Mastering TOEIC Reading Part 1 & 2: Interpreting Balance Sheets in Financial Reports

TOEIC Reading Practice Test: Financial Reporting and Balance Sheet Analysis

Part 1: Incomplete Sentences

1. The company’s balance sheet provides a snapshot of its financial __ at a specific point in time.
   A. position
   B. statement
   C. report
   D. analysis

2. Assets are resources owned by a company that have __ value or can generate future economic benefits.
   A. economic
   B. financial
   C. monetary
   D. fiscal

3. Liabilities represent the company’s financial __ to other parties.
   A. assets
   B. obligations
   C. equity
   D. capital

4. The difference between total assets and total liabilities is known as shareholders’ __.
   A. profit
   B. revenue
   C. equity
   D. income

5. Current assets are expected to be converted into cash or used up within __ year.
   A. a
   B. one
   C. this
   D. the

6. Long-term assets, such as property and equipment, are expected to provide value for more than __ operating cycle.
   A. single
   B. one
   C. a
   D. the

7. Accounts receivable represents money owed to the company by its __.
   A. suppliers
   B. employees
   C. customers
   D. investors

8. Inventory includes goods that are ready for __ or are in the process of being produced.
   A. sale
   B. selling
   C. sold
   D. sales

9. The acid-test ratio is a measure of a company’s ability to pay its short-term __ using its most liquid assets.
   A. debts
   B. expenses
   C. liabilities
   D. obligations

10. A company’s working capital is calculated by subtracting current liabilities from __ assets.
    A. fixed
    B. current
    C. total
    D. liquid

11. The balance sheet must always __, with total assets equaling the sum of liabilities and shareholders’ equity.
    A. balance
    B. equal
    C. match
    D. align

12. Retained earnings represent the cumulative __ of a company that have not been distributed to shareholders.
    A. profits
    B. revenues
    C. incomes
    D. gains

13. Goodwill is an __ asset that represents the excess of the purchase price over the fair value of acquired net assets.
    A. tangible
    B. intangible
    C. current
    D. fixed

14. The debt-to-equity ratio is a measure of a company’s financial __, indicating how much debt is used to finance operations.
    A. leverage
    B. liquidity
    C. profitability
    D. efficiency

15. Depreciation is the systematic allocation of the cost of a tangible asset over its useful __.
    A. time
    B. period
    C. life
    D. span

16. A company’s market capitalization is calculated by multiplying its stock price by the number of __ shares.
    A. outstanding
    B. issued
    C. traded
    D. listed

17. The quick ratio excludes __ from current assets when assessing a company’s short-term liquidity.
    A. cash
    B. inventory
    C. receivables
    D. investments

18. A __ balance sheet presents the company’s financial position for multiple periods side by side for comparison.
    A. comparative
    B. consolidated
    C. comprehensive
    D. cumulative

19. Notes to the financial statements provide additional __ about the items presented in the main financial statements.
    A. details
    B. information
    C. explanations
    D. disclosures

20. The going concern assumption implies that a company will continue to operate for the __ future.
    A. near
    B. foreseeable
    C. immediate
    D. long-term

21. A strong balance sheet typically shows a healthy __ between assets, liabilities, and equity.
    A. ratio
    B. proportion
    C. balance
    D. relationship

22. Prepaid expenses are considered assets because they represent future __ benefits.
    A. economic
    B. financial
    C. monetary
    D. fiscal

23. The book value of a company is the total value of its assets minus its __.
    A. liabilities
    B. equity
    C. revenue
    D. expenses

24. A company’s __ structure refers to the mix of debt and equity used to finance its operations.
    A. financial
    B. capital
    C. asset
    D. ownership

25. Off-balance sheet items are financial __ or transactions that are not recorded on the balance sheet.
    A. obligations
    B. assets
    C. liabilities
    D. activities

26. The conservatism principle in accounting suggests that potential losses should be __ immediately, while potential gains should not be recognized until realized.
    A. recorded
    B. ignored
    C. deferred
    D. estimated

27. A __ balance sheet shows the financial position of a group of related companies as if they were a single economic entity.
    A. combined
    B. consolidated
    C. aggregated
    D. integrated

28. The materiality principle states that all important financial information should be __ in the financial statements.
    A. disclosed
    B. hidden
    C. omitted
    D. excluded

29. A company’s __ capital represents the funds invested by shareholders in exchange for ownership stakes.
    A. working
    B. debt
    C. paid-in
    D. retained

30. The current ratio is calculated by dividing current assets by current __.
    A. equity
    B. liabilities
    C. revenue
    D. expenses

Balance sheet analysis in financial reporting

Part 2: Text Completion

Text 1:

Financial analysts rely heavily on balance sheets to assess a company’s financial health. A balance sheet provides a snapshot of a company’s (31)__ at a specific point in time. It consists of three main components: assets, (32)__, and shareholders’ equity. Assets represent resources owned by the company that have economic value, while liabilities are the company’s financial obligations. The difference between assets and liabilities is the (33)__, which represents the owners’ stake in the business. A key principle in accounting is that the balance sheet must always (34)__, with total assets equaling the sum of liabilities and shareholders’ equity.

31. A. position
    B. statement
    C. report
    D. analysis

32. A. profits
    B. revenues
    C. liabilities
    D. expenses

33. A. net income
    B. shareholders’ equity
    C. working capital
    D. retained earnings

34. A. fluctuate
    B. increase
    C. decrease
    D. balance

Text 2:

When interpreting a balance sheet, analysts often focus on key ratios and metrics. The (35)__ ratio, calculated by dividing current assets by current liabilities, indicates a company’s ability to meet short-term obligations. Another important measure is the (36)__ ratio, which excludes inventory from current assets when assessing liquidity. The debt-to-equity ratio reveals the company’s capital structure and financial leverage. Additionally, analysts examine the composition of assets, looking at the mix of (37)__ assets (like cash and inventory) versus long-term assets (such as property and equipment). The quality of assets, particularly accounts receivable and inventory, is also scrutinized to assess their (38)__ value.

35. A. quick
    B. current
    C. debt
    D. asset

36. A. working capital
    B. debt-to-equity
    C. acid-test
    D. inventory turnover

37. A. fixed
    B. intangible
    C. current
    D. depreciated

38. A. book
    B. market
    C. historical
    D. realizable

Text 3:

Balance sheets also provide insights into a company’s growth and financial management. An increase in (39)__ over time may indicate business expansion or improved profitability. Changes in the composition of liabilities, such as a shift from short-term to long-term debt, can reflect changes in the company’s financing strategy. The balance sheet is often analyzed in conjunction with other financial statements, such as the (40)__ statement and cash flow statement, to gain a comprehensive understanding of the company’s financial position and performance. Investors and creditors use this information to make informed decisions about investing in or lending to the company.

39. A. revenue
    B. expenses
    C. assets
    D. liabilities

40. A. income
    B. cash flow
    C. owner’s equity
    D. financial position

Text 4:

Advanced balance sheet analysis involves examining off-balance sheet items and footnotes. Off-balance sheet items are financial (41)__ or transactions that are not recorded directly on the balance sheet but can significantly impact a company’s financial risk and performance. These may include operating leases, contingent liabilities, or special purpose entities. The notes to the financial statements provide crucial (42)__ about accounting policies, assumptions, and additional details about balance sheet items. Analysts also consider non-financial factors that may affect the interpretation of the balance sheet, such as industry trends, competitive positioning, and (43)__ conditions. A thorough analysis helps in understanding the company’s true financial position, beyond just the numbers presented in the (44)__.

41. A. assets
    B. liabilities
    C. equity
    D. obligations

42. A. estimates
    B. projections
    C. information
    D. calculations

43. A. market
    B. economic
    C. political
    D. social

44. A. income statement
    B. cash flow statement
    C. balance sheet
    D. annual report

Answer Key

Part 1: Incomplete Sentences

1. A
2. C
3. B
4. C
5. B
6. B
7. C
8. A
9. C
10. B
11. A
12. A
13. B
14. A
15. C
16. A
17. B
18. A
19. B
20. B
21. C
22. A
23. A
24. B
25. A
26. A
27. B
28. A
29. C
30. B

Part 2: Text Completion

31. A
32. C
33. B
34. D
35. B
36. C
37. C
38. D
39. C
40. A
41. D
42. C
43. B
44. C

This TOEIC Reading practice test focuses on interpreting balance sheets in financial reports, covering key concepts and terminology related to financial statement analysis. The test is designed to assess your understanding of financial vocabulary, accounting principles, and the ability to comprehend and analyze financial information presented in various contexts.