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web.groovymark@gmail.com
- December 23, 2024
Question 21
Which financial statement provides a snapshot of a company’s financial position at a specific point in time?
a) Income statement
b) Statement of cash flows
c) Statement of retained earnings
d) Balance sheet
Answer: d) Balance sheet
Explanation: The balance sheet provides a summary of a company’s assets, liabilities, and equity at a particular date.
Question 22
A company reports an increase in sales but a decrease in net income. What could this indicate?
a) The company is improving profitability
b) The company is facing higher operating expenses
c) The company has reduced its debt
d) The company has decreased its inventory
Answer: b) The company is facing higher operating expenses
Explanation: Higher operating expenses could offset the increase in sales, resulting in lower net income despite improved revenue.
Question 23
Which of the following describes horizontal analysis?
a) Comparing financial statement data over multiple time periods
b) Comparing a company’s performance to industry peers
c) Comparing a company’s financial ratios to benchmarks
d) Comparing balance sheet items at a single point in time
Answer: a) Comparing financial statement data over multiple time periods
Explanation: Horizontal analysis involves comparing financial data from multiple periods to identify trends and changes over time.
Question 24
What does the term “operating income” represent on the income statement?
a) Total revenue minus operating expenses
b) Total revenue minus net income
c) Net income minus non-operating income
d) Gross profit minus taxes
Answer: a) Total revenue minus operating expenses
Explanation: Operating income reflects the profit generated from a company’s normal business operations, excluding non-operating income and expenses.
Question 25
How does a decrease in the cost of goods sold (COGS) affect a company’s gross profit margin?
a) Increases the gross profit margin
b) Decreases the gross profit margin
c) Has no effect on the gross profit margin
d) Increases the operating margin but not gross profit margin
Answer: a) Increases the gross profit margin
Explanation: A decrease in COGS increases gross profit, as gross profit is calculated as total revenue minus COGS. This also improves the gross profit margin.
Question 26
What is the difference between gross profit and operating profit?
a) Gross profit includes all revenue, while operating profit only includes sales
b) Gross profit is before operating expenses, while operating profit is after
c) Operating profit includes interest and taxes, while gross profit does not
d) Operating profit includes depreciation, while gross profit does not
Answer: b) Gross profit is before operating expenses, while operating profit is after
Explanation: Gross profit is the profit a company makes after deducting COGS, while operating profit is the profit after all operating expenses have been deducted.
Question 27
Which type of analysis examines a company’s financial ratios over a single period to assess performance?
a) Vertical analysis
b) Horizontal analysis
c) Trend analysis
d) Ratio analysis
Answer: d) Ratio analysis
Explanation: Ratio analysis is used to evaluate various aspects of a company's financial performance by calculating and interpreting financial ratios for a specific period.
Question 28
A company increases its sales volume without changing its price. What effect does this have on net income?
a) Increases net income
b) Decreases net income
c) Has no effect on net income
d) Decreases gross profit
Answer: a) Increases net income
Explanation: Increasing sales volume typically results in higher revenue and net income, assuming costs do not increase disproportionately.
Question 29
Which financial ratio measures the profitability of a company in relation to its total assets?
a) Return on equity
b) Debt-to-equity ratio
c) Return on assets
d) Quick ratio
Answer: c) Return on assets
Explanation: Return on assets (ROA) measures how efficiently a company uses its assets to generate profit.
Question 30
Which financial metric shows how much profit a company makes from its typical operations?
a) Net income
b) Operating income
c) Gross profit
d) Earnings before interest and taxes (EBIT)
Answer: b) Operating income
Explanation: Operating income represents the profit a company generates from its core business operations, excluding interest and taxes.
Question 31
A company purchases $100,000 worth of equipment. How is this recorded in the statement of cash flows?
a) As an operating cash outflow
b) As an investing cash outflow
c) As a financing cash outflow
d) It is not recorded in the cash flow statement
Answer: b) As an investing cash outflow
Explanation: The purchase of equipment is considered an investment in long-term assets and is recorded as an investing activity on the statement of cash flows.
Question 32
What does the interest coverage ratio measure?
a) A company’s ability to generate profit relative to its revenue
b) A company’s ability to meet its interest payments on debt
c) A company’s ability to repay long-term debt
d) A company’s ability to generate cash flow from operations
Answer: b) A company’s ability to meet its interest payments on debt
Explanation: The interest coverage ratio measures how easily a company can pay interest on its outstanding debt with its earnings before interest and taxes.
Question 33
Which of the following would decrease a company’s return on equity (ROE)?
a) An increase in net income
b) An increase in equity without a corresponding increase in net income
c) A reduction in debt
d) An increase in retained earnings
Answer: b) An increase in equity without a corresponding increase in net income
Explanation: If equity increases without a corresponding increase in net income, the ROE will decrease as the company’s return on equity is diluted.
Question 34
What is the impact of issuing new shares on earnings per share (EPS)?
a) It dilutes earnings per share
b) It increases earnings per share
c) It decreases retained earnings
d) It increases the return on equity
Answer: a) It dilutes earnings per share
Explanation: Issuing new shares increases the total number of shares outstanding, which can dilute earnings per share if net income remains unchanged.
Question 35
Which ratio is commonly used to measure a company’s ability to pay its short-term obligations?
a) Return on equity
b) Debt-to-equity ratio
c) Current ratio
d) Price-to-earnings ratio
Answer: c) Current ratio
Explanation: The current ratio compares a company’s current assets to its current liabilities, helping assess its ability to cover short-term obligations.
Question 36
What does the term “financial leverage” refer to?
a) The amount of fixed assets a company owns
b) The use of debt to finance a company’s assets
c) The efficiency of a company’s operations
d) The ability of a company to generate positive cash flow
Answer: b) The use of debt to finance a company's assets
Explanation: Financial leverage refers to the use of debt to increase the potential return on investment for equity holders.
Question 37
What happens to a company’s equity when it pays dividends?
a) Equity increases
b) Equity decreases
c) Equity remains the same
d) Equity is transferred to retained earnings
Answer: b) Equity decreases
Explanation: When dividends are paid, they reduce the company's retained earnings, which in turn decreases total equity.
Question 38
What is the primary difference between operating and non-operating expenses?
a) Operating expenses are related to core business operations, while non-operating expenses are not
b) Non-operating expenses are fixed costs, while operating expenses are variable costs
c) Operating expenses are tax-deductible, while non-operating expenses are not
d) Operating expenses are always recurring, while non-operating expenses are one-time costs
Answer: a) Operating expenses are related to core business operations, while non-operating expenses are not
Explanation: Operating expenses are incurred during the normal course of business, while non-operating expenses are not directly tied to the company’s core operations.
Question 39
A company decides to increase its advertising budget to improve brand visibility. Where will this be reflected on the financial statements?
a) As an increase in revenue on the income statement
b) As an increase in assets on the balance sheet
c) As an operating expense on the income statement
d) As a cash outflow in the investing section of the cash flow statement
Answer: c) As an operating expense on the income statement
Explanation: Advertising expenses are classified as operating expenses and will appear on the income statement.
Question 40
Which of the following transactions would not be considered a cash flow from investing activities?
a) Purchase of land
b) Sale of a subsidiary
c) Purchase of inventory
d) Sale of equipment
Answer: c) Purchase of inventory
Explanation: The purchase of inventory is considered an operating activity, not an investing activity, as it is part of the normal business operations.
