Financial Statements Analysis Practice Exam

Financial Statements Analysis Practice Exam

 

1. Which of the following ratios is used to assess a company’s liquidity?

• A) Return on equity
• B) Quick ratio
• C) Debt-to-equity ratio
• D) Gross profit margin

2. The purpose of the income statement is to:

• A) Show the company’s financial position at a specific point in time
• B) Report the company’s profitability over a period
• C) List the company’s assets and liabilities
• D) Display a company’s cash flows

3. Which of the following is considered a non-operating expense?

• A) Depreciation
• B) Interest expense
• C) COGS (Cost of Goods Sold)
• D) Salaries expense

4. A company’s ability to generate profits from its assets is measured by which ratio?

• A) Return on assets (ROA)
• B) Debt ratio
• C) Current ratio
• D) Price-to-earnings (P/E) ratio

5. What does the balance sheet show?

• A) A company’s net income for a specific period
• B) A company’s financial position at a point in time
• C) A company’s expenses and revenue
• D) A company’s cash flow from operations

6. The debt-to-equity ratio helps evaluate a company’s:

• A) Profitability
• B) Liquidity
• C) Solvency
• D) Operational efficiency

7. What does the current ratio measure?

• A) The ability of a company to pay off its short-term liabilities with its current assets
• B) The ability of a company to generate profit from its sales
• C) The proportion of debt in the capital structure
• D) The profitability of a company

8. Which financial statement reflects a company’s revenues and expenses over a period of time?

• A) Balance sheet
• B) Income statement
• C) Statement of cash flows
• D) Retained earnings statement

9. Which ratio is most useful for evaluating a company’s ability to cover its short-term obligations with its most liquid assets?

• A) Current ratio
• B) Quick ratio
• C) Asset turnover ratio
• D) Return on equity

10. What does the price-to-earnings (P/E) ratio measure?

• A) A company’s earnings relative to its stock price
• B) A company’s earnings before interest and tax
• C) A company’s return on assets
• D) A company’s liquidity

11. Which of the following represents an investing activity in the statement of cash flows?

• A) Selling inventory
• B) Issuing bonds
• C) Purchasing property, plant, and equipment
• D) Paying dividends

12. Which of the following is not an operating activity on the statement of cash flows?

• A) Collection of receivables
• B) Payment of salaries
• C) Payment of dividends
• D) Sale of inventory

13. What is the formula for the gross profit margin?

• A) Gross profit / Sales revenue
• B) Net income / Total assets
• C) Operating income / Total liabilities
• D) Net profit / Sales revenue

14. A decrease in accounts receivable would be classified as:

• A) A use of cash
• B) A source of cash
• C) An investing activity
• D) A financing activity

15. Which of the following ratios would be used to measure the efficiency of a company in using its assets to generate sales?

• A) Return on equity
• B) Inventory turnover ratio
• C) Asset turnover ratio
• D) Debt-to-equity ratio

16. The quick ratio excludes which of the following from current assets?

• A) Cash
• B) Accounts receivable
• C) Inventory
• D) Marketable securities

17. The accounts payable turnover ratio measures:

• A) The efficiency of a company in collecting its accounts receivable
• B) The efficiency of a company in paying its suppliers
• C) The profitability of a company
• D) The liquidity of a company

18. Which ratio measures the proportion of assets financed by creditors rather than by stockholders?

• A) Current ratio
• B) Debt ratio
• C) Return on assets
• D) Profit margin

19. Which of the following is a sign of a company having strong financial health?

• A) High debt-to-equity ratio
• B) Low return on assets
• C) High current ratio
• D) Low profit margin

20. Which of the following is a common measure of profitability?

• A) Current ratio
• B) Return on equity
• C) Debt-to-equity ratio
• D) Quick ratio

21. What type of activity is issuing stock in exchange for cash classified as on the statement of cash flows?

• A) Operating activity
• B) Financing activity
• C) Investing activity
• D) Non-cash activity

22. Which of the following is considered a non-cash item on the cash flow statement?

• A) Depreciation
• B) Interest paid
• C) Dividends received
• D) Purchases of inventory

23. The return on equity (ROE) is calculated by:

• A) Net income / Total liabilities
• B) Net income / Shareholders’ equity
• C) Net income / Sales revenue
• D) Total assets / Shareholders’ equity

24. If a company has a high accounts receivable turnover ratio, it indicates:

• A) The company is collecting its receivables efficiently
• B) The company is not paying its debts
• C) The company has too much debt
• D) The company is inefficient in its operations

25. A company’s earnings before interest and taxes (EBIT) is calculated by:

• A) Subtracting operating expenses from gross profit
• B) Adding operating income to net income
• C) Subtracting taxes from gross income
• D) Adding interest expenses to net income

26. The statement of cash flows helps to:

• A) Determine the amount of profit made by the company
• B) Show how a company’s cash position changes over a period of time
• C) Assess a company’s liquidity position
• D) Report the company’s revenue

27. Which of the following ratios is a measure of a company’s debt relative to its equity capital?

• A) Current ratio
• B) Debt-to-equity ratio
• C) Gross profit margin
• D) Return on assets

28. A company’s ability to generate sales relative to its assets is indicated by the:

• A) Profit margin
• B) Asset turnover ratio
• C) Return on equity
• D) Debt ratio

29. What is the primary purpose of financial statement analysis?

• A) To calculate the company’s profits
• B) To evaluate the financial performance and position of the company
• C) To prepare the company’s tax returns
• D) To establish company policies

30. The cash conversion cycle is a metric used to evaluate:

• A) The time it takes for a company to convert its investments in inventory into cash flows
• B) The liquidity of the company
• C) The profitability of the company
• D) The return on assets

 

31. The times interest earned ratio is used to measure:

• A) A company’s profitability
• B) A company’s ability to pay interest on its debt
• C) A company’s cash flow position
• D) A company’s financial structure

32. Which of the following ratios is most useful for evaluating a company’s overall profitability?

• A) Debt ratio
• B) Return on assets (ROA)
• C) Quick ratio
• D) Inventory turnover

33. What does a high inventory turnover ratio indicate?

• A) The company is efficiently managing its inventory
• B) The company is overstocked with inventory
• C) The company is inefficient in its operations
• D) The company has low sales

34. Which of the following financial ratios measures the proportion of a company’s assets that are financed by debt?

• A) Debt-to-assets ratio
• B) Current ratio
• C) Return on equity
• D) Gross profit margin

35. In the context of the statement of cash flows, which of the following is an example of an operating activity?

• A) Borrowing funds from a bank
• B) Purchasing a building
• C) Selling goods and services to customers
• D) Issuing common stock

36. The gross profit margin ratio indicates:

• A) The percentage of each dollar of sales that results in profit after direct costs
• B) The profitability of a company after all expenses
• C) The level of debt relative to equity
• D) The ability of a company to pay its short-term debts

37. The cash flow from operating activities is primarily derived from:

• A) The sale of long-term assets
• B) The sale of inventory and collection of receivables
• C) Borrowings and issuing stock
• D) Depreciation and amortization

38. Which of the following best describes the relationship between the income statement and the statement of cash flows?

• A) The income statement reports profits, and the cash flow statement explains the changes in cash from operating, investing, and financing activities
• B) Both reports focus on the company’s liquidity position
• C) Both reports focus on the company’s profitability
• D) They are unrelated financial statements

39. If a company has a high return on equity (ROE), it generally means:

• A) The company is highly leveraged
• B) The company is efficiently using shareholders’ equity to generate profits
• C) The company has low operating expenses
• D) The company is not using enough debt financing

40. Which of the following statements is true regarding the statement of cash flows?

• A) It shows the company’s profitability for a period
• B) It shows the financial position of the company at a point in time
• C) It provides information about the cash inflows and outflows over a period
• D) It is not used by investors to evaluate financial health

41. In the direct method of preparing the statement of cash flows, cash receipts from customers are calculated by:

• A) Subtracting cash payments from cash sales
• B) Adding sales revenue to changes in accounts receivable
• C) Subtracting changes in inventory from total revenue
• D) Adding cash sales to changes in accounts receivable

42. Which of the following is an example of a financing activity on the statement of cash flows?

• A) Issuing bonds to raise capital
• B) Purchasing equipment
• C) Paying employee salaries
• D) Selling inventory to customers

43. A company with a higher return on assets (ROA) is likely to:

• A) Be more efficient in using its assets to generate earnings
• B) Have a higher debt ratio
• C) Be inefficient in using its assets
• D) Have lower earnings relative to its assets

44. What does the quick ratio measure that the current ratio does not?

• A) The company’s ability to pay its debts with its most liquid assets
• B) The company’s ability to cover all short-term liabilities with all current assets
• C) The overall profitability of the company
• D) The level of debt in the company’s capital structure

45. Which of the following is the main purpose of the earnings before interest and tax (EBIT) metric?

• A) To show the company’s profitability after paying taxes and interest
• B) To show the company’s profitability from core operations, excluding financing and tax impacts
• C) To reflect the company’s overall profit after accounting for all expenses
• D) To show the company’s ability to meet short-term obligations

46. What does a decrease in accounts payable indicate in terms of cash flow?

• A) It is a use of cash, as the company has paid off its suppliers
• B) It is a source of cash, as the company has delayed payments
• C) It has no effect on cash flow
• D) It represents an increase in operating income

47. The term “working capital” refers to:

• A) Total assets minus total liabilities
• B) The difference between current assets and current liabilities
• C) The total amount of long-term debt the company owes
• D) The total net income earned by the company

48. The quick ratio is considered a more conservative measure of liquidity than the current ratio because it:

• A) Excludes current liabilities from the calculation
• B) Excludes inventory, which may not be as easily converted to cash
• C) Focuses on long-term liabilities
• D) Includes only cash and cash equivalents

49. A company with a high times interest earned ratio is considered to be:

• A) Riskier in terms of financial leverage
• B) Better able to meet its interest obligations
• C) Less profitable than its peers
• D) Highly leveraged with a large amount of debt

50. Which of the following ratios is used to measure how well a company utilizes its assets to generate revenue?

• A) Return on equity (ROE)
• B) Return on assets (ROA)
• C) Earnings before interest and taxes (EBIT)
• D) Price-to-earnings ratio (P/E)

51. The inventory turnover ratio is calculated as:

• A) Cost of goods sold / Average inventory
• B) Net income / Average inventory
• C) Sales / Average inventory
• D) Current assets / Average inventory

52. If a company has a very high debt-to-equity ratio, it suggests that the company:

• A) Is highly leveraged and may have more financial risk
• B) Is using little debt and relies mostly on equity financing
• C) Has a strong liquidity position
• D) Is experiencing declining profitability

53. Which of the following is a common use of the statement of cash flows?

• A) To determine the company’s market value
• B) To assess the company’s ability to generate cash and its need for external financing
• C) To measure the company’s profitability over a period
• D) To assess the value of the company’s assets

54. The price-to-earnings (P/E) ratio is commonly used to evaluate:

• A) A company’s profitability relative to its assets
• B) A company’s debt relative to equity
• C) The market value of a company’s stock relative to its earnings
• D) A company’s return on investment

55. The cash flow to debt ratio measures:

• A) The company’s ability to generate cash from operations relative to its total debt
• B) The company’s ability to meet its short-term obligations
• C) The company’s efficiency in using assets to generate revenue
• D) The profitability of the company

56. The price-to-sales (P/S) ratio is calculated by:

• A) Dividing the market value of equity by the total revenue
• B) Dividing the total liabilities by the equity
• C) Dividing the total sales by the equity
• D) Dividing the net income by total sales

57. What is the main purpose of financial ratios in business analysis?

• A) To calculate the company’s market value
• B) To measure the company’s profitability, efficiency, liquidity, and solvency
• C) To forecast future market trends
• D) To determine the company’s tax obligations

58. Which of the following is considered an example of a non-cash activity in the cash flow statement?

• A) Issuing stock for cash
• B) Purchase of equipment with cash
• C) Depreciation expense
• D) Conversion of bonds to equity

59. A company’s gross margin ratio is calculated by:

• A) Gross profit / Net income
• B) Gross profit / Sales revenue
• C) Operating income / Sales revenue
• D) Net income / Total assets

60. The debt service coverage ratio is used to assess:

• A) A company’s ability to meet its debt obligations
• B) A company’s overall profitability
• C) A company’s ability to generate sales
• D) A company’s liquidity position

 

61. A company has a return on assets (ROA) of 12%. If its average total assets are $500,000, what is its net income?

• A) $60,000
• B) $120,000
• C) $10,000
• D) $600,000

62. Which of the following best describes the operating cycle of a company?

• A) The time it takes to convert inventory into cash
• B) The time it takes to convert liabilities into assets
• C) The length of time it takes to sell a product
• D) The time between acquiring inventory and paying off debt

63. If a company’s return on equity (ROE) is lower than its return on assets (ROA), this most likely indicates:

• A) High levels of debt financing
• B) The company is not using equity capital efficiently
• C) The company is underperforming relative to its peers
• D) The company is highly liquid

64. The cash flow margin ratio measures:

• A) The company’s ability to cover its debts with cash from operations
• B) The proportion of sales that convert to operating cash flow
• C) The company’s ability to generate earnings from sales
• D) The company’s ability to repay its long-term debts

65. Which of the following ratios can indicate a company’s financial stability by measuring its debt relative to its equity?

• A) Debt-to-equity ratio
• B) Gross margin ratio
• C) Current ratio
• D) Return on equity (ROE)

66. In financial statement analysis, vertical analysis is typically used to:

• A) Compare a company’s financials to industry averages
• B) Analyze the trend in a company’s performance over time
• C) Examine individual line items as a percentage of total revenue or assets
• D) Forecast future financial performance

67. What does a low quick ratio indicate about a company?

• A) It has high liquidity and can meet its short-term obligations
• B) It is highly dependent on inventory for liquidity
• C) It is in a strong financial position with substantial equity
• D) It is at risk of insolvency

68. The times interest earned ratio is used to assess:

• A) A company’s ability to meet its interest payments
• B) A company’s profitability
• C) A company’s efficiency in managing working capital
• D) A company’s cash flow position

69. A company with a high receivables turnover ratio is likely to:

• A) Collect payments from customers more quickly
• B) Have trouble collecting its receivables
• C) Be overly reliant on credit sales
• D) Have low sales

70. Which of the following ratios measures how effectively a company is using its assets to generate sales?

• A) Return on assets (ROA)
• B) Return on equity (ROE)
• C) Asset turnover ratio
• D) Debt ratio

71. If a company’s current ratio is less than 1, it generally indicates:

• A) The company has more liabilities than assets in the short term
• B) The company is in a strong financial position
• C) The company can easily pay off its short-term liabilities
• D) The company has high profitability

72. What does a company’s current ratio indicate?

• A) The company’s ability to cover its short-term liabilities with its current assets
• B) The company’s profitability over a period
• C) The company’s overall market value
• D) The company’s ability to convert its inventory into cash

73. Which of the following ratios measures a company’s ability to pay off its current liabilities with its most liquid assets?

• A) Quick ratio
• B) Debt-to-equity ratio
• C) Price-to-earnings ratio
• D) Asset turnover ratio

74. A high price-to-earnings (P/E) ratio typically suggests:

• A) The stock is undervalued compared to its earnings
• B) The company is highly profitable
• C) Investors expect high future growth from the company
• D) The company has high debt levels

75. The cash flow from financing activities includes which of the following?

• A) Issuing stock and borrowing funds
• B) Paying dividends and repurchasing stock
• C) Selling goods and services
• D) Purchasing long-term assets

76. The debt-to-equity ratio helps assess:

• A) The company’s profitability
• B) The company’s financial risk by comparing its debt to its equity
• C) The efficiency of the company’s operations
• D) The company’s ability to generate cash flow

77. Which of the following is true about the operating cash flow ratio?

• A) It measures the company’s ability to pay off current liabilities with cash from operating activities
• B) It reflects the company’s profitability after all expenses are paid
• C) It is the same as the quick ratio
• D) It is used to evaluate a company’s leverage

78. The return on equity (ROE) ratio is calculated as:

• A) Net income / Shareholders’ equity
• B) Net income / Total assets
• C) Gross profit / Total assets
• D) Operating income / Shareholders’ equity

79. The inventory turnover ratio is useful for determining:

• A) How often a company replenishes its inventory
• B) The company’s overall profitability
• C) The effectiveness of a company’s use of debt
• D) The company’s ability to pay off short-term liabilities

80. Which of the following ratios would be most helpful in assessing a company’s ability to meet its short-term obligations?

• A) Quick ratio
• B) Return on assets (ROA)
• C) Debt-to-equity ratio
• D) Gross margin ratio

81. A company that has a high gross profit margin is likely to:

• A) Have high sales costs relative to its revenue
• B) Be able to maintain a significant markup on its products
• C) Have low operational efficiency
• D) Be heavily reliant on debt financing

82. Which of the following ratios indicates the number of times a company’s net income can cover its interest payments?

• A) Times interest earned ratio
• B) Debt-to-equity ratio
• C) Return on assets ratio
• D) Asset turnover ratio

83. The return on sales ratio is calculated by:

• A) Net income / Sales
• B) Net income / Total assets
• C) Sales / Total assets
• D) Operating income / Sales

84. The acid-test ratio is another name for which of the following?

• A) Quick ratio
• B) Current ratio
• C) Cash flow ratio
• D) Return on equity

85. A company with a negative cash flow from operations is:

• A) Likely to face liquidity issues in the near future
• B) Generating sufficient cash to cover its investments
• C) Efficient in managing working capital
• D) Generating more cash than it needs for daily operations

86. The financial leverage ratio is used to:

• A) Determine the extent to which a company is using debt to finance its assets
• B) Measure a company’s profitability
• C) Measure the cash flow from operating activities
• D) Assess the company’s ability to pay its short-term liabilities

87. What does the net profit margin indicate?

• A) The percentage of revenue that results in net profit after all expenses
• B) The total profit a company makes before taxes and expenses
• C) The efficiency of a company in using its assets
• D) The ability of a company to meet its short-term obligations

88. Which of the following best describes the relationship between debt and equity in the capital structure of a company?

• A) Debt represents borrowed money that must be repaid, while equity represents ownership interest
• B) Debt and equity are essentially interchangeable in financing decisions
• C) Equity financing is less risky than debt financing
• D) Debt financing is always more expensive than equity financing

89. A company’s financial statement analysis primarily helps:

• A) Management make strategic decisions and evaluate performance
• B) Determine the company’s market value
• C) Set dividend payouts
• D) Forecast future sales and market demand

90. A company with a high cash flow from operating activities to current liabilities ratio is likely to:

• A) Be in a strong position to cover its short-term liabilities with cash generated from operations
• B) Be in danger of defaulting on its obligations
• C) Struggle to generate enough cash to cover debt obligations
• D) Be relying heavily on external financing

 

91. The operating profit margin is used to evaluate:

• A) The percentage of profit a company makes from its operations after variable costs are covered
• B) The ability of the company to manage its debt levels
• C) The efficiency of the company’s asset utilization
• D) The company’s return on equity

92. If a company’s quick ratio is greater than 1, this suggests that:

• A) The company has sufficient liquid assets to cover its current liabilities
• B) The company is not using its assets efficiently
• C) The company is highly reliant on its inventory to meet short-term obligations
• D) The company is over-leveraged

93. A company with a low inventory turnover ratio may be experiencing:

• A) Efficient inventory management
• B) A slow-moving inventory
• C) High levels of sales and marketing expenses
• D) Low demand for its products

94. Which of the following is NOT a component of working capital?

• A) Accounts payable
• B) Accounts receivable
• C) Inventory
• D) Long-term debt

95. What does the return on investment (ROI) measure?

• A) The profitability relative to the amount of capital invested
• B) The company’s ability to meet its short-term obligations
• C) The efficiency in managing long-term debt
• D) The level of liquidity available to the company

96. The price-to-earnings (P/E) ratio can help investors assess:

• A) The profitability of a company
• B) The risk of investing in a company
• C) The price relative to the company’s earnings
• D) The debt levels of a company

97. A company with a high return on equity (ROE) is likely to:

• A) Be highly profitable relative to the equity invested by shareholders
• B) Have a low asset turnover ratio
• C) Be using minimal leverage to finance its operations
• D) Be underperforming compared to industry peers

98. What is the purpose of horizontal analysis in financial statement analysis?

• A) To compare a company’s financial performance over multiple periods
• B) To compare a company’s financials with those of its competitors
• C) To analyze the vertical relationship between line items in a financial statement
• D) To measure the company’s profitability relative to industry standards

99. If a company’s current ratio is less than the industry average, it could indicate:

• A) The company’s liquidity position is weaker than its competitors
• B) The company is using its assets more efficiently than its competitors
• C) The company has higher profitability than its competitors
• D) The company is using more debt in its financing than competitors

100. The gross profit margin is most useful for assessing:

• A) The profitability of a company’s core business operations, excluding non-operating expenses
• B) The ability of the company to meet its short-term liabilities
• C) The overall market value of the company
• D) The company’s effectiveness in managing long-term debt

101. The net working capital is calculated by:

• A) Current assets minus current liabilities
• B) Total assets minus total liabilities
• C) Current assets plus long-term liabilities
• D) Cash flow from operations minus liabilities

102. The times interest earned ratio measures:

• A) How well a company can meet its interest payments with its operating income
• B) The company’s overall market value
• C) How efficiently a company is using its assets to generate sales
• D) The company’s profitability relative to its total assets

103. Which of the following would be the least effective in assessing a company’s ability to pay its short-term obligations?

• A) Quick ratio
• B) Current ratio
• C) Cash flow from operations
• D) Return on assets

104. A company’s receivables turnover ratio is useful for assessing:

• A) The efficiency of a company in collecting receivables
• B) The company’s ability to generate profits
• C) The company’s ability to manage debt
• D) The company’s sales growth

105. The current ratio is most useful in evaluating:

• A) A company’s short-term liquidity
• B) A company’s profitability
• C) A company’s market valuation
• D) A company’s long-term solvency

106. If a company’s debt-to-equity ratio is increasing, it might indicate:

• A) The company is taking on more debt relative to equity financing
• B) The company is decreasing its reliance on debt financing
• C) The company’s financial risk is decreasing
• D) The company is paying off its long-term liabilities

107. The operating cash flow to sales ratio is useful for assessing:

• A) The proportion of sales that convert into cash flow from operations
• B) A company’s ability to cover its operating expenses with cash flow
• C) A company’s overall profitability
• D) A company’s liquidity position

108. Which of the following is true regarding the debt ratio?

• A) A higher debt ratio indicates greater financial risk
• B) A lower debt ratio indicates higher profitability
• C) The debt ratio measures the company’s profitability
• D) A higher debt ratio is always better for a company

109. A company with a low payout ratio is likely:

• A) Retaining a higher proportion of its earnings for reinvestment
• B) Paying out a high proportion of its earnings to shareholders
• C) In financial distress and unable to pay dividends
• D) Highly dependent on debt financing

110. The cash conversion cycle is an important metric for:

• A) Evaluating the efficiency of a company’s working capital management
• B) Measuring a company’s profitability over time
• C) Assessing the company’s ability to manage long-term debt
• D) Forecasting future sales growth

111. A company with a high asset turnover ratio is likely to:

• A) Be using its assets efficiently to generate sales
• B) Have a high debt-to-equity ratio
• C) Be operating with low profitability
• D) Be using minimal working capital

112. The dividend yield ratio is calculated by:

• A) Annual dividends per share / Market price per share
• B) Net income / Total equity
• C) Net income / Total assets
• D) Earnings per share / Market price per share

113. Which of the following ratios is most likely to be used to evaluate the risk of bankruptcy?

• A) Altman Z-score
• B) Return on equity
• C) Dividend payout ratio
• D) Gross profit margin

114. The return on sales ratio is primarily useful for evaluating:

• A) The company’s efficiency in converting sales into profit
• B) The company’s liquidity position
• C) The company’s ability to pay dividends
• D) The company’s debt management strategy

115. The price-to-book (P/B) ratio is calculated by:

• A) Market price per share / Book value per share
• B) Market price per share / Earnings per share
• C) Total assets / Total equity
• D) Net income / Book value

116. The cash flow to debt ratio measures:

• A) A company’s ability to cover its debt obligations with operating cash flow
• B) The company’s profitability relative to its debt levels
• C) The total cash generated from operations relative to its total debt
• D) The company’s efficiency in converting cash flow into profits

117. A high fixed asset turnover ratio typically indicates:

• A) The company is efficiently utilizing its fixed assets to generate sales
• B) The company has low levels of fixed assets
• C) The company is using excessive debt to finance its fixed assets
• D) The company is inefficient in managing its fixed assets

118. The equity multiplier is a measure of:

• A) A company’s financial leverage
• B) The company’s ability to generate profits
• C) A company’s asset utilization
• D) The company’s liquidity

119. A company with a low quick ratio may face difficulty in:

• A) Meeting its short-term obligations without relying on inventory
• B) Generating sufficient cash flow from operations
• C) Managing its long-term debt levels
• D) Generating sufficient profit margins

120. The net profit margin is calculated as:

• A) Net income / Sales
• B) Gross profit / Sales
• C) Operating income / Total assets
• D) Net income / Total assets

 

 

121. The primary purpose of financial statement analysis is to:

• A) Provide a historical record of a company’s financial performance
• B) Assist management in decision-making
• C) Predict future financial performance and risks
• D) Increase the company’s market share

122. A company with a negative working capital is likely to:

• A) Have a surplus of assets over liabilities
• B) Be facing liquidity problems
• C) Have excessive inventory
• D) Be overly profitable

123. Which of the following statements about the price-to-earnings (P/E) ratio is correct?

• A) A high P/E ratio indicates the stock is undervalued
• B) A low P/E ratio suggests the company is highly profitable
• C) The P/E ratio can help assess whether a stock is overvalued or undervalued
• D) The P/E ratio measures the company’s dividend-paying ability

124. The cash flow from operating activities can be derived from which of the following?

• A) The net income adjusted for non-cash items and changes in working capital
• B) Sales revenue minus cost of goods sold
• C) The difference between total assets and liabilities
• D) The total income minus interest expenses

125. The days sales outstanding (DSO) ratio measures:

• A) The number of days it takes for a company to collect its receivables
• B) The company’s ability to meet short-term obligations
• C) The number of days a company’s inventory stays in stock
• D) The speed at which a company repays its long-term debt

126. A higher return on assets (ROA) indicates:

• A) The company is using its assets effectively to generate profit
• B) The company has high levels of debt
• C) The company is investing heavily in new assets
• D) The company has high operating expenses

127. Which of the following is true regarding the quick ratio?

• A) It includes all current assets in its calculation
• B) It excludes inventories from the current assets
• C) It is more comprehensive than the current ratio
• D) It measures the efficiency of a company’s fixed assets

128. The gross profit margin is most useful for analyzing:

• A) A company’s ability to meet its short-term obligations
• B) The proportion of sales revenue that exceeds the cost of goods sold
• C) The company’s overall profitability
• D) The company’s management of operating expenses

129. A company with a low times interest earned (TIE) ratio may be:

• A) At risk of not being able to meet its interest payments
• B) Efficiently using its debt to finance operations
• C) Generating strong operating income
• D) Relying heavily on equity financing

130. Which of the following is an example of an operating activity on the cash flow statement?

• A) Issuing bonds
• B) Purchasing equipment
• C) Receiving payment from customers
• D) Paying dividends

131. A decrease in the current ratio could indicate:

• A) A potential decrease in a company’s liquidity
• B) An increase in the company’s ability to pay off long-term debt
• C) A more efficient use of the company’s working capital
• D) An increase in short-term profitability

132. The inventory turnover ratio measures:

• A) How quickly a company sells its inventory
• B) The efficiency of the company’s sales department
• C) The number of days it takes to collect receivables
• D) The efficiency of the company’s use of fixed assets

133. The net income divided by the total assets is known as:

• A) Return on equity (ROE)
• B) Return on assets (ROA)
• C) Return on sales (ROS)
• D) Earnings per share (EPS)

134. The debt-to-equity ratio is used to evaluate:

• A) The proportion of debt used relative to equity in the capital structure
• B) The company’s ability to meet short-term obligations
• C) The company’s profitability
• D) The risk associated with the company’s investments

135. The capital structure refers to:

• A) The mix of debt and equity financing used by a company
• B) The company’s revenue generation process
• C) The company’s fixed and variable costs
• D) The distribution of dividends among shareholders

136. A company’s dividend payout ratio is calculated by:

• A) Dividends paid / Net income
• B) Net income / Dividends paid
• C) Dividends paid / Total assets
• D) Earnings per share / Market price per share

137. Which of the following is a limitation of ratio analysis?

• A) Ratios are based on historical data and may not reflect future performance
• B) Ratios are always accurate
• C) Ratios do not help in comparing companies within the same industry
• D) Ratios ignore external factors such as market conditions

138. The accounts payable turnover ratio measures:

• A) The efficiency of a company in paying off its suppliers
• B) How often a company’s accounts payable balance is paid off
• C) The company’s ability to convert accounts payable into cash
• D) How quickly the company collects payments from customers

139. A company’s return on equity (ROE) ratio measures:

• A) The company’s ability to generate profits from shareholders’ equity
• B) The company’s profitability relative to its total assets
• C) The return from investment in long-term assets
• D) The efficiency of the company’s asset utilization

140. The quick ratio is generally considered a better measure of liquidity than the current ratio because it:

• A) Excludes inventories, which may not be easily converted to cash
• B) Includes all current liabilities
• C) Focuses on long-term debt
• D) Measures the company’s ability to pay dividends

141. A company with a high asset turnover ratio is likely:

• A) Efficient in utilizing its assets to generate sales
• B) Carrying excessive long-term debt
• C) Generating low profits relative to its asset base
• D) Underperforming in its industry

142. Which of the following ratios helps in evaluating the profitability of a company relative to its equity?

• A) Return on assets (ROA)
• B) Return on equity (ROE)
• C) Earnings per share (EPS)
• D) Price-to-earnings (P/E) ratio

143. The free cash flow to firm (FCFF) is used to:

• A) Measure the cash flow available to all investors after capital expenditures
• B) Measure the cash flow available to equity holders only
• C) Estimate the company’s dividend payments
• D) Calculate the net income of a company

144. The dividend yield is calculated by:

• A) Dividends per share / Market price per share
• B) Earnings per share / Market price per share
• C) Net income / Market value of equity
• D) Dividend payout ratio / Net income

145. A company with a higher-than-average inventory turnover ratio is likely:

• A) Managing its inventory effectively
• B) Incurring higher costs in production
• C) Facing high demand for its products
• D) Struggling with excess inventory

146. A high price-to-book (P/B) ratio suggests:

• A) Investors are willing to pay more for each dollar of net assets
• B) The company is generating low profits
• C) The company has high levels of debt
• D) The company’s stock is undervalued

147. What does the return on sales (ROS) ratio measure?

• A) The profitability of a company relative to its total sales
• B) The company’s ability to meet its long-term obligations
• C) The efficiency of the company in managing its cash flow
• D) The return on investment for shareholders

148. Which of the following is an example of a financing activity in the cash flow statement?

• A) Issuing stock
• B) Purchasing raw materials
• C) Paying salaries
• D) Paying interest on loans

149. The times interest earned (TIE) ratio measures:

• A) The company’s ability to meet its interest payments
• B) The number of times a company earns its total revenue
• C) The company’s operating income relative to its debt
• D) The company’s ability to generate operating cash flow

150. A company with a high receivables turnover ratio is likely to:

• A) Collect payments from customers efficiently
• B) Be experiencing slow collections
• C) Have high inventory levels
• D) Face difficulty in managing accounts payable

 

151. The main purpose of the cash flow statement is to:

• A) Show a company’s profitability
• B) Provide information on the company’s liquidity and cash position
• C) Calculate the company’s income taxes
• D) Report the company’s equity growth

152. The current ratio is used to measure:

• A) The company’s efficiency in generating sales
• B) The company’s ability to pay short-term obligations
• C) The amount of debt the company has relative to equity
• D) The return on assets

153. Which of the following would not be considered an investing activity on the cash flow statement?

• A) Purchase of machinery
• B) Sale of investments
• C) Issuance of stock
• D) Purchase of real estate

154. A high debt-to-equity ratio suggests that:

• A) The company has a low level of debt relative to equity
• B) The company is highly leveraged and may have higher financial risk
• C) The company is underperforming
• D) The company has strong operational efficiency

155. If a company’s return on equity (ROE) increases, it typically indicates that:

• A) The company is using its equity capital more efficiently
• B) The company has reduced its debt
• C) The company’s profitability is decreasing
• D) The company’s revenue is falling

156. The acid-test ratio is more stringent than the current ratio because it:

• A) Includes all liabilities in its calculation
• B) Excludes inventories, which may be hard to liquidate
• C) Includes fixed assets in its assets total
• D) Excludes accounts payable

157. The price-to-earnings (P/E) ratio is most useful in:

• A) Assessing the company’s profitability in relation to its market value
• B) Estimating the company’s asset growth rate
• C) Evaluating the company’s revenue potential
• D) Measuring the company’s operating efficiency

158. The operating margin ratio shows:

• A) The company’s ability to generate profits from its sales after variable costs
• B) The company’s ability to meet its interest obligations
• C) The company’s net income after tax
• D) The company’s total assets relative to equity

159. The statement of shareholders’ equity provides information on:

• A) A company’s cash inflows and outflows
• B) A company’s earnings per share
• C) Changes in the company’s equity over a period of time
• D) A company’s ability to generate cash flow

160. In financial statement analysis, horizontal analysis is used to:

• A) Compare financial data across different companies
• B) Analyze changes in financial data over a period of time
• C) Measure a company’s profitability relative to its assets
• D) Evaluate the company’s dividend payout ratio

161. The quick ratio is more conservative than the current ratio because it:

• A) Excludes current liabilities
• B) Includes only cash and cash equivalents in assets
• C) Excludes inventory from current assets
• D) Excludes accounts payable from current liabilities

162. The operating cash flow ratio is calculated by dividing:

• A) Operating cash flow by current liabilities
• B) Operating cash flow by total assets
• C) Net income by current liabilities
• D) Operating cash flow by long-term debt

163. What does a company’s inventory turnover ratio indicate?

• A) The speed at which a company’s inventory is sold and replaced
• B) The time it takes to collect payments from customers
• C) The ratio of income from operations to total liabilities
• D) The ratio of assets to current liabilities

164. The main objective of the return on assets (ROA) ratio is to measure:

• A) The profitability relative to the company’s equity
• B) The efficiency of a company in using its assets to generate profits
• C) The ability of a company to pay short-term obligations
• D) The proportion of debt in the company’s capital structure

165. If a company’s accounts receivable turnover ratio is decreasing, it may indicate that:

• A) The company is collecting receivables more quickly
• B) The company is having trouble collecting payments from customers
• C) The company is increasing its sales
• D) The company has reduced its sales volume

166. Which of the following ratios is used to assess the financial risk of a company?

• A) Price-to-earnings ratio
• B) Debt-to-equity ratio
• C) Return on assets ratio
• D) Gross profit margin

167. The current ratio is calculated as:

• A) Current assets / Current liabilities
• B) Total assets / Total liabilities
• C) Current liabilities / Current assets
• D) Total liabilities / Equity

168. The cash flow from investing activities typically includes:

• A) Payments to suppliers
• B) Borrowing from creditors
• C) Purchase and sale of long-term assets
• D) Payment of dividends

169. A company with a high operating margin is likely to:

• A) Be able to generate more profit from its sales after accounting for operating expenses
• B) Have a high level of debt
• C) Be inefficient in managing its costs
• D) Rely heavily on equity financing

170. In financial analysis, vertical analysis is used to:

• A) Compare financial statements across multiple companies
• B) Evaluate the relationship between various financial statement items in a single period
• C) Analyze the company’s operating efficiency
• D) Measure the company’s asset growth

171. The times interest earned (TIE) ratio is calculated by dividing:

• A) Operating income by interest expense
• B) Net income by interest expense
• C) Operating income by net income
• D) Total liabilities by interest expense

172. The return on equity (ROE) ratio is calculated by dividing:

• A) Net income by shareholders’ equity
• B) Net income by total assets
• C) Operating income by total equity
• D) Earnings before interest and taxes (EBIT) by shareholders’ equity

173. A company with a high quick ratio indicates:

• A) The company is very liquid and able to cover short-term liabilities quickly
• B) The company has a large amount of inventory on hand
• C) The company is heavily reliant on debt
• D) The company is not generating enough revenue

174. Which of the following statements is true about the gross profit margin ratio?

• A) It measures a company’s overall profitability after all expenses
• B) It is used to measure a company’s efficiency in managing inventory
• C) It reflects the proportion of sales revenue left after subtracting the cost of goods sold
• D) It includes operating expenses and interest payments

175. The days payable outstanding (DPO) ratio measures:

• A) How long it takes for the company to pay its suppliers
• B) How quickly the company collects payments from customers
• C) The company’s ability to generate cash flow
• D) The number of days it takes to sell inventory

176. A higher gross profit margin indicates that:

• A) The company is effectively managing its production costs relative to sales
• B) The company is highly leveraged
• C) The company’s sales revenue is declining
• D) The company has high operating expenses

177. The cash flow to debt ratio measures:

• A) The company’s ability to generate cash relative to its debt obligations
• B) The company’s operating income relative to its debt
• C) The total debt of a company relative to its equity
• D) The total assets relative to total liabilities

178. The dividend payout ratio shows:

• A) The proportion of earnings paid out as dividends
• B) The efficiency of the company in utilizing retained earnings
• C) The total dividends paid relative to total revenue
• D) The company’s ability to pay off its debt

179. The capital intensity ratio is used to evaluate:

• A) How capital-intensive the company’s operations are
• B) The company’s asset turnover
• C) The company’s debt-to-equity ratio
• D) The company’s ability to generate income from operations

180. A company’s earnings before interest and taxes (EBIT) is useful for:

• A) Assessing the company’s profitability before the impact of financing decisions
• B) Measuring the company’s ability to meet its interest obligations
• C) Determining the company’s equity value
• D) Analyzing the company’s capital structure

 

181. Which of the following would be classified as a financing activity in the cash flow statement?

• A) Purchase of inventory
• B) Sale of equipment
• C) Issuance of stock
• D) Payment of operating expenses

182. Which ratio is most useful in evaluating the efficiency of a company’s use of its assets?

• A) Current ratio
• B) Return on assets (ROA)
• C) Debt-to-equity ratio
• D) Dividend payout ratio

183. The debt-to-equity ratio measures:

• A) The profitability of a company relative to its debt
• B) The amount of debt relative to the company’s equity capital
• C) The ability of a company to generate cash from operations
• D) The efficiency in utilizing company assets

184. If a company has a high quick ratio, it generally indicates that the company:

• A) May have a high level of unsold inventory
• B) Is able to cover its short-term obligations without selling inventory
• C) Is facing liquidity issues
• D) Has low levels of cash on hand

185. A company’s return on assets (ROA) ratio is calculated by:

• A) Net income / Total assets
• B) Operating income / Total equity
• C) Net income / Shareholders’ equity
• D) Operating income / Total assets

186. The cash conversion cycle measures:

• A) How long it takes for a company to convert its inventory into cash
• B) The company’s profitability over time
• C) The ratio of assets to liabilities
• D) The period a company takes to pay its creditors

187. Which of the following is a key indicator of a company’s liquidity?

• A) Quick ratio
• B) Return on equity
• C) Asset turnover ratio
• D) Operating margin

188. A company’s asset turnover ratio is useful for assessing:

• A) The efficiency of the company in using its assets to generate revenue
• B) The company’s debt load
• C) The proportion of debt to equity
• D) The effectiveness of inventory management

189. Which of the following would likely lead to an increase in a company’s current ratio?

• A) Paying off short-term debt
• B) Selling long-term assets for cash
• C) Increasing accounts payable
• D) Decreasing accounts receivable

190. The gross profit margin ratio reflects:

• A) The percentage of sales revenue after covering the cost of goods sold
• B) A company’s ability to manage its operating expenses
• C) The company’s net income as a percentage of sales
• D) A company’s ability to generate cash from its operations

191. What is the main purpose of the operating cash flow ratio?

• A) To assess a company’s ability to cover short-term liabilities with its operating cash flow
• B) To evaluate a company’s revenue generation
• C) To determine the profitability of a company’s operations
• D) To calculate the company’s cost of capital

192. A decrease in a company’s accounts receivable turnover ratio may indicate:

• A) That the company is collecting its receivables more quickly
• B) That the company has more efficient inventory management
• C) That the company is struggling to collect payments from its customers
• D) That the company has a stronger cash position

193. A high return on equity (ROE) is generally considered to indicate that:

• A) The company is using its shareholders’ equity effectively to generate profits
• B) The company is not utilizing its assets efficiently
• C) The company has a large amount of debt
• D) The company has low operating expenses

194. Which of the following is true about the quick ratio compared to the current ratio?

• A) The quick ratio includes inventory in its calculation
• B) The quick ratio excludes cash from its calculation
• C) The quick ratio excludes inventory, making it a more conservative measure of liquidity
• D) The quick ratio includes total liabilities in its calculation

195. The days sales outstanding (DSO) ratio is used to measure:

• A) The average number of days it takes for a company to collect payment after a sale
• B) The time taken by a company to convert inventory into sales
• C) The time it takes to pay off short-term obligations
• D) The company’s profitability over time

196. Which of the following ratios is most helpful in determining a company’s ability to meet its interest obligations?

• A) Return on assets (ROA)
• B) Debt-to-equity ratio
• C) Times interest earned (TIE) ratio
• D) Price-to-earnings ratio

197. A company with a high asset turnover ratio is likely to:

• A) Use its assets effectively to generate sales
• B) Be highly leveraged
• C) Have high levels of unsold inventory
• D) Have low profitability

198. The price-to-earnings (P/E) ratio is calculated by:

• A) Market price per share / Earnings per share
• B) Net income / Total equity
• C) Earnings per share / Market price per share
• D) Operating income / Market price per share

199. A high dividend payout ratio indicates that:

• A) The company retains a large portion of its earnings for reinvestment
• B) The company pays out most of its earnings to shareholders as dividends
• C) The company has high profitability
• D) The company is investing in capital expenditures

200. A company’s net working capital is calculated as:

• A) Total assets – Total liabilities
• B) Current assets – Current liabilities
• C) Total equity – Total liabilities
• D) Total assets – Current liabilities

201. A company with a low days payable outstanding (DPO) ratio is likely to:

• A) Be paying its suppliers quickly
• B) Have high levels of inventory
• C) Be experiencing liquidity problems
• D) Take longer to collect from customers

202. The cash flow margin ratio is useful for assessing:

• A) The company’s ability to generate cash from its sales relative to its operating expenses
• B) The company’s profitability relative to its assets
• C) The company’s efficiency in managing its liabilities
• D) The company’s liquidity relative to its short-term obligations

203. The return on investment (ROI) is calculated by:

• A) Net income / Total assets
• B) Net income / Investment
• C) Operating income / Total liabilities
• D) Net income / Shareholders’ equity

204. If a company’s days inventory outstanding (DIO) increases, it suggests that:

• A) The company is selling inventory more quickly
• B) The company is holding inventory for a longer period
• C) The company is experiencing liquidity issues
• D) The company is reducing its production costs

205. Which of the following would be classified as an operating activity in the cash flow statement?

• A) Issuance of bonds
• B) Sale of equipment
• C) Payment of employee salaries
• D) Purchase of investments

206. A company with a high debt-to-equity ratio is likely to:

• A) Be highly dependent on debt for financing its operations
• B) Have a low level of debt compared to equity
• C) Have a high level of equity financing
• D) Be able to generate more profit from its equity investments

207. The earnings before interest, taxes, depreciation, and amortization (EBITDA) is used to:

• A) Measure a company’s operating performance without the effects of financing and accounting decisions
• B) Assess the company’s profitability relative to its debt levels
• C) Measure the company’s cash flow from investing activities
• D) Evaluate the company’s capital structure

208. The times interest earned (TIE) ratio is used to measure:

• A) A company’s ability to meet its interest obligations based on its operating income
• B) A company’s profitability in relation to its total equity
• C) The proportion of debt financing used by the company
• D) A company’s liquidity in the short term

209. The asset-liability matching strategy is most useful for:

• A) Minimizing the company’s exposure to interest rate risk
• B) Maximizing equity returns
• C) Maximizing the company’s cash flow
• D) Minimizing the company’s debt

210. The operating profit margin shows:

• A) The percentage of revenue left after subtracting variable costs
• B) The company’s total liabilities relative to assets
• C) The company’s income after all expenses, including taxes
• D) The company’s ability to pay short-term obligations

 

211. Which financial ratio is most commonly used to evaluate a company’s liquidity?

• A) Return on equity (ROE)
• B) Current ratio
• C) Debt-to-equity ratio
• D) Asset turnover ratio

212. Which of the following is a key factor in determining the net income of a company?

• A) Cash inflows from financing activities
• B) Operating expenses
• C) Changes in working capital
• D) Depreciation of assets

213. Which of the following best measures the efficiency of a company in managing its inventories?

• A) Return on assets (ROA)
• B) Inventory turnover ratio
• C) Debt-to-equity ratio
• D) Dividend payout ratio

214. The purpose of financial statement analysis is to:

• A) Determine a company’s future stock price
• B) Assess a company’s profitability, liquidity, and solvency
• C) Identify the company’s tax obligations
• D) Evaluate the company’s corporate governance

215. If a company has a quick ratio of less than 1, it indicates:

• A) The company has sufficient liquid assets to cover current liabilities
• B) The company may have liquidity problems in the short term
• C) The company is highly profitable
• D) The company has a low level of debt

216. Which of the following financial statements provides information on a company’s profitability over a specific period?

• A) Balance sheet
• B) Income statement
• C) Cash flow statement
• D) Statement of changes in equity

217. What does the return on equity (ROE) ratio measure?

• A) The profitability of a company relative to its equity
• B) The company’s ability to pay off its debts
• C) The efficiency of a company in utilizing its assets
• D) The liquidity of a company

218. The interest coverage ratio measures:

• A) A company’s ability to meet its interest obligations based on its operating income
• B) A company’s profitability over time
• C) The company’s efficiency in managing working capital
• D) The company’s return on equity

219. What does the operating cash flow ratio measure?

• A) The relationship between operating income and interest payments
• B) The company’s ability to generate cash from its operating activities relative to its short-term obligations
• C) The liquidity of the company’s total assets
• D) The profitability of a company’s operations

220. A company’s profitability ratio is important because it helps to:

• A) Assess how well the company can cover its short-term liabilities
• B) Understand how much profit a company generates relative to its revenue, assets, or equity
• C) Determine the company’s debt burden
• D) Evaluate the company’s efficiency in using its assets

221. Which of the following would be considered a non-operating item on the income statement?

• A) Sales revenue
• B) Cost of goods sold
• C) Interest expense
• D) Operating income

222. The dividend yield ratio is calculated by:

• A) Dividends per share / Market price per share
• B) Net income / Shareholders’ equity
• C) Earnings per share / Market price per share
• D) Total assets / Shareholders’ equity

223. A company’s asset turnover ratio of 3 indicates that:

• A) The company is generating three times its total assets in sales
• B) The company has a high level of inventory
• C) The company has a low return on assets
• D) The company’s assets are underutilized

224. The cash flow from operations is:

• A) The net income minus dividends
• B) The cash generated or consumed by a company’s core business activities
• C) The sum of all financial cash flows
• D) The cash inflows from long-term investments

225. The price-to-book (P/B) ratio is useful for:

• A) Determining how much investors are willing to pay for each dollar of equity
• B) Assessing the company’s liquidity position
• C) Evaluating the company’s ability to pay off short-term obligations
• D) Estimating the company’s future earnings growth

226. A company’s gross margin ratio is:

• A) Gross profit / Net sales
• B) Net income / Net sales
• C) Operating income / Total assets
• D) Total liabilities / Total assets

227. A company with a high leverage ratio is likely to:

• A) Have a high amount of debt relative to its equity
• B) Have a low level of financial risk
• C) Use more equity financing than debt financing
• D) Be highly liquid

228. What does a high price-to-earnings (P/E) ratio typically indicate about a company?

• A) It is undervalued in the market
• B) It has high growth expectations from investors
• C) It has low profitability relative to its share price
• D) It is highly leveraged

229. Which of the following is used to calculate the current ratio?

• A) Current liabilities / Current assets
• B) Current assets / Current liabilities
• C) Total liabilities / Total assets
• D) Net income / Total assets

230. The working capital of a company is calculated by:

• A) Total assets – Total liabilities
• B) Current assets – Current liabilities
• C) Total equity – Total liabilities
• D) Current liabilities – Current assets

231. The current ratio provides insight into:

• A) The company’s ability to pay off its short-term debts with its short-term assets
• B) The company’s return on equity
• C) The company’s efficiency in managing assets
• D) The company’s profitability over time

232. A company’s operating margin indicates:

• A) The proportion of revenue that remains after paying operating expenses
• B) The company’s ability to pay interest on its debts
• C) The company’s total sales relative to its net income
• D) The level of profitability after all expenses are deducted

233. The accounts receivable turnover ratio helps to measure:

• A) How efficiently a company collects payments from customers
• B) The company’s profitability relative to its sales
• C) The company’s ability to pay its short-term liabilities
• D) The effectiveness of inventory management

234. The acid-test ratio (or quick ratio) excludes which of the following?

• A) Cash and cash equivalents
• B) Accounts payable
• C) Inventory
• D) Accounts receivable

235. The basic earnings per share (EPS) ratio is calculated by:

• A) Net income / Weighted average shares outstanding
• B) Operating income / Total assets
• C) Dividends / Market price per share
• D) Net income / Total liabilities

236. A company’s capital structure refers to:

• A) The composition of its liabilities and equity financing
• B) The company’s profitability over time
• C) The relationship between its assets and liabilities
• D) The method it uses to manage inventory

237. A significant increase in a company’s inventory turnover ratio generally suggests:

• A) Improved efficiency in managing inventory
• B) A decrease in sales activity
• C) A higher level of unsold goods
• D) Reduced profitability

238. Which of the following is a liquidity ratio?

• A) Price-to-earnings (P/E) ratio
• B) Return on equity (ROE)
• C) Current ratio
• D) Debt-to-equity ratio

239. A company that has a high current ratio but low quick ratio may be:

• A) Relying on inventory to meet its short-term obligations
• B) Highly efficient in managing its working capital
• C) Experiencing liquidity issues despite its high current ratio
• D) Able to pay off its debts immediately

240. Which ratio would be most helpful in evaluating a company’s ability to cover its interest payments?

• A) Times interest earned (TIE) ratio
• B) Return on equity (ROE)
• C) Debt-to-equity ratio
• D) Asset turnover ratio

 

241. The “price-to-sales” (P/S) ratio is calculated by:

• A) Market price per share / Sales per share
• B) Net income / Sales
• C) Earnings per share / Sales per share
• D) Sales / Total assets

242. The debt ratio measures:

• A) The proportion of a company’s total assets that are financed by debt
• B) The relationship between a company’s equity and debt
• C) The company’s ability to generate profit from its assets
• D) The liquidity of a company

243. The formula for the return on assets (ROA) is:

• A) Net income / Shareholders’ equity
• B) Net income / Total assets
• C) Operating income / Total liabilities
• D) Net income / Net sales

244. A higher asset turnover ratio typically indicates that:

• A) The company is using its assets more efficiently to generate sales
• B) The company has a large amount of debt
• C) The company is experiencing high growth
• D) The company has low sales

245. Which of the following best measures how efficiently a company is using its assets to generate sales?

• A) Return on equity (ROE)
• B) Asset turnover ratio
• C) Price-to-earnings ratio (P/E)
• D) Gross margin ratio

246. What is the primary purpose of the statement of cash flows?

• A) To assess the company’s ability to generate cash from operations
• B) To calculate the company’s profitability
• C) To measure the company’s equity
• D) To summarize the company’s liabilities

247. A company with a low dividend payout ratio:

• A) Retains more earnings for reinvestment
• B) Pays out most of its earnings to shareholders as dividends
• C) Has higher dividend yields
• D) Is less likely to retain earnings for future growth

248. The net profit margin ratio is calculated by:

• A) Gross profit / Sales
• B) Operating income / Sales
• C) Net income / Sales
• D) Net income / Total assets

249. Which ratio is used to measure a company’s ability to generate sales from its working capital?

• A) Working capital turnover
• B) Current ratio
• C) Debt-to-equity ratio
• D) Quick ratio

250. The times interest earned (TIE) ratio is a measure of:

• A) A company’s ability to cover its interest expenses with its earnings
• B) A company’s efficiency in generating sales from its assets
• C) A company’s return on equity
• D) The liquidity of the company’s current assets

251. The “cash conversion cycle” measures:

• A) How quickly a company can convert its investments in inventory and other resources into cash flows from sales
• B) The relationship between cash inflows and cash outflows
• C) How efficiently a company generates sales from its assets
• D) The company’s profitability relative to its assets

252. Which of the following is an example of a solvency ratio?

• A) Return on assets (ROA)
• B) Debt-to-equity ratio
• C) Gross margin ratio
• D) Operating margin ratio

253. Which of the following statements about financial leverage is true?

• A) Financial leverage refers to the use of debt to finance a company’s assets
• B) Higher leverage generally means lower financial risk
• C) Financial leverage has no impact on profitability
• D) Financial leverage is only relevant to companies in the banking sector

254. Which of the following financial ratios is used to determine the effectiveness of a company’s management in utilizing its total assets to generate profit?

• A) Return on assets (ROA)
• B) Current ratio
• C) Quick ratio
• D) Dividend payout ratio

255. The equity multiplier is used to measure:

• A) The total amount of equity in relation to total assets
• B) The amount of debt used in financing the company’s assets
• C) The company’s ability to meet its short-term obligations
• D) The profitability of a company relative to its equity

256. Which of the following is an indication of a company’s ability to pay its long-term obligations?

• A) Current ratio
• B) Quick ratio
• C) Debt-to-equity ratio
• D) Cash ratio

257. Which ratio would be used to evaluate a company’s profitability relative to its shareholders’ equity?

• A) Return on equity (ROE)
• B) Return on assets (ROA)
• C) Debt-to-equity ratio
• D) Dividend payout ratio

258. Which of the following financial ratios would you use to assess a company’s ability to pay short-term liabilities with its most liquid assets?

• A) Current ratio
• B) Quick ratio
• C) Cash flow ratio
• D) Asset turnover ratio

259. A company with a price-to-earnings (P/E) ratio of 10 suggests that:

• A) Investors are willing to pay 10 times the company’s earnings for each share of stock
• B) The company is not profitable
• C) The company’s stock is undervalued
• D) The company has a high return on equity

260. Which of the following financial ratios would be useful in determining a company’s ability to meet its interest payments?

• A) Current ratio
• B) Debt-to-equity ratio
• C) Interest coverage ratio
• D) Dividend yield ratio

261. The return on investment (ROI) is calculated by:

• A) Net income / Total assets
• B) Net income / Shareholders’ equity
• C) Operating income / Total investment
• D) Earnings before interest and tax (EBIT) / Total investment

262. A company with a lower operating margin ratio suggests that:

• A) The company is less efficient in controlling its costs
• B) The company is highly profitable
• C) The company generates more revenue from its operations
• D) The company has high debt levels

263. The “working capital” of a company is an indicator of:

• A) The company’s ability to cover its short-term liabilities with its short-term assets
• B) The company’s ability to generate profits
• C) The total equity available for shareholders
• D) The company’s debt-to-equity ratio

264. Which of the following ratios can help assess the efficiency of a company in collecting its receivables?

• A) Accounts receivable turnover ratio
• B) Current ratio
• C) Return on assets (ROA)
• D) Price-to-earnings (P/E) ratio

265. The “return on sales” ratio measures:

• A) The proportion of profit generated from sales after all expenses
• B) The efficiency of a company in managing its costs
• C) The company’s return on equity
• D) The company’s ability to pay dividends

 

266. The “debt-to-equity” ratio is used to assess:

• A) The proportion of debt financing versus equity financing
• B) The liquidity of a company
• C) The profitability of a company
• D) The efficiency of a company’s asset usage

267. If a company has a high current ratio, it suggests that:

• A) The company may have too many assets tied up in inventory
• B) The company is facing financial difficulties
• C) The company has insufficient current assets
• D) The company’s profitability is high

268. The gross profit margin ratio is calculated by:

• A) Gross profit / Total assets
• B) Gross profit / Sales revenue
• C) Operating income / Sales revenue
• D) Net income / Sales revenue

269. The “quick ratio” is also known as:

• A) The acid-test ratio
• B) The current ratio
• C) The cash ratio
• D) The solvency ratio

270. A company’s “earnings per share” (EPS) is calculated by:

• A) Net income / Total assets
• B) Net income / Outstanding shares
• C) Gross profit / Total assets
• D) Operating income / Total equity

271. A company’s “inventory turnover” ratio measures:

• A) How quickly the company can sell its inventory
• B) The efficiency of asset management
• C) The profitability from inventory
• D) The company’s ability to repay short-term debt

272. The “operating income margin” ratio measures:

• A) Profitability from core business operations
• B) Total profitability after all expenses
• C) A company’s liquidity
• D) How much debt the company uses

273. Which of the following ratios helps assess how well a company can meet its long-term obligations?

• A) Debt-to-equity ratio
• B) Times interest earned ratio
• C) Return on equity
• D) Earnings per share

274. The price-to-earnings (P/E) ratio is calculated by:

• A) Market price per share / Earnings per share
• B) Net income / Market price per share
• C) Earnings per share / Market price per share
• D) Net income / Shareholders’ equity

275. A company with a high return on assets (ROA) indicates:

• A) The company is effectively utilizing its assets to generate profit
• B) The company has too much debt
• C) The company has high operating costs
• D) The company is relying heavily on equity financing

276. The “accounts payable turnover” ratio measures:

• A) How efficiently a company pays its suppliers
• B) The efficiency of a company in converting sales to cash
• C) The proportion of debt versus equity financing
• D) The company’s ability to meet long-term obligations

277. The “net working capital” is defined as:

• A) Current assets minus current liabilities
• B) Total assets minus total liabilities
• C) Total liabilities minus equity
• D) Current assets plus long-term debt

278. A company with a low return on equity (ROE) suggests:

• A) The company is not generating sufficient profits from its equity
• B) The company has high liquidity
• C) The company is utilizing assets efficiently
• D) The company’s stock is undervalued

279. The “price-to-book” ratio is used to:

• A) Measure the market value of a company’s equity compared to its book value
• B) Assess the efficiency of inventory management
• C) Measure the profitability from sales
• D) Calculate the company’s total liabilities

280. The current ratio is calculated by:

• A) Current assets / Current liabilities
• B) Current assets / Total liabilities
• C) Total assets / Current liabilities
• D) Current liabilities / Equity

281. The “times interest earned” ratio measures:

• A) The company’s ability to cover its interest payments
• B) The company’s ability to generate revenue
• C) The company’s return on investment
• D) The efficiency in managing inventory

282. A decrease in the inventory turnover ratio may indicate:

• A) Excess inventory or slow-moving products
• B) Strong sales performance
• C) An increase in accounts payable
• D) Efficient inventory management

283. The “return on investment” (ROI) ratio calculates:

• A) The profit generated relative to the investment
• B) The profitability from core operations
• C) The percentage of debt in the capital structure
• D) The growth rate of assets

284. The “asset utilization” ratio is important because:

• A) It measures the efficiency of using assets to generate revenue
• B) It measures a company’s debt levels
• C) It indicates a company’s liquidity
• D) It assesses the company’s profitability

285. A company with a low “price-to-sales” (P/S) ratio suggests:

• A) The stock may be undervalued
• B) The company has high debt levels
• C) The company is unprofitable
• D) The company is inefficient in generating sales

286. The “cash flow margin ratio” measures:

• A) The company’s ability to convert sales into cash
• B) The efficiency of asset management
• C) The company’s profitability
• D) The amount of cash in relation to total assets

287. A high “earnings before interest and tax” (EBIT) margin suggests:

• A) The company is efficient in generating profit from its operations
• B) The company is highly leveraged
• C) The company is not paying enough taxes
• D) The company has low sales

288. The “capital structure” of a company refers to:

• A) The mix of debt and equity financing
• B) The company’s ability to generate cash flow
• C) The company’s profitability
• D) The company’s asset management strategy

289. The “dividend payout ratio” is calculated by:

• A) Dividends / Net income
• B) Net income / Dividends
• C) Dividends / Total assets
• D) Operating income / Dividends

290. A company’s “return on capital employed” (ROCE) is a measure of:

• A) The efficiency of capital utilization to generate profits
• B) The company’s ability to meet its short-term obligations
• C) The relationship between profit and total assets
• D) The company’s debt levels

 

291. A company’s “operating cycle” refers to:

• A) The time it takes to convert inventory into cash
• B) The time it takes to generate a profit from sales
• C) The time it takes to pay off liabilities
• D) The time it takes to produce goods

292. The “net profit margin” ratio shows:

• A) The percentage of revenue that becomes profit after expenses
• B) The percentage of total assets used to generate revenue
• C) The company’s return on investment
• D) The company’s ability to pay short-term debt

293. A company’s “liquidity” ratios primarily measure:

• A) The ability to meet short-term obligations
• B) The efficiency of asset management
• C) The profitability from core operations
• D) The debt ratio of the company

294. The “return on sales” ratio is another name for:

• A) Profit margin
• B) Return on assets
• C) Return on equity
• D) Gross profit margin

295. The “debt-to-assets” ratio is used to determine:

• A) What percentage of a company’s assets is financed by debt
• B) The company’s profitability
• C) How quickly a company can pay off its short-term debt
• D) The company’s stock price

296. A company with a high “debt-to-equity” ratio is generally considered:

• A) More risky in terms of debt management
• B) More likely to generate high returns on equity
• C) To have low profitability
• D) To have lower liquidity

297. The “dividend yield” ratio measures:

• A) The return on investment from dividends relative to the stock price
• B) The percentage of earnings paid out as dividends
• C) The return on equity generated from dividends
• D) The dividend payout compared to the company’s debt

298. A “high” current ratio indicates:

• A) A potential issue with overstocking inventory
• B) Strong liquidity and ability to cover short-term liabilities
• C) A high level of debt
• D) High profitability

299. The “cash flow from operations” is an important measure because it:

• A) Shows how much cash a company generates from its core business activities
• B) Measures the efficiency of a company’s investments
• C) Shows the cash inflow from financing activities
• D) Assesses a company’s ability to repay long-term debt

300. The “asset-to-equity” ratio measures:

• A) The leverage of a company in relation to its equity base
• B) The liquidity of the company
• C) The proportion of debt in total financing
• D) The company’s profitability

301. A high “inventory turnover” ratio suggests:

• A) Efficient use of inventory and rapid sales
• B) Low sales and poor inventory management
• C) High debt levels and poor asset management
• D) High costs in maintaining inventory

302. The “cash ratio” measures:

• A) A company’s ability to meet its short-term liabilities using only cash or cash equivalents
• B) A company’s overall profitability
• C) A company’s ability to pay long-term debt
• D) The amount of debt relative to equity

303. The “profitability index” is used to:

• A) Measure the profitability of investment projects
• B) Assess a company’s return on equity
• C) Calculate the ratio of profits to total assets
• D) Determine the company’s liquidity

304. The “interest coverage ratio” is used to determine:

• A) A company’s ability to meet its interest payments on debt
• B) A company’s profitability from operations
• C) A company’s ability to generate cash from assets
• D) The efficiency of the company’s capital structure

305. The “quick ratio” differs from the current ratio because it:

• A) Excludes inventory from current assets
• B) Includes all short-term liabilities
• C) Includes cash equivalents in current liabilities
• D) Excludes liabilities due within a year

306. The “operating margin” ratio shows:

• A) The percentage of revenue that is left after covering operating expenses
• B) The profitability of a company after all expenses
• C) The percentage of total assets used in operations
• D) The proportion of debt in financing operations

307. The “fixed asset turnover” ratio measures:

• A) How efficiently a company uses its fixed assets to generate revenue
• B) The efficiency of using all assets to generate revenue
• C) The level of capital investment in fixed assets
• D) The debt-to-equity ratio

308. A company’s “current liabilities” includes:

• A) Accounts payable, short-term debt, and other obligations due within a year
• B) Long-term debt, equity, and short-term loans
• C) Equity and earnings from the business
• D) Inventory, accounts receivable, and fixed assets

309. The “operating income” is calculated by:

• A) Subtracting operating expenses from gross income
• B) Subtracting total liabilities from total assets
• C) Adding non-operating income to gross profit
• D) Subtracting interest and taxes from gross profit

310. The “book value per share” is calculated by:

• A) Dividing shareholders’ equity by the number of shares outstanding
• B) Dividing total assets by the number of shares outstanding
• C) Dividing net income by the number of shares outstanding
• D) Dividing market price by the number of shares outstanding

 

311. The “return on investment (ROI)” ratio measures:

• A) The return generated on the total investment made in the business
• B) The return generated on equity
• C) The return from the sale of an asset
• D) The profitability of the company from operations

312. A “high” inventory turnover ratio generally indicates:

• A) Efficient inventory management and strong sales
• B) Poor inventory management and overstocking
• C) Low sales and poor liquidity
• D) Low profitability

313. The “price-to-earnings (P/E) ratio” measures:

• A) How much investors are willing to pay for a company’s earnings
• B) The dividend yield of the company
• C) The level of debt relative to equity
• D) The company’s ability to generate profit from its assets

314. The “current ratio” is a measure of:

• A) A company’s ability to pay short-term obligations with its short-term assets
• B) The company’s profitability from core operations
• C) The company’s return on equity
• D) The company’s debt load relative to equity

315. The “return on assets (ROA)” ratio shows:

• A) How effectively a company is using its assets to generate profit
• B) The proportion of assets financed by equity
• C) The amount of assets relative to liabilities
• D) The return from investing in equity

316. The “earnings per share (EPS)” is calculated by:

• A) Dividing net income by the number of shares outstanding
• B) Dividing net income by the total assets
• C) Dividing total revenue by the number of shares outstanding
• D) Subtracting total liabilities from net income

317. The “gross margin” ratio shows:

• A) The percentage of revenue remaining after deducting the cost of goods sold
• B) The company’s ability to generate profits from operations
• C) The percentage of total sales converted to net income
• D) The ratio of fixed costs to variable costs

318. The “debt service coverage ratio” is used to measure:

• A) The company’s ability to meet its debt obligations from operating income
• B) The company’s overall debt level
• C) The company’s ability to pay dividends to shareholders
• D) The company’s capacity to finance new projects

319. The “operating cash flow ratio” is used to assess:

• A) A company’s ability to cover its short-term liabilities with cash from operations
• B) The company’s efficiency in generating operating income
• C) The proportion of capital expenditures to operating income
• D) The company’s profitability from core operations

320. The “working capital” is calculated by:

• A) Subtracting current liabilities from current assets
• B) Adding total liabilities to total equity
• C) Dividing total assets by current liabilities
• D) Subtracting long-term debt from equity

321. The “return on equity (ROE)” measures:

• A) The return generated on shareholders’ equity
• B) The return generated on total assets
• C) The profitability from the sale of assets
• D) The earnings available to common shareholders

322. The “dividend payout ratio” is calculated by:

• A) Dividing dividends by net income
• B) Dividing net income by shareholders’ equity
• C) Dividing operating income by net income
• D) Dividing sales by total assets

323. The “price-to-book (P/B) ratio” is used to:

• A) Compare a company’s market value to its book value
• B) Measure a company’s return on investments
• C) Evaluate a company’s debt load relative to equity
• D) Assess the company’s earnings compared to its market price

324. The “cash conversion cycle” is a measure of:

• A) The time taken to convert inventory into cash
• B) The time taken to generate profits from sales
• C) The time taken to pay off liabilities
• D) The company’s liquidity and ability to meet short-term debt

325. The “fixed charge coverage ratio” is used to assess:

• A) The company’s ability to meet fixed charges, including interest and lease payments
• B) The company’s profitability from fixed assets
• C) The efficiency of capital expenditure
• D) The company’s ability to pay dividends to shareholders

326. The “capital adequacy ratio” is primarily used in:

• A) The banking industry to measure the financial stability of banks
• B) The retail industry to measure profitability
• C) The technology sector to measure market growth
• D) The real estate sector to assess cash flow

327. The “asset turnover ratio” measures:

• A) How efficiently a company uses its assets to generate sales
• B) The company’s profitability from asset sales
• C) The ratio of assets to liabilities
• D) The company’s liquidity

328. A “declining” return on equity (ROE) can indicate:

• A) A decrease in profitability or efficiency in using shareholders’ equity
• B) An increase in the company’s stock price
• C) A decrease in long-term liabilities
• D) An increase in the company’s assets

329. The “market-to-book” ratio is used to assess:

• A) The market value of a company relative to its book value
• B) The profitability of a company’s assets
• C) The ability to cover short-term liabilities
• D) The efficiency of capital investment

330. The “leverage ratio” is used to measure:

• A) The amount of debt used in financing relative to equity
• B) The return on assets
• C) The profitability from core operations
• D) The liquidity of the company

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