Week 14 — Answer Key

Financial Reporting Basics (Return to Syllabus)

Instructor Version — Detailed Answers for the Income Statement, Balance Sheet, and Statement of Cash Flows

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Concept 1

Purpose of Financial Reporting — Answer Key

Financial statements communicate profitability, financial position, and cash flows. Students must show that reliable financial reporting depends on complete and accurate bookkeeping, reconciliations, and adjusting entries.

Concept 2

Income Statement — Instructor Answers

The income statement includes:

Revenue
COGS
Gross Profit
Operating Expenses
Operating Income
Other Income & Expenses
Net Income

Students should emphasize that the income statement covers a period of time and that net income flows into retained earnings on the balance sheet.

Red Flags Students Should Identify:

Negative revenue
Unusual or missing COGS
Expense accounts with credits
Sudden spikes or drops in expenses

Concept 3

Balance Sheet — Instructor Answers

Students must identify:

Assets: Cash, AR, Inventory, Prepaids, Fixed Assets
Liabilities: AP, Accrued Liabilities, Loans
Equity: Owner Capital, Retained Earnings

They must state that the balance sheet is a snapshot at a point in time and must satisfy the equation: Assets = Liabilities + Equity.

Common Red Flags:

Negative asset balances
Debit balances in liability accounts
Large suspense or uncategorized accounts

Concept 4

Statement of Cash Flows — Instructor Answers

The statement of cash flows includes:

Operating Activities — receipts from customers, payments to vendors, payroll
Investing Activities — purchase or sale of fixed assets
Financing Activities — loans, repayments, contributions, distributions

Students must explain how profit differs from cash and how reconciliations ensure accuracy.

Concept 5

How Bookkeeping Feeds Financial Statements

Correct answers describe how:

AP bills create expenses → income statement
AR invoices create revenue → income statement
Cash activity affects the balance sheet and cash flows
Adjusting entries refine financial results
Net income flows into retained earnings

Concept 6

Cash-Basis vs. Accrual-Basis Reporting — Instructor Key

Students must correctly state that cash basis recognizes revenue and expenses when cash changes hands, while accrual basis recognizes them when earned or incurred. They must also explain that accrual basis gives a more accurate picture of performance.

Concept 7

Sample Transaction Effects — Model Answers

A. Customer Invoice (2,000)

Accounts Receivable ↑
Revenue ↑
No cash impact yet

B. Vendor Bill (500)

Accounts Payable ↑
Expense ↑
No cash impact

C. Loan Payment (1,000: 800 principal, 200 interest)

Cash ↓ 1,000
Interest Expense ↑ 200
Loan Payable ↓ 800

D. Equipment Purchase (5,000)

Cash ↓
Fixed Assets ↑
No expense until depreciation

Concept 8

Error Identification — Instructor Guidance

Students should recognize issues such as:

Debit balances in AP or loan accounts
Negative expense accounts
Missing or abnormal revenue balances
Cash not tying to bank reconciliations
Suspense or “Ask My Accountant” balances

Discussion

Discussion Prompt — Model Answer

Bookkeepers affect financial statements through daily coding and month-end adjustments. Understanding reporting helps bookkeepers spot errors early, improve accuracy, and communicate effectively with accountants who finalize the statements.

Summary

Week 14 Summary — Instructor Version

Students should now understand the structure and purpose of all three financial statements, how bookkeeping activities feed them, and how to generate accurate preliminary reports in accounting software.