow statement at all; it raises revenue and accounts receivable instead.
50. In May, Saffron Table asks its bank for a second loan. Based on April's results, which conclusion would the bank most reasonably draw?
Answer: D. Saffron Table earned an $8,000 profit, but its operating activities used $4,000 of cash ($6,000 of cash sales plus the $2,000 collection, minus $12,000 paid for food, wages, and rent), mainly because $14,000 of April's sales haven't been paid yet. Even after borrowing $7,000, its cash fell by $3,000. A lender would see that repayment depends on collecting those receivables. Profit isn't cash, buying an oven is an investing activity rather than an operating loss, and one loan to buy an oven isn't evidence that the business can't pay its bills.
