Financial Statements Analysis Exam Questions and Answers

Sample Questions and Answers

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
Answer: A

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
Answer: A

The “dividend payout ratio” is calculated by:

A) Dividends / Net income

B) Net income / Dividends

C) Dividends / Total assets

D) Operating income / Dividends
Answer: A

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
Answer: A

 

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
Answer: A

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
Answer: A

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
Answer: A

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

A) Profit margin

B) Return on assets

C) Return on equity

D) Gross profit margin
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: B

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

 

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A

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
Answer: A