-
web.groovymark@gmail.com
- December 23, 2024
Question 41
What is the purpose of a company’s statement of retained earnings?
a) To summarize the company’s revenues and expenses
b) To show changes in retained earnings over time
c) To display a company’s total liabilities
d) To highlight changes in a company’s cash flow
Answer: b) To show changes in retained earnings over time
Explanation: The statement of retained earnings reconciles the beginning and ending retained earnings, reflecting profits retained after dividends are paid.
Question 42
Which of the following would be considered a financing activity on the statement of cash flows?
a) Issuing bonds
b) Purchasing inventory
c) Selling equipment
d) Paying salaries
Answer: a) Issuing bonds
Explanation: Financing activities involve raising capital through debt or equity, such as issuing bonds or repaying loans.
Question 43
What does a high price-to-earnings (P/E) ratio indicate about a company?
a) The company is undervalued
b) The company’s stock is overpriced
c) The company’s earnings are decreasing
d) Investors expect future growth
Answer: d) Investors expect future growth
Explanation: A high P/E ratio suggests that investors believe the company will experience future earnings growth, justifying a higher stock price.
Question 44
How does an increase in the dividend payout ratio 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: When a company increases its dividend payout, more earnings are distributed to shareholders, reducing retained earnings.
Question 45
What does the book value of a company represent?
a) The current market value of the company
b) The difference between assets and liabilities
c) The price-to-earnings ratio
d) The company’s future earnings potential
Answer: b) The difference between assets and liabilities
Explanation: Book value represents the net value of a company’s assets after deducting liabilities, providing a conservative estimate of its worth.
Question 46
Which ratio is best for evaluating a company’s profitability?
a) Debt-to-equity ratio
b) Current ratio
c) Return on equity (ROE)
d) Quick ratio
Answer: c) Return on equity (ROE)
Explanation: ROE measures a company’s profitability by showing how effectively it generates profits from shareholders’ equity.
Question 47
Which of the following would be classified as a non-operating expense?
a) Salaries expense
b) Interest expense
c) Depreciation expense
d) Rent expense
Answer: b) Interest expense
Explanation: Non-operating expenses are not related to the core operations of a business. Interest expense is a financial cost incurred from borrowing.
Question 48
What is a company’s net profit margin?
a) Net income divided by total sales
b) Total assets divided by total liabilities
c) Gross profit divided by net sales
d) Net income divided by total assets
Answer: a) Net income divided by total sales
Explanation: Net profit margin measures the percentage of revenue that remains as net income after all expenses have been deducted.
Question 49
How does the use of accelerated depreciation affect a company’s income statement in the early years of an asset’s life?
a) Increases net income
b) Decreases net income
c) Has no effect on net income
d) Increases equity
Answer: b) Decreases net income
Explanation: Accelerated depreciation results in higher depreciation expenses in the early years of an asset’s life, reducing net income during that period.
Question 50
Which financial statement provides details about cash generated and used during a specific period?
a) Income statement
b) Balance sheet
c) Statement of retained earnings
d) Statement of cash flows
Answer: d) Statement of cash flows
Explanation: The statement of cash flows details the cash inflows and outflows from operating, investing, and financing activities during a specific period.
