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web.groovymark@gmail.com
- December 23, 2024
Question 41
Which of the following increases a company’s return on assets (ROA)?
a) Increasing assets
b) Increasing net income
c) Increasing debt
d) Increasing equity
Answer: b) Increasing net income
Explanation: ROA is calculated by dividing net income by total assets, so an increase in net income improves ROA.
Question 42
Which ratio is used to evaluate a company’s efficiency in managing its inventory?
a) Gross profit margin
b) Inventory turnover ratio
c) Return on assets
d) Current ratio
Answer: b) Inventory turnover ratio
Explanation: The inventory turnover ratio measures how efficiently a company is managing its inventory by comparing the cost of goods sold to average inventory.
Question 43
What is the effect of recognizing a gain on the sale of an asset?
a) Increases cash flow from operations
b) Increases net income
c) Decreases equity
d) Increases liabilities
Answer: b) Increases net income
Explanation: Recognizing a gain on the sale of an asset increases net income as the gain is recorded on the income statement.
Question 44
How does paying dividends affect a company’s cash flow?
a) Increases cash flow from operations
b) Decreases cash flow from financing activities
c) No effect on cash flow
d) Increases net income
Answer: b) Decreases cash flow from financing activities
Explanation: Dividends are cash outflows that reduce cash flow from financing activities.
Question 45
What is the primary use of the return on investment (ROI) ratio?
a) To measure profitability relative to total assets
b) To assess how efficiently a company is using its capital to generate returns
c) To calculate the company’s liquidity
d) To measure the debt-to-equity ratio
Answer: b) To assess how efficiently a company is using its capital to generate returns
Explanation: ROI measures how effectively a company uses its capital to generate profit relative to the investment.
Question 46
Which financial metric is used to assess the profitability of a company’s core business operations, excluding non-operating income and expenses?
a) Gross margin
b) Operating margin
c) Return on assets
d) Quick ratio
Answer: b) Operating margin
Explanation: The operating margin measures profitability from core business operations, excluding non-operating items like interest and taxes.
Question 47
How does an increase in prepaid expenses affect the balance sheet?
a) Increases liabilities
b) Decreases assets
c) Increases current assets
d) Decreases equity
Answer: c) Increases current assets
Explanation: Prepaid expenses are recorded as current assets on the balance sheet, as they represent future economic benefits.
Question 48
What effect does purchasing equipment with cash have on the statement of cash flows?
a) Increases cash flow from operations
b) Increases cash flow from investing activities
c) Decreases cash flow from investing activities
d) Increases liabilities
Answer: c) Decreases cash flow from investing activities
Explanation: Purchasing equipment is considered an investing activity and results in a cash outflow, reducing cash flow from investing activities.
Question 49
Which of the following transactions would be classified as a financing activity on the statement of cash flows?
a) Purchasing inventory
b) Paying interest on debt
c) Issuing common stock
d) Selling equipment
Answer: c) Issuing common stock
Explanation: Issuing common stock is a financing activity because it raises capital by selling ownership shares in the company.
Question 50
What is the purpose of calculating the current ratio?
a) To measure profitability
b) To evaluate how efficiently a company is using its assets
c) To assess a company’s ability to pay short-term liabilities
d) To calculate return on equity
Answer: c) To assess a company’s ability to pay short-term liabilities
Explanation: The current ratio measures a company’s ability to cover its short-term liabilities with its current assets, indicating liquidity.
