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web.groovymark@gmail.com
- December 23, 2024
Question 21
How does a reduction in accounts payable impact a company’s working capital?
a) Increases working capital
b) Decreases working capital
c) Has no effect on working capital
d) Increases liabilities
Answer: a) Increases working capital
Explanation: A reduction in accounts payable decreases current liabilities, thus increasing working capital.
Question 22
What is a primary characteristic of preferred stock?
a) Preferred stockholders have voting rights
b) Preferred stock pays fixed dividends
c) Preferred stock is more volatile than common stock
d) Preferred stock has a maturity date
Answer: b) Preferred stock pays fixed dividends
Explanation: Preferred stock typically provides shareholders with a fixed dividend and has a higher claim on assets than common stock, but usually lacks voting rights.
Question 23
Which ratio would best indicate a company’s ability to generate profit from its assets?
a) Return on assets (ROA)
b) Current ratio
c) Debt-to-equity ratio
d) Quick ratio
Answer: a) Return on assets (ROA)
Explanation: ROA measures a company’s efficiency in using its assets to generate profit, providing insight into operational performance.
Question 24
What does the inventory turnover ratio measure?
a) How quickly a company converts inventory into sales
b) How efficiently a company collects receivables
c) How much cash a company holds relative to its liabilities
d) How much debt a company holds relative to its equity
Answer: a) How quickly a company converts inventory into sales
Explanation: The inventory turnover ratio shows how many times a company’s inventory is sold and replaced over a period, reflecting operational efficiency.
Question 25
How does an increase in dividend payouts affect a company’s retained earnings?
a) Increases retained earnings
b) Decreases retained earnings
c) Has no effect on retained earnings
d) Increases liabilities
Answer: b) Decreases retained earnings
Explanation: Dividends paid to shareholders are subtracted from retained earnings, reducing the company’s retained capital.
Question 26
Which financial statement details the revenues and expenses of a company?
a) Balance sheet
b) Statement of cash flows
c) Income statement
d) Statement of retained earnings
Answer: c) Income statement
Explanation: The income statement shows a company’s revenues, expenses, and profit over a specific period, providing a summary of financial performance.
Question 27
Which financial ratio measures a company’s profitability relative to its equity?
a) Return on equity (ROE)
b) Current ratio
c) Price-to-earnings (P/E) ratio
d) Debt-to-equity ratio
Answer: a) Return on equity (ROE)
Explanation: ROE measures how efficiently a company generates profits from its shareholders’ equity, providing insight into financial performance.
Question 28
What effect does increasing accounts receivable have on a company’s net working capital?
a) Decreases net working capital
b) Increases net working capital
c) Reduces liabilities
d) Has no effect on net working capital
Answer: b) Increases net working capital
Explanation: Increasing accounts receivable raises current assets, which in turn increases the company’s net working capital.
Question 29
Which of the following would be classified as a financing activity on the statement of cash flows?
a) Issuing common stock
b) Purchasing inventory
c) Paying for marketing expenses
d) Collecting cash from customers
Answer: a) Issuing common stock
Explanation: Financing activities include transactions that affect a company’s equity or debt, such as issuing stock or repaying loans.
Question 30
What is the purpose of calculating a company’s free cash flow (FCF)?
a) To evaluate liquidity
b) To determine how much cash is available for reinvestment or distribution
c) To assess profitability
d) To analyze debt levels
Answer: b) To determine how much cash is available for reinvestment or distribution
Explanation: Free cash flow represents the cash a company generates after accounting for capital expenditures, available for reinvestment or distribution to investors.
Question 31
How does an increase in prepaid expenses affect cash flow?
a) Increases cash flow
b) Decreases cash flow
c) Has no effect on cash flow
d) Increases net income
Answer: b) Decreases cash flow
Explanation: Prepaid expenses reduce available cash because they represent payments made in advance for goods or services to be received in the future.
Question 32
What is the impact of a stock split on a company’s market capitalization?
a) Increases market capitalization
b) Decreases market capitalization
c) Has no effect on market capitalization
d) Reduces the number of shares outstanding
Answer: c) Has no effect on market capitalization
Explanation: A stock split increases the number of shares outstanding while proportionally reducing the stock price, leaving the company’s total market value unchanged.
Question 33
Which of the following would be classified as an investing activity on the statement of cash flows?
a) Paying dividends
b) Issuing bonds
c) Purchasing equipment
d) Repurchasing shares
Answer: c) Purchasing equipment
Explanation: Investing activities involve the acquisition or sale of long-term assets, such as purchasing equipment or property.
Question 34
What does a negative operating cash flow indicate?
a) The company is generating more cash from operations than expenses
b) The company is experiencing operational losses
c) The company has a positive net income
d) The company’s liabilities exceed its assets
Answer: b) The company is experiencing operational losses
Explanation: Negative operating cash flow suggests that the company is spending more cash on its day-to-day operations than it is generating.
Question 35
What is a key advantage of issuing bonds for financing?
a) It increases ownership dilution
b) Interest on bonds is tax-deductible
c) It reduces a company’s debt-to-equity ratio
d) Bond interest rates are fixed forever
Answer: b) Interest on bonds is tax-deductible
Explanation: Interest payments on bonds are tax-deductible, making debt financing more attractive for companies seeking to lower their taxable income.
Question 36
How does an increase in wages payable affect the balance sheet?
a) Increases liabilities
b) Decreases liabilities
c) Increases assets
d) Decreases assets
Answer: a) Increases liabilities
Explanation: Wages payable represent money owed to employees but not yet paid, which increases the company’s current liabilities.
Question 37
Which of the following is an example of a non-cash expense?
a) Rent expense
b) Amortization expense
c) Salaries expense
d) Marketing expense
Answer: b) Amortization expense
Explanation: Amortization is a non-cash expense that reduces the value of intangible assets over time, similar to depreciation for tangible assets.
Question 38
What is the effect of declaring dividends on retained earnings?
a) Increases retained earnings
b) Decreases retained earnings
c) Has no effect on retained earnings
d) Increases liabilities
Answer: b) Decreases retained earnings
Explanation: Dividends declared reduce retained earnings because they represent distributions of earnings to shareholders.
Question 39
Which of the following would decrease a company’s gross profit margin?
a) A decrease in COGS
b) An increase in sales revenue
c) An increase in COGS
d) A decrease in operating expenses
Answer: c) An increase in COGS
Explanation: Gross profit margin is calculated as gross profit divided by revenue. If COGS increases without a corresponding increase in revenue, gross profit margin will decrease.
Question 40
How does a company recognize an uncollectible account under the allowance method?
a) By reducing accounts payable
b) By writing off the account
c) By increasing assets
d) By reducing equity
Answer: b) By writing off the account
Explanation: Under the allowance method, an uncollectible account is written off by reducing accounts receivable and the allowance for doubtful accounts.
