Q. If a company has a debt to equity ratio of 1.5, what does this indicate?
-
A.
The company has more equity than debt
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B.
The company has more debt than equity
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C.
The company is fully financed by equity
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D.
The company has no debt
Solution
A debt to equity ratio of 1.5 indicates that the company has more debt than equity.
Correct Answer:
B
— The company has more debt than equity
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Q. What does a high inventory turnover ratio suggest?
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A.
Slow-moving inventory
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B.
Efficient inventory management
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C.
Excessive stock levels
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D.
Low sales volume
Solution
A high inventory turnover ratio suggests efficient inventory management and strong sales.
Correct Answer:
B
— Efficient inventory management
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Q. What does a low gross profit margin indicate?
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A.
High production costs
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B.
Strong pricing power
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C.
Efficient cost management
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D.
High sales volume
Solution
A low gross profit margin indicates high production costs relative to sales.
Correct Answer:
A
— High production costs
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Q. What does a negative return on equity (ROE) indicate?
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A.
The company is profitable
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B.
The company is losing money
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C.
The company has high debt
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D.
The company is growing
Solution
A negative return on equity (ROE) indicates that the company is losing money relative to its equity.
Correct Answer:
B
— The company is losing money
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Q. What does the price-to-earnings (P/E) ratio measure?
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A.
Company profitability
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B.
Market valuation of a company
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C.
Debt levels
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D.
Asset efficiency
Solution
The price-to-earnings (P/E) ratio measures the market valuation of a company relative to its earnings.
Correct Answer:
B
— Market valuation of a company
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Q. What is the effect of depreciation on financial statements?
-
A.
Increases net income
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B.
Decreases net income
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C.
Has no effect on cash flow
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D.
Increases asset value
Solution
Depreciation decreases net income as it is an expense that reduces profit.
Correct Answer:
B
— Decreases net income
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Q. What is the effect of straight-line depreciation on financial statements?
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A.
Increases asset value
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B.
Reduces net income evenly over time
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C.
Increases cash flow
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D.
Decreases total liabilities
Solution
Straight-line depreciation reduces net income evenly over the asset's useful life.
Correct Answer:
B
— Reduces net income evenly over time
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Q. What is the primary purpose of calculating the current ratio?
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A.
To assess profitability
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B.
To evaluate liquidity
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C.
To measure solvency
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D.
To analyze efficiency
Solution
The current ratio measures a company's ability to pay short-term obligations, thus evaluating liquidity.
Correct Answer:
B
— To evaluate liquidity
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Q. Which accounting ratio indicates how effectively a company is using its assets to generate earnings?
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A.
Debt to equity ratio
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B.
Return on assets (ROA)
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C.
Current ratio
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D.
Quick ratio
Solution
Return on assets (ROA) shows how effectively a company is using its assets to generate earnings.
Correct Answer:
B
— Return on assets (ROA)
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Q. Which accounting standard requires companies to disclose their accounting policies?
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A.
IFRS
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B.
GAAP
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C.
IAS
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D.
FASB
Solution
IFRS requires companies to disclose their accounting policies in the financial statements.
Correct Answer:
A
— IFRS
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Q. Which of the following is NOT a component of the acid-test ratio?
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A.
Cash
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B.
Accounts receivable
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C.
Inventory
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D.
Marketable securities
Solution
Inventory is not included in the acid-test ratio, which measures immediate liquidity.
Correct Answer:
C
— Inventory
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Q. Which ratio is used to assess a company's ability to meet its long-term obligations?
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A.
Current ratio
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B.
Quick ratio
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C.
Debt to equity ratio
-
D.
Return on equity
Solution
The debt to equity ratio is used to assess a company's ability to meet its long-term obligations.
Correct Answer:
C
— Debt to equity ratio
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Q. Which ratio would you use to assess a company's ability to cover its long-term obligations?
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A.
Current ratio
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B.
Debt to equity ratio
-
C.
Return on equity
-
D.
Gross profit margin
Solution
The debt to equity ratio assesses a company's ability to cover its long-term obligations.
Correct Answer:
B
— Debt to equity ratio
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