Chartered Financial Analyst (CFA) Practice Exam Level 2

Which of the following is a component of the Balance Sheet?

1. Sales

2. Common Stock

3. Depreciation

4. Operating Income

The correct answer is: Common Stock

The correct component of the Balance Sheet is common stock. The Balance Sheet is one of the core financial statements and provides a snapshot of a company's financial position at a specific point in time. It consists of three main sections: assets, liabilities, and shareholders’ equity. Common stock represents equity financing provided by shareholders in exchange for ownership in the company. It is recorded under the shareholders’ equity section of the Balance Sheet, indicating the capital contributed by the owners. Sales, depreciation, and operating income are not components of the Balance Sheet; instead, they are more relevant to the Income Statement. Sales reflect revenue from operations, depreciation is an expense associated with the reduction in value of tangible fixed assets over time, and operating income represents the profit derived from a company’s core business operations. These components are critical for evaluating a company's performance over a period, but they do not appear on the Balance Sheet itself.