-
web.groovymark@gmail.com
- December 23, 2024
Question 01
What does the current ratio measure in a company’s financial performance?
a) A company’s profitability
b) A company’s ability to meet short-term obligations
c) The efficiency of a company’s operations
d) A company’s return on equity
Answer: b) A company’s ability to meet short-term obligations
Explanation: The current ratio compares a company’s current assets to its current liabilities, providing insight into its liquidity and ability to cover short-term debts.
Question 02
How does an increase in accounts receivable impact cash flow from operations?
a) Increases cash flow
b) Decreases cash flow
c) Has no effect on cash flow
d) Improves working capital
Answer: b) Decreases cash flow
Explanation: An increase in accounts receivable means more credit sales and less immediate cash inflow, thus reducing cash flow from operations.
Question 03
Which of the following is considered a long-term liability?
a) Accounts payable
b) Short-term loan
c) Bonds payable
d) Inventory
Answer: c) Bonds payable
Explanation: Long-term liabilities, like bonds payable, are obligations that a company expects to pay after more than one year.
Question 04
What does the debt-to-equity ratio indicate?
a) The profitability of a company
b) A company’s financial leverage
c) The efficiency of asset utilization
d) A company’s liquidity
Answer: b) A company’s financial leverage
Explanation: The debt-to-equity ratio compares a company’s total debt to its equity, indicating how much debt is used to finance the company’s assets
Question 05
Which financial statement provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time?
a) Income statement
b) Statement of cash flows
c) Balance sheet
d) Statement of retained earnings
Answer: c) Balance sheet
Explanation: The balance sheet presents a company’s financial position at a specific moment, detailing its assets, liabilities, and shareholders’ equity.
Question 06
What happens to a company’s net income when depreciation expense increases?
a) Net income increases
b) Net income decreases
c) Net income remains the same
d) Net income becomes negative
Answer: b) Net income decreases
Explanation: Depreciation is a non-cash expense that reduces a company’s net income, though it doesn’t affect cash flow.
Question 07
What does the quick ratio exclude when calculating a company’s liquidity?
a) Accounts receivable
b) Inventory
c) Cash
d) Short-term investments
Answer: b) Inventory
Explanation: The quick ratio, also known as the acid-test ratio, excludes inventory from current assets to provide a stricter measure of liquidity.
Question 08
What is the formula for calculating gross profit margin?
a) Gross profit / Total assets
b) Gross profit / Net income
c) Gross profit / Net sales
d) Gross profit / Operating income
Answer: c) Gross profit / Net sales
Explanation: Gross profit margin is calculated by dividing gross profit by net sales, showing the percentage of revenue that exceeds COGS.
Question 09
A company reports a 10% increase in sales but a 5% decrease in net income. What could explain this discrepancy?
a) An increase in the tax rate
b) A decrease in operating expenses
c) A reduction in interest expenses
d) A rise in the cost of goods sold
Answer: d) A rise in the cost of goods sold
Explanation: Higher COGS can reduce net income despite an increase in sales, as it directly reduces gross profit.
Question 10
What is the main purpose of the statement of cash flows?
a) To show a company’s liquidity
b) To show a company’s profitability
c) To track the company’s stock performance
d) To provide a summary of the company’s long-term strategy
Answer: a) To show a company’s liquidity
Explanation: The statement of cash flows summarizes the cash inflows and outflows from operating, investing, and financing activities, providing insight into liquidity.
Question 11
Which of the following is considered an intangible asset?
a) Equipment
b) Inventory
c) Patents
d) Land
Answer: c) Patents
Explanation: Intangible assets, like patents, lack physical substance but provide long-term value to a company.
Question 12
What effect does amortization have on a company’s net income?
a) Increases net income
b) Decreases net income
c) Has no effect on net income
d) Increases equity
Answer: b) Decreases net income
Explanation: Amortization of intangible assets reduces net income, similar to how depreciation reduces the value of tangible assets.
Question 13
What does the accounts receivable turnover ratio measure?
a) A company’s liquidity
b) A company’s efficiency in collecting receivables
c) A company’s ability to pay its debts
d) A company’s profitability
Answer: b) A company’s efficiency in collecting receivables
Explanation: The accounts receivable turnover ratio measures how efficiently a company collects its credit sales over a given period.
Question 14
How does the issuance of common stock affect a company’s balance sheet?
a) Increases liabilities and decreases equity
b) Decreases assets and liabilities
c) Increases assets and equity
d) Increases liabilities and assets
Answer: c) Increases assets and equity
Explanation: Issuing common stock raises capital for the company, increasing both cash (assets) and shareholders’ equity.
Question 15
Which of the following would increase a company’s working capital?
a) Paying off a short-term loan
b) Selling a long-term asset
c) Increasing accounts receivable
d) Purchasing new inventory
Answer: c) Increasing accounts receivable
Explanation: Working capital is current assets minus current liabilities. An increase in accounts receivable increases current assets, thus raising working capital.
Question 16
What does the term “book value” of an asset refer to?
a) The fair market value of the asset
b) The historical cost of the asset minus depreciation
c) The value of the asset based on future cash flows
d) The replacement cost of the asset
Answer: b) The historical cost of the asset minus depreciation
Explanation: The book value of an asset is its original cost minus accumulated depreciation, representing its current value on the balance sheet.
Question 17
How does repurchasing shares affect a company’s return on equity (ROE)?
a) Increases ROE
b) Decreases ROE
c) Has no effect on ROE
d) Increases liabilities
Answer: a) Increases ROE
Explanation: Repurchasing shares reduces the amount of equity, which increases ROE as long as net income remains constant.
Question 18
What is the primary purpose of financial statement analysis?
a) To compare financial data with competitors
b) To evaluate a company’s overall financial health
c) To calculate a company’s taxes
d) To forecast a company’s future stock price
Answer: b) To evaluate a company’s overall financial health
Explanation: Financial statement analysis helps stakeholders assess a company’s financial position, profitability, and performance.
Question 19
How does increasing financial leverage affect a company’s risk?
a) Decreases the company’s risk
b) Increases the company’s risk
c) Has no effect on risk
d) Increases liquidity
Answer: b) Increases the company’s risk
Explanation: Increasing financial leverage means taking on more debt, which increases the company’s financial risk due to the obligation to repay interest and principal.
Question 20
Which of the following is an example of an operating activity in the statement of cash flows?
a) Purchasing new machinery
b) Issuing dividends
c) Selling goods to customers
d) Repurchasing shares
Answer: c) Selling goods to customers
Explanation: Operating activities include the primary revenue-generating activities of the business, such as selling goods or services.
