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web.groovymark@gmail.com
- December 23, 2024
Question 01
What is the primary purpose of the balance sheet?
a) To show a company’s profitability
b) To summarize a company’s revenues and expenses
c) To provide a snapshot of a company’s financial position at a specific point in time
d) To detail a company’s cash inflows and outflows
Answer: c) To provide a snapshot of a company’s financial position at a specific point in time
Explanation: The balance sheet reports a company’s assets, liabilities, and shareholders' equity at a specific point in time, showing the financial health of the company.
Question 02
Which of the following is classified as a current asset?
a) Equipment
b) Inventory
c) Goodwill
d) Long-term investments
Answer: b) Inventory
Explanation: Current assets are those expected to be converted into cash within one year, and inventory is a prime example of a current asset.
Question 03
What does a high debt-to-equity ratio suggest about a company?
a) The company relies heavily on debt for financing
b) The company is highly liquid
c) The company has low financial risk
d) The company is generating high profits
Answer: a) The company relies heavily on debt for financing
Explanation: A high debt-to-equity ratio indicates that a company is using more debt relative to its equity, which may suggest higher financial risk.
Question 04
Which of the following is an example of an intangible asset?
a) Land
b) Inventory
c) Trademarks
d) Buildings
Answer: c) Trademarks
Explanation: Intangible assets are non-physical assets like trademarks, patents, and goodwill that add value to a company.
Question 05
What is the primary function of the income statement?
a) To show the financial position of a company at a point in time
b) To measure profitability over a specific period
c) To outline changes in cash flow
d) To list the company’s assets and liabilities
Answer: b) To measure profitability over a specific period
Explanation: The income statement shows a company’s revenues, expenses, and profits over a period, revealing its financial performance.
Question 06
Which financial ratio measures a company’s ability to pay off short-term obligations?
a) Return on assets
b) Debt-to-equity ratio
c) Current ratio
d) Price-to-earnings ratio
Answer: c) Current ratio
Explanation: The current ratio measures a company’s ability to cover its short-term liabilities with its short-term assets.
Question 07
What is the effect of issuing additional shares on a company’s earnings per share (EPS)?
a) Increases EPS
b) Decreases EPS
c) Has no effect on EPS
d) Increases equity
Answer: b) Decreases EPS
Explanation: Issuing more shares increases the number of shares outstanding, reducing the earnings per share.
Question 08
Which of the following would cause an increase in a company’s operating income?
a) Increasing interest expense
b) Decreasing selling expenses
c) Decreasing revenue
d) Increasing dividends
Answer: b) Decreasing selling expenses
Explanation: Operating income increases when a company reduces its operating expenses, such as selling expenses, without reducing revenue.
Question 09
What does the quick ratio exclude that the current ratio includes?
a) Accounts receivable
b) Cash
c) Inventory
d) Accounts payable
Answer: c) Inventory
Explanation: The quick ratio excludes inventory because it focuses on the company’s most liquid assets to measure its ability to cover short-term liabilities.
Question 10
Which financial statement would you analyze to understand a company’s debt levels?
a) Statement of cash flows
b) Income statement
c) Statement of retained earnings
d) Balance sheet
Answer: d) Balance sheet
Explanation: The balance sheet lists all of a company’s liabilities, including both short-term and long-term debt.
Question 11
What is the impact of a stock repurchase on shareholders’ equity?
a) Increases shareholders’ equity
b) Decreases shareholders’ equity
c) Has no effect on shareholders’ equity
d) Increases liabilities
Answer: b) Decreases shareholders' equity
Explanation: A stock repurchase reduces the number of shares outstanding, decreasing shareholders' equity.
Question 12
Which financial ratio is most useful for evaluating a company’s operational efficiency?
a) Return on assets
b) Current ratio
c) Gross profit margin
d) Inventory turnover
Answer: d) Inventory turnover
Explanation: The inventory turnover ratio measures how efficiently a company manages its inventory by showing how quickly it is sold.
Question 13
What does a negative cash flow from investing activities typically indicate?
a) The company is generating insufficient cash from operations
b) The company is experiencing financial trouble
c) The company is investing in long-term assets
d) The company is borrowing too much debt
Answer: c) The company is investing in long-term assets
Explanation: Negative cash flow from investing activities often indicates that a company is investing in assets like property, equipment, or acquisitions.
Question 14
Which financial statement shows a company’s profitability over a specific period?
a) Balance sheet
b) Income statement
c) Statement of retained earnings
d) Statement of cash flows
Answer: b) Income statement
Explanation: The income statement measures a company’s revenues, expenses, and profit or loss over a given period.
Question 15
What is a primary reason for calculating return on assets (ROA)?
a) To assess how efficiently a company generates profit from its total assets
b) To determine how well a company manages its liabilities
c) To calculate the amount of cash available for dividend payments
d) To determine the equity-to-debt ratio
Answer: a) To assess how efficiently a company generates profit from its total assets
Explanation: ROA measures how well a company uses its assets to generate earnings.
Question 16
What does the price-to-earnings (P/E) ratio represent?
a) The market value of a company compared to its book value
b) The company’s equity compared to its total liabilities
c) The ratio of a company’s current price to its earnings per share
d) The company’s assets compared to its earnings
Answer: c) The ratio of a company's current price to its earnings per share
Explanation: The P/E ratio measures how much investors are willing to pay for each dollar of earnings.
Question 17
How does an increase in the cost of goods sold (COGS) affect a company’s gross profit margin?
a) Increases gross profit margin
b) Decreases gross profit margin
c) Has no effect on gross profit margin
d) Increases net income
Answer: b) Decreases gross profit margin
Explanation: Gross profit margin is calculated as gross profit divided by revenue, so an increase in COGS reduces gross profit and the margin.
Question 18
What is the primary focus of the statement of cash flows?
a) To assess a company’s financial position at a specific point in time
b) To show the company’s cash inflows and outflows from operating, investing, and financing activities
c) To show the company’s retained earnings
d) To summarize revenues and expenses
Answer: b) To show the company’s cash inflows and outflows from operating, investing, and financing activities
Explanation: The statement of cash flows provides information about how cash is generated and used in a company’s operations, investments, and financing.
Question 19
How does an increase in interest expense affect a company’s net income?
a) Increases net income
b) Decreases net income
c) Has no effect on net income
d) Increases assets
Answer: b) Decreases net income
Explanation: Interest expense is deducted from operating income, lowering the company’s net income.
Question 20
Which ratio is used to evaluate a company’s liquidity?
a) Debt-to-equity ratio
b) Return on equity
c) Current ratio
d) Price-to-book ratio
Answer: c) Current ratio
Explanation: The current ratio measures a company’s ability to meet its short-term liabilities with its short-term assets, providing insight into liquidity.
