Sample Questions and Answers
What is the purpose of the statement of retained earnings?
A) To report the company’s net income for the period
B) To show changes in the owner’s equity over a period
C) To track changes in cash flows from operating activities
D) To summarize liabilities and equity at a given point
Answer: B
Which of the following is considered a non-operating activity?
A) Interest income
B) Sales of inventory
C) Administrative expenses
D) Manufacturing costs
Answer: A
What is the main function of the break-even analysis?
A) To determine the point at which total revenue equals total cost
B) To calculate profit margins
C) To estimate the return on investment
D) To evaluate financial risks
Answer: A
Which of the following is an example of a financial investment?
A) Purchasing inventory for resale
B) Investing in stocks or bonds
C) Acquiring machinery for production
D) Paying for advertising expenses
Answer: B
What is the definition of the operating cycle?
A) The time between purchasing raw materials and receiving payment from customers
B) The time between selling inventory and collecting cash
C) The period during which a company produces and sells goods
D) The time between receiving funds from shareholders and paying dividends
Answer: A
What does the term “liquidity” refer to?
A) The company’s ability to generate profits
B) The company’s ability to meet short-term financial obligations
C) The company’s cash flow management
D) The company’s ability to raise capital from investors
Answer: B
Which of the following is NOT a characteristic of a sole proprietorship?
A) Limited liability for the owner
B) Owned and controlled by a single individual
C) Simple to form and manage
D) Profits taxed as personal income
Answer: A
Which of the following is an example of a fixed cost?
A) Raw materials
B) Sales commissions
C) Rent for office space
D) Direct labor
Answer: C
Which of the following is a primary goal of financial management?
A) Maximizing market share
B) Minimizing expenses
C) Maximizing shareholder wealth
D) Reducing debt
Answer: C
Which of the following best describes “margin of safety”?
A) The difference between actual sales and break-even sales
B) The amount of profit generated by sales above fixed costs
C) The percentage of total costs that are variable
D) The safety reserves maintained for operating expenses
Answer: A
In a cost-volume-profit analysis, which of the following is assumed to be constant?
A) Variable costs
B) Total fixed costs
C) Sales price per unit
D) Sales volume
Answer: B
What is the primary difference between managerial accounting and financial accounting?
A) Managerial accounting is used for internal decision-making, while financial accounting is for external reporting
B) Managerial accounting follows GAAP, while financial accounting does not
C) Managerial accounting is concerned only with long-term decisions, while financial accounting focuses on short-term operations
D) Managerial accounting uses historical data, while financial accounting uses forecasts
Answer: A
What does the quick ratio measure?
A) The company’s ability to pay off all liabilities
B) The company’s ability to meet its short-term obligations using its most liquid assets
C) The company’s profitability
D) The company’s leverage
Answer: B
Which of the following is an example of an indirect cost in manufacturing?
A) Direct labor
B) Raw materials
C) Factory overhead
D) Sales commissions
Answer: C
What is the formula to calculate return on assets (ROA)?
A) Net income / Total assets
B) Net income / Equity
C) Operating income / Total liabilities
D) Net income / Revenue
Answer: A
In which of the following financial statements would you find “net income”?
A) Income Statement
B) Cash Flow Statement
C) Balance Sheet
D) Retained Earnings Statement
Answer: A
Which of the following ratios measures how effectively a company is using its assets to generate sales?
A) Current ratio
B) Return on equity
C) Asset turnover ratio
D) Debt-to-equity ratio
Answer: C
Which of the following is an advantage of a corporation?
A) Unlimited liability for shareholders
B) Simplicity of organization and operation
C) The ability to raise capital through stock sales
D) Reduced tax burdens
Answer: C
What does the term “operating leverage” refer to?
A) The relationship between operating income and variable costs
B) The use of fixed costs in a company’s cost structure
C) The impact of financial debt on profits
D) The flexibility of a company to adjust its operations in response to changes in sales
Answer: B
What does the term “capital budgeting” refer to?
A) The process of determining the appropriate level of debt financing
B) The process of allocating funds to new projects and long-term investments
C) The process of calculating short-term profitability
D) The process of estimating tax obligations
Answer: B
Which of the following is NOT a factor that affects a company’s capital structure?
A) Market conditions
B) Interest rates
C) Personal preferences of the company’s managers
D) The company’s profitability
Answer: C
What does a company’s cash flow statement primarily report?
A) The profitability of the company
B) Changes in the company’s financial position
C) The company’s equity
D) Cash inflows and outflows over a period of time
Answer: D
Which of the following is an example of a non-current liability?
A) Accounts payable
B) Bonds payable
C) Accrued expenses
D) Bank overdraft
Answer: B
Which of the following would be considered a “non-operating” item in the income statement?
A) Depreciation expense
B) Interest expense
C) Sales revenue
D) Cost of goods sold
Answer: B
What is the primary purpose of a forecast in financial management?
A) To estimate future financial performance
B) To record past transactions
C) To prepare the company’s income tax return
D) To provide a legal record of financial activity
Answer: A
Which of the following would increase a company’s working capital?
A) Decreasing accounts payable
B) Borrowing more funds
C) Selling inventory
D) Increasing long-term debt
Answer: A
Which of the following is a characteristic of an internal control system?
A) It is designed to ensure that the company meets industry regulations
B) It helps safeguard company assets and ensure the reliability of financial reporting
C) It is primarily used to calculate taxes
D) It focuses only on external audits
Answer: B
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