-
web.groovymark@gmail.com
- December 23, 2024
Question 41
Which financial statement provides information about a company’s liquidity, solvency, and financial flexibility?
a) Income statement
b) Balance sheet
c) Statement of cash flows
d) Statement of retained earnings
Answer: b) Balance sheet
Explanation: The balance sheet provides a snapshot of a company’s financial position, including its liquidity (current assets vs. current liabilities) and solvency (long-term assets vs. long-term liabilities).
Question 42
What is the effect of paying cash dividends on a company’s cash flow?
a) Increases cash flow
b) Decreases cash flow
c) Has no effect on cash flow
d) Increases assets
Answer: b) Decreases cash flow
Explanation: Paying dividends results in a cash outflow, reducing the company’s cash reserves.
Question 43
Which of the following is an example of a capital expenditure?
a) Paying employee salaries
b) Purchasing a new building
c) Paying off short-term debt
d) Selling inventory
Answer: b) Purchasing a new building
Explanation: Capital expenditures are investments in long-term assets like buildings or equipment.
Question 44
How is goodwill recorded on the balance sheet after an acquisition?
a) As a current asset
b) As a long-term liability
c) As a non-current asset
d) As an operating expense
Answer: c) As a non-current asset
Explanation: Goodwill, which arises from an acquisition when the purchase price exceeds the fair value of the net assets, is recorded as a non-current asset on the balance sheet.
Question 45
Which of the following would cause an increase in a company’s debt-to-equity ratio?
a) Issuing more common stock
b) Repurchasing common stock
c) Paying off long-term debt
d) Increasing retained earnings
Answer: b) Repurchasing common stock
Explanation: Repurchasing stock reduces equity, increasing the debt-to-equity ratio if debt levels remain constant.
Question 46
Which financial metric is most useful for assessing a company’s ability to pay off long-term debt?
a) Current ratio
b) Price-to-earnings ratio
c) Debt-to-equity ratio
d) Times interest earned ratio
Answer: d) Times interest earned ratio
Explanation: The times interest earned ratio measures how easily a company can cover its interest payments, giving insight into its ability to service long-term debt.
Question 47
What effect does an increase in prepaid expenses have on working capital?
a) Increases working capital
b) Decreases working capital
c) Has no effect on working capital
d) Increases liabilities
Answer: b) Decreases working capital
Explanation: An increase in prepaid expenses, which are current assets, reduces the cash available for short-term liabilities, decreasing working capital.
Question 48
Which of the following is a financing activity in the statement of cash flows?
a) Issuing common stock
b) Paying rent
c) Purchasing inventory
d) Selling long-term assets
Answer: a) Issuing common stock
Explanation: Financing activities involve raising or repaying capital, such as issuing stock or repurchasing shares.
Question 49
What is the primary focus of the statement of retained earnings?
a) To report the company’s assets and liabilities
b) To show changes in shareholders’ equity over time
c) To summarize the company’s cash flow activities
d) To calculate gross profit
Answer: b) To show changes in shareholders' equity over time
Explanation: The statement of retained earnings explains how retained earnings have changed due to net income, dividends, and other adjustments.
Question 50
How does selling inventory affect the balance sheet?
a) Increases accounts payable
b) Increases shareholders’ equity
c) Decreases inventory and increases cash or accounts receivable
d) Increases liabilities
Answer: c) Decreases inventory and increases cash or accounts receivable
Explanation: Selling inventory decreases the inventory account and increases either cash or accounts receivable depending on whether the sale was made in cash or on credit.
