-
web.groovymark@gmail.com
- December 23, 2024
Question 01
What is the primary purpose of financial statement analysis?
a) To determine market share
b) To forecast future stock prices
c) To evaluate the financial health and performance of a company
d) To calculate tax liabilities
Answer: c) To evaluate the financial health and performance of a company
Explanation: Financial statement analysis helps investors, creditors, and other stakeholders assess the financial stability and profitability of a company to make informed decisions.
Question 02
Which financial ratio is commonly used to assess a company’s profitability?
a) Debt-to-equity ratio
b) Current ratio
c) Return on equity
d) Interest coverage ratio
Answer: c) Return on equity
Explanation: Return on equity (ROE) measures the profitability of a company by showing how much profit it generates with the money shareholders have invested.
Question 03
A company reports strong net income but weak operating cash flow. What might this indicate?
a) The company is highly profitable
b) The company is generating cash faster than expected
c) The company may be using aggressive accounting practices
d) The company is focusing on expanding its asset base
Answer: c) The company may be using aggressive accounting practices
Explanation: A discrepancy between strong net income and weak cash flow could suggest that the company is recognizing revenue before actually receiving cash, which might indicate aggressive accounting.
Question 04
What does a high price-to-earnings (P/E) ratio typically suggest about a company?
a) The company is undervalued
b) The company is experiencing low growth
c) Investors expect high growth in the future
d) The company has low profit margins
Answer: c) Investors expect high growth in the future
Explanation: A high P/E ratio suggests that investors expect future growth and are willing to pay more for each dollar of earnings, indicating optimism about the company's potential.
Question 05
What financial metric is most appropriate for comparing companies of different sizes?
a) Gross profit
b) Operating income
c) Return on assets (ROA)
d) Total revenue
Answer: c) Return on assets (ROA)
Explanation: ROA measures how efficiently a company uses its assets to generate profit, making it a useful metric for comparing companies of different sizes.
Question 06
Which of the following would increase a company’s quick ratio?
a) Selling inventory
b) Borrowing long-term debt
c) Issuing new shares of stock
d) Paying off short-term liabilities
Answer: d) Paying off short-term liabilities
Explanation: The quick ratio measures a company's ability to meet short-term obligations without relying on inventory. Paying off short-term liabilities improves the quick ratio by reducing liabilities.
Question 07
A company increases its accounts receivable. How does this affect its cash flow from operations?
a) Increases cash flow
b) Decreases cash flow
c) Has no impact on cash flow
d) Increases net income
Answer: b) Decreases cash flow
Explanation: An increase in accounts receivable means that the company has more outstanding payments from customers, reducing cash flow from operations.
Question 08
What does the debt-to-equity ratio measure?
a) A company’s profitability
b) A company’s ability to pay its long-term obligations
c) A company’s leverage or financing structure
d) A company’s efficiency in managing assets
Answer: c) A company’s leverage or financing structure
Explanation: The debt-to-equity ratio compares a company’s total debt to its shareholders' equity, indicating how much debt is used to finance its assets relative to equity.
Question 09
Which financial statement shows a company’s sources and uses of cash over a period?
a) Balance sheet
b) Income statement
c) Statement of retained earnings
d) Statement of cash flows
Answer: d) Statement of cash flows
Explanation: The statement of cash flows details how much cash was generated or used by operating, investing, and financing activities during a specific period.
Question 10
What is the formula to calculate working capital?
a) Total assets minus total liabilities
b) Current assets minus current liabilities
c) Total liabilities minus current liabilities
d) Current assets divided by total assets
Answer: b) Current assets minus current liabilities
Explanation: Working capital measures a company’s liquidity and ability to meet short-term obligations by comparing current assets to current liabilities.
Question 11
Which expense does not affect a company’s cash flow?
a) Salaries expense
b) Depreciation expense
c) Interest expense
d) Rent expense
Answer: b) Depreciation expense
Explanation: Depreciation is a non-cash expense, meaning it reduces net income but does not directly affect the company’s cash flow.
Question 12
A company’s stock price increases significantly due to rumors of a potential acquisition. What is this an example of?
a) Market inefficiency
b) Speculative investing
c) Insider trading
d) Efficient market hypothesis
Answer: b) Speculative investing
Explanation: The stock price rise is due to speculation about the company’s future, driven by rumors, rather than any fundamental changes in its financial performance.
Question 13
Which of the following is classified as an operating expense?
a) Interest payments on debt
b) Purchase of equipment
c) Research and development costs
d) Payment of dividends
Answer: c) Research and development costs
Explanation: Research and development costs are considered operating expenses as they are part of the normal activities involved in running the business.
Question 14
How can a company improve its current ratio?
a) By selling long-term assets
b) By increasing current liabilities
c) By reducing accounts payable
d) By borrowing more short-term debt
Answer: c) By reducing accounts payable
Explanation: Reducing current liabilities, such as accounts payable, will improve the current ratio by increasing the gap between current assets and current liabilities.
Question 15
What does the term “market capitalization” refer to?
a) The total value of a company’s assets
b) The amount of equity issued by a company
c) The total market value of a company’s outstanding shares
d) The amount of debt a company owes
Answer: c) The total market value of a company’s outstanding shares
Explanation: Market capitalization is calculated by multiplying a company’s current share price by its total number of outstanding shares.
Question 16
Which financial metric helps determine the risk associated with a company’s debt?
a) Gross margin
b) Debt-to-equity ratio
c) Return on equity
d) Operating income
Answer: b) Debt-to-equity ratio
Explanation: The debt-to-equity ratio provides insights into a company’s leverage and the risk that comes with using debt to finance its operations.
Question 17
What does a decrease in a company’s inventory indicate on its financial statements?
a) Increased production efficiency
b) Improved profitability
c) The sale of goods or a reduction in purchases
d) The company is expanding its product offerings
Answer: c) The sale of goods or a reduction in purchases
Explanation: A decrease in inventory could indicate that the company has sold goods or reduced its purchases, which would be reflected in its financial statements.
Question 18
Which of the following is considered a non-operating item on the income statement?
a) Revenue from sales
b) Rent expense
c) Interest income
d) Salaries expense
Answer: c) Interest income
Explanation: Interest income is not directly related to a company’s core operations and is therefore classified as a non-operating item on the income statement.
Question 19
What is the primary purpose of the statement of retained earnings?
a) To show how much profit has been paid out as dividends
b) To summarize a company’s earnings and losses
c) To show changes in a company’s retained earnings over time
d) To show a company’s cash position
Answer: c) To show changes in a company’s retained earnings over time
Explanation: The statement of retained earnings shows how much of the company’s earnings have been retained and reinvested, as opposed to being paid out as dividends.
Question 20
A firm issues $10 million in new stock and uses the proceeds to pay down long-term debt. What is the effect of this transaction?
a) Increases liabilities
b) Increases equity and reduces liabilities
c) Increases cash flow from operating activities
d) Reduces shareholders’ equity
Answer: b) Increases equity and reduces liabilities
Explanation: Issuing new stock increases equity, and using the proceeds to pay down debt reduces liabilities.
