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web.groovymark@gmail.com
- December 23, 2024
Question 01
Which financial ratio measures a company’s ability to meet short-term obligations with its most liquid assets?
a) Debt-to-equity ratio
b) Quick ratio
c) Current ratio
d) Return on equity
Answer: b) Quick ratio
Explanation: The quick ratio measures a company’s ability to cover short-term liabilities using its most liquid assets, excluding inventory.
Question 02
What is the effect of an increase in inventory on cash flow from operations?
a) Increases cash flow
b) Decreases cash flow
c) No effect on cash flow
d) Increases net income
Answer: b) Decreases cash flow
Explanation: An increase in inventory ties up cash, reducing cash flow from operations.
Question 03
Which financial statement provides a snapshot of a company’s financial position at a specific point in time?
a) Income statement
b) Balance sheet
c) Statement of cash flows
d) Statement of retained earnings
Answer: b) Balance sheet
Explanation: The balance sheet reports a company's assets, liabilities, and shareholders' equity at a specific date.
Question 04
How does paying off short-term debt affect the current ratio?
a) Increases the current ratio
b) Decreases the current ratio
c) Has no effect on the current ratio
d) Reduces liabilities
Answer: a) Increases the current ratio
Explanation: Paying off short-term debt reduces current liabilities, which increases the current ratio.
Question 05
What is the primary purpose of the statement of cash flows?
a) To provide a detailed breakdown of operating expenses
b) To assess a company’s liquidity, solvency, and financial flexibility
c) To summarize the company’s net income
d) To report changes in shareholders’ equity
Answer: b) To assess a company's liquidity, solvency, and financial flexibility
Explanation: The statement of cash flows tracks the movement of cash within a company, showing its liquidity and ability to generate cash.
Question 06
What effect does issuing new shares have on a company’s earnings per share (EPS)?
a) Increases EPS
b) Decreases EPS
c) No effect on EPS
d) Increases net income
Answer: b) Decreases EPS
Explanation: Issuing new shares increases the number of shares outstanding, reducing earnings per share if net income remains unchanged.
Question 07
Which financial metric is used to evaluate a company’s ability to pay interest on its debt?
a) Current ratio
b) Return on assets
c) Times interest earned
d) Debt-to-equity ratio
Answer: c) Times interest earned
Explanation: The times interest earned ratio measures how easily a company can cover interest payments on its debt with its operating income.
Question 08
What is the formula for calculating net working capital?
a) Current assets minus current liabilities
b) Total assets minus total liabilities
c) Current liabilities minus current assets
d) Total liabilities minus equity
Answer: a) Current assets minus current liabilities
Explanation: Net working capital is calculated by subtracting current liabilities from current assets, indicating the company’s short-term liquidity.
Question 09
Which of the following is considered a non-cash item on the income statement?
a) Depreciation
b) Cost of goods sold
c) Interest expense
d) Dividends paid
Answer: a) Depreciation
Explanation: Depreciation is a non-cash expense that reduces the value of an asset over time but does not involve an actual cash outflow.
Question 10
Which financial ratio measures how efficiently a company is using its assets to generate sales?
a) Asset turnover ratio
b) Gross profit margin
c) Price-to-earnings ratio
d) Quick ratio
Answer: a) Asset turnover ratio
Explanation: The asset turnover ratio measures a company’s efficiency in generating sales from its total assets.
Question 11
What effect does a dividend payment have on retained earnings?
a) Increases retained earnings
b) Decreases retained earnings
c) No effect on retained earnings
d) Increases liabilities
Answer: b) Decreases retained earnings
Explanation: Paying dividends reduces retained earnings, as the profits are distributed to shareholders rather than being reinvested in the company.
Question 12
Which of the following transactions is classified as an investing activity on the statement of cash flows?
a) Issuing common stock
b) Repaying short-term debt
c) Purchasing a new piece of equipment
d) Paying interest on a loan
Answer: c) Purchasing a new piece of equipment
Explanation: Investing activities include transactions that involve the purchase or sale of long-term assets, such as equipment.
Question 13
How is goodwill created in financial accounting?
a) When a company issues more stock than needed
b) When a company is acquired for more than the fair value of its assets
c) When a company underpays for an acquisition
d) When a company sells more goods than expected
Answer: b) When a company is acquired for more than the fair value of its assets
Explanation: Goodwill represents the premium paid over the fair value of a company’s net assets during an acquisition.
Question 14
What does the debt-to-assets ratio measure?
a) A company’s liquidity
b) A company’s use of debt to finance assets
c) A company’s profitability
d) A company’s ability to generate sales
Answer: b) A company’s use of debt to finance assets
Explanation: The debt-to-assets ratio compares a company’s total liabilities to its total assets, showing the proportion of assets financed by debt.
Question 15
Which of the following increases a company’s equity?
a) Issuing bonds
b) Repurchasing common stock
c) Issuing common stock
d) Paying dividends
Answer: c) Issuing common stock
Explanation: Issuing common stock raises equity as the company receives capital from shareholders in exchange for ownership shares.
Question 16
Which financial statement provides information about a company’s revenues and expenses over a specific period?
a) Balance sheet
b) Income statement
c) Statement of cash flows
d) Statement of retained earnings
Answer: b) Income statement
Explanation: The income statement reports a company’s financial performance, showing revenues, expenses, and net income over a specific period.
Question 17
What is the purpose of calculating the price-to-book (P/B) ratio?
a) To measure the market value of a company’s assets
b) To compare a company’s market value to its book value
c) To determine the company’s liquidity
d) To assess the company’s profitability
Answer: b) To compare a company’s market value to its book value
Explanation: The P/B ratio compares a company’s market value to its book value, helping investors determine whether the stock is overvalued or undervalued.
Question 18
Which of the following would increase a company’s return on equity (ROE)?
a) Increasing equity
b) Increasing net income
c) Reducing debt
d) Increasing operating expenses
Answer: b) Increasing net income
Explanation: ROE is calculated by dividing net income by shareholders’ equity. Increasing net income improves ROE.
Question 19
What is the effect of an increase in accounts payable on cash flow?
a) Increases cash flow
b) Decreases cash flow
c) No effect on cash flow
d) Increases liabilities
Answer: a) Increases cash flow
Explanation: An increase in accounts payable delays cash outflow, increasing cash flow from operations.
Question 20
Which financial ratio measures the profitability of a company relative to its total assets?
a) Return on equity (ROE)
b) Gross margin
c) Return on assets (ROA)
d) Quick ratio
Answer: c) Return on assets (ROA)
Explanation: ROA measures how efficiently a company generates profit from its total assets.
