-
web.groovymark@gmail.com
- December 23, 2024
Question 21
Which of the following actions will reduce a company’s working capital?
a) Increasing inventory
b) Paying down accounts payable
c) Collecting receivables
d) Reducing long-term debt
Answer: b) Paying down accounts payable
Explanation: Paying down accounts payable decreases current liabilities, reducing working capital.
Question 22
What does a company’s gross profit margin measure?
a) The percentage of revenue that remains after COGS is deducted
b) The percentage of assets financed by equity
c) The percentage of net income earned on sales
d) The percentage of debt relative to total liabilities
Answer: a) The percentage of revenue that remains after COGS is deducted
Explanation: Gross profit margin shows the proportion of revenue left after accounting for COGS, highlighting profitability before operating expenses.
Question 23
What is the effect of declaring a cash dividend on 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: Declaring a cash dividend reduces retained earnings because it represents a distribution of profits to shareholders.
Question 24
Which of the following will decrease a company’s current ratio?
a) Paying off short-term debt
b) Purchasing inventory on credit
c) Collecting accounts receivable
d) Selling long-term assets
Answer: b) Purchasing inventory on credit
Explanation: Purchasing inventory on credit increases current liabilities, reducing the current ratio.
Question 25
What is the primary purpose of calculating return on equity (ROE)?
a) To measure a company’s profitability relative to shareholders’ equity
b) To determine how much of the company is financed by debt
c) To calculate the company’s overall liquidity
d) To assess the company’s gross profit margin
Answer: a) To measure a company’s profitability relative to shareholders' equity
Explanation: ROE measures how effectively a company is using shareholders' equity to generate profit.
Question 26
Which statement is true regarding the difference between accounts payable and notes payable?
a) Notes payable are typically short-term, while accounts payable are long-term
b) Accounts payable are typically interest-bearing, while notes payable are not
c) Notes payable usually have an interest component, while accounts payable do not
d) Accounts payable are listed under non-current liabilities, while notes payable are listed under current liabilities
Answer: c) Notes payable usually have an interest component, while accounts payable do not
Explanation: Notes payable often include interest obligations, whereas accounts payable generally do not accrue interest.
Question 27
What impact does the repurchase of common stock have on the price-to-earnings (P/E) ratio?
a) Increases the P/E ratio
b) Decreases the P/E ratio
c) Has no effect on the P/E ratio
d) Reduces outstanding liabilities
Answer: a) Increases the P/E ratio
Explanation: Repurchasing stock reduces the number of shares outstanding, which can increase the P/E ratio if earnings remain constant.
Question 28
Which of the following items is reported as an operating activity in the statement of cash flows?
a) Proceeds from issuing bonds
b) Payment of dividends
c) Cash received from customers
d) Purchase of equipment
Answer: c) Cash received from customers
Explanation: Cash received from customers is part of a company’s operating activities, reflecting cash inflows from core business operations.
Question 29
What does a negative working capital indicate?
a) The company is highly profitable
b) The company is unable to cover its short-term liabilities with its current assets
c) The company has high liquidity
d) The company has more long-term assets than liabilities
Answer: b) The company is unable to cover its short-term liabilities with its current assets
Explanation: Negative working capital means a company has more current liabilities than current assets, suggesting a potential liquidity issue.
Question 30
Which financial ratio measures the proportion of a company’s earnings that are paid out as dividends?
a) Dividend payout ratio
b) Dividend yield
c) Price-to-earnings ratio
d) Return on equity
Answer: a) Dividend payout ratio
Explanation: The dividend payout ratio measures the percentage of earnings distributed to shareholders as dividends.
Question 31
How is depreciation reported on the statement of cash flows?
a) As an inflow in financing activities
b) As an expense in operating activities
c) As an addition to net income in operating activities
d) As a deduction in investing activities
Answer: c) As an addition to net income in operating activities
Explanation: Depreciation is a non-cash expense and is added back to net income in the statement of cash flows under operating activities.
Question 32
Which of the following is a non-current liability?
a) Accounts payable
b) Accrued expenses
c) Bonds payable
d) Short-term debt
Answer: c) Bonds payable
Explanation: Non-current liabilities, such as bonds payable, are obligations that are not due within the current accounting period.
Question 33
What is the effect of an increase in accounts receivable on 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: An increase in accounts receivable means that more sales are made on credit, reducing cash flow until the payments are collected.
Question 34
Which of the following would be classified as a financing activity in the statement of cash flows?
a) Purchasing inventory
b) Repurchasing common stock
c) Paying wages
d) Purchasing equipment
Answer: b) Repurchasing common stock
Explanation: Financing activities include transactions that affect a company’s equity and debt, such as repurchasing shares.
Question 35
What does the return on investment (ROI) ratio measure?
a) The profitability of investments relative to the cost of the investment
b) The liquidity of the company’s assets
c) The company’s ability to cover its debts
d) The proportion of revenue spent on operating expenses
Answer: a) The profitability of investments relative to the cost of the investment
Explanation: ROI measures how efficiently a company generates profit from investments relative to the cost of those investments.
Question 36
Which financial metric indicates how much investors are willing to pay per dollar of earnings?
a) Price-to-book ratio
b) Return on equity
c) Price-to-earnings ratio
d) Dividend payout ratio
Answer: c) Price-to-earnings ratio
Explanation: The P/E ratio shows how much investors are willing to pay for each dollar of a company’s earnings, indicating market expectations of future growth.
Question 37
Which of the following would increase a company’s gross profit margin?
a) Decreasing the cost of goods sold
b) Increasing operating expenses
c) Decreasing sales
d) Paying down long-term debt
Answer: a) Decreasing the cost of goods sold
Explanation: Lowering COGS increases the gross profit margin, as the company retains a larger portion of its revenue after covering production costs.
Question 38
What is the primary reason for using the weighted average cost of capital (WACC) in valuation?
a) To calculate the company’s net income
b) To assess the cost of equity relative to liabilities
c) To discount future cash flows in a valuation model
d) To determine the optimal capital structure
Answer: c) To discount future cash flows in a valuation model
Explanation: WACC represents the average cost of a company’s capital, both equity and debt, and is used to discount future cash flows when calculating the company’s value.
Question 39
What is the effect of reducing operating expenses on operating income?
a) Increases operating income
b) Decreases operating income
c) Has no effect on operating income
d) Reduces gross profit
Answer: a) Increases operating income
Explanation: Operating income increases when operating expenses, such as wages or rent, are reduced.
Question 40
What does the debt-to-equity ratio measure?
a) A company’s liquidity
b) A company’s capital structure
c) A company’s profitability
d) A company’s gross profit margin
Answer: b) A company’s capital structure
Explanation: The debt-to-equity ratio compares the amount of a company’s debt to its shareholders' equity, showing how the company is financed.
