University of Eastern California

Department of Finance and Accounting

Fundamentals of Finance and Accounting, FIN 101

Test Prep - Summer 2020, Prof. Alen McMurphy

1- What is the difference between a balance sheet, an income statement, and a statement
of cash flows?

Answer
Each of these statements reports different parts of the financial position of a company. A balance sheet
reports the assets and liabilities of an organization as of a given date; an income statement reports the
revenues and expenses of an organization as of a certain period of time, and a statement of cash flows
measures the change in an organization’s cash position from one period to another.

Explanation
The balance sheet of a company is a depiction of the assets and liabilities of an organization as of a
certain moment in time. The balance sheet displays the assets of a company, typically broken down into
current assets (cash, accounts receivable, inventory) fixed assets (property, plant, and equipment) and
long term/other assets (notes receivable, amounts to be collected in more than 12 months). It also
shows liabilities in the same way, with both current (accounts payable, accrued balances, and short term
notes) as well as long term liabilities (notes and loans payable, other amounts due in more than 12
months). The final portion of the balance sheet included the owner or shareholder’s equity. This is the
amount the owners of the company have vested in the company.

The income statement measures the total amount of revenues (sales) and the total amount of expenses
for an organization over a given period of time. The difference between total revenue and total expense
is considered the net income of the organization.

The statement of cash flows measures how a company used its cash from one period to the next. The
statement of cash flows is broken down into three parts, cash flows from operating activities (includes
net income), cash flow from financing activities (includes loan and note proceeds or payments), and cash
flows from investing (includes the purchase or sale of long term assets).

2- What is a call option on a stock? What are the primary factors that impact the value
of a call option? Describe how a change in each factor influences the value of a call
option.