MULTIPLE-CHOICE QUESTIONS WITH ANSWERS RELATED TO FINANCE AND FINANCIAL STATEMENT ANALYSIS

Which of the following financial statements provides a snapshot of a company’s financial position at a specific point in time?
A) Income Statement
B) Balance Sheet
C) Cash Flow Statement
D) Statement of Retained Earnings
Answer: B) Balance Sheet

The financial ratio used to assess a company’s ability to pay its short-term obligations with its most liquid assets is called:
A) Return on Equity (ROE)
B) Current Ratio
C) Debt-to-Equity Ratio
D) Price-to-Earnings (P/E) Ratio
Answer: B) Current Ratio

Which of the following is a measure of a company’s profitability relative to its assets?
A) Earnings Per Share (EPS)
B) Price-to-Book (P/B) Ratio
C) Return on Assets (ROA)
D) Gross Profit Margin
Answer: C) Return on Assets (ROA)

If a company has a high debt-to-equity ratio, it indicates:
A) Strong financial health
B) Low risk
C) A higher level of financial leverage
D) High liquidity
Answer: C) A higher level of financial leverage

Which financial statement represents a company’s revenues and expenses over a period of time?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
Answer: B) Income Statement

The DuPont analysis breaks down return on equity (ROE) into which components?
A) Profit margin, asset turnover, and financial leverage
B) Liquidity, solvency, and profitability
C) Operating income, interest expense, and taxes
D) Earnings before interest and taxes (EBIT), interest expense, and taxes
Answer: A) Profit margin, asset turnover, and financial leverage

Which of the following ratios measures the efficiency of a company’s operations in generating profits from its revenue?
A) Inventory Turnover Ratio
B) Debt-to-Asset Ratio
C) Return on Investment (ROI)
D) Quick Ratio
Answer: C) Return on Investment (ROI)

Which financial ratio indicates the percentage of profit a company generates from its total revenue?
A) Gross Profit Margin
B) Operating Profit Margin
C) Net Profit Margin
D) Return on Investment (ROI)
Answer: C) Net Profit Margin

A high price-to-earnings (P/E) ratio typically indicates:
A) Undervalued stock
B) Strong growth potential
C) Low profitability
D) High risk
Answer: B) Strong growth potential

The term “EBITDA” stands for:
A) Earnings Before Interest, Taxes, Depreciation, and Amortization
B) Earnings Before Interest and Taxes, Dividends, and Assets
C) Earnings Before Income Tax, Dividends, and Amortization
D) Earnings Before Interest, Taxes, Depreciation, and Assets
Answer: A) Earnings Before Interest, Taxes, Depreciation, and Amortization

Which of the following financial ratios measures a company’s ability to cover its interest payments with its earnings before interest and taxes (EBIT)?
A) Debt-to-Equity Ratio
B) Times Interest Earned Ratio
C) Return on Assets (ROA)
D) Price-to-Earnings (P/E) Ratio
Answer: B) Times Interest Earned Ratio

The quick ratio is also known as:
A) Acid-Test Ratio
B) Debt Ratio
C) Operating Margin
D) Asset Turnover Ratio
Answer: A) Acid-Test Ratio

A decrease in a company’s accounts receivable turnover ratio may indicate:
A) Improved efficiency in collecting outstanding payments
B) Increased liquidity risk
C) Higher profitability
D) Stronger financial leverage
Answer: B) Increased liquidity risk

Which of the following is a measure of how much profit a company generates with each dollar of shareholders’ equity?
A) Return on Equity (ROE)
B) Return on Assets (ROA)
C) Debt-to-Equity Ratio
D) Operating Profit Margin
Answer: A) Return on Equity (ROE)

The Sustainable Growth Rate (SGR) is calculated as the product of which two financial ratios?
A) Return on Equity (ROE) and Debt-to-Equity Ratio
B) Net Profit Margin and Current Ratio
C) Retention Ratio and Return on Assets (ROA)
D) Return on Equity (ROE) and the Plowback Ratio
Answer: D) Return on Equity (ROE) and the Plowback Ratio

Which financial ratio measures the proportion of debt financing in a company’s capital structure?
A) Debt-to-Equity Ratio
B) Quick Ratio
C) Price-to-Book (P/B) Ratio
D) Inventory Turnover Ratio
Answer: A) Debt-to-Equity Ratio

In financial analysis, the term “beta” measures:
A) The rate of inflation
B) The volatility of a stock relative to the overall market
C) The correlation between two securities
D) The level of systematic risk in a portfolio
Answer: B) The volatility of a stock relative to the overall market

Which financial statement shows changes in a company’s cash and cash equivalents over a specific period?
A) Income Statement
B) Balance Sheet
C) Cash Flow Statement
D) Statement of Retained Earnings
Answer: C) Cash Flow Statement

The formula for calculating the debt-to-equity ratio is:
A) Total Debt / Total Assets
B) Total Debt / Total Equity
C) Total Assets / Total Equity
D) Total Liabilities / Total Equity
Answer: B) Total Debt / Total Equity

A decrease in a company’s inventory turnover ratio may indicate:
A) Improved efficiency in managing inventory
B) Increased liquidity risk
C) Higher profitability
D) Stronger financial leverage
Answer: B) Increased liquidity risk

The term “liquidity ratio” refers to:
A) A company’s ability to meet its long-term financial obligations
B) The ability of a company to convert its assets into cash quickly without significant loss
C) A measure of how efficiently a company uses its assets to generate sales
D) The relationship between a company’s short-term debt and its total equity
Answer: B) The ability of a company to convert its assets into cash quickly without significant loss

The plowback ratio is also known as the:
A) Dividend Yield
B) Retention Ratio
C) Earnings Per Share (EPS)
D) Price-to-Earnings (P/E) Ratio
Answer: B) Retention Ratio

Which financial ratio measures the efficiency of a company in managing its inventory?
A) Inventory Turnover Ratio
B) Debt-to-Equity Ratio
C) Return on Investment (ROI)
D) Quick Ratio
Answer: A) Inventory Turnover Ratio

A high dividend payout ratio typically indicates:
A) Strong growth potential
B) Low profitability
C) Conservative financial policy
D) High risk
Answer: C) Conservative financial policy

The formula to calculate the net profit margin is:
A) (Net Income / Total Assets) x 100
B) (Net Income / Total Revenue) x 100
C) (Net Income / Total Equity) x 100
D) (Net Income / Earnings Before Interest and Taxes) x 100
Answer: B) (Net Income / Total Revenue) x 100

The term “working capital” refers to:
A) The difference between current assets and current liabilities
B) The total assets minus total liabilities
C) The ability of a company to pay off its long-term debt
D) The total equity of the company
Answer: A) The difference between current assets and current liabilities

Which of the following is a measure of how efficiently a company uses its assets to generate revenue?
A) Asset Turnover Ratio
B) Debt-to-Equity Ratio
C) Times Interest Earned Ratio
D) Return on Equity (ROE)
Answer: A) Asset Turnover Ratio

Which financial statement shows the changes in a company’s retained earnings over a specific period?
A) Income Statement
B) Balance Sheet
C) Cash Flow Statement
D) Statement of Retained Earnings
Answer: D) Statement of Retained Earnings

The formula for calculating the quick ratio is:
A) (Current Assets – Inventory) / Current Liabilities
B) (Current Assets – Current Liabilities) / Inventory
C) Current Assets / Current Liabilities
D) (Current Assets – Inventory) / Total Liabilities
Answer: A) (Current Assets – Inventory) / Current Liabilities

Which financial ratio measures a company’s ability to generate earnings from its investments in fixed assets?
A) Return on Equity (ROE)
B) Return on Assets (ROA)
C) Return on Investment (ROI)
D) Earnings Per Share (EPS)
Answer: B) Return on Assets (ROA)

The formula to calculate the earnings per share (EPS) is:
A) Net Income / Total Equity
B) Net Income / Total Assets
C) Net Income / Number of Shares Outstanding
D) Net Income / Total Revenue
Answer: C) Net Income / Number of Shares Outstanding

Which financial ratio measures a company’s ability to meet its short-term liabilities with its most liquid assets?
A) Debt-to-Equity Ratio
B) Return on Investment (ROI)
C) Quick Ratio
D) Gross Profit Margin
Answer: C) Quick Ratio

The degree of financial leverage (DFL) measures:
A) The proportion of debt financing in a company’s capital structure
B) The relationship between a company’s earnings before interest and taxes (EBIT) and its net income
C) The variability of a company’s earnings per share (EPS) relative to changes in its sales
D) The volatility of a company’s stock price relative to changes in the overall market
Answer: C) The variability of a company’s earnings per share (EPS) relative to changes in its sales

Which financial ratio measures a company’s ability to cover its interest payments with its operating income?
A) Times Interest Earned Ratio
B) Current Ratio
C) Debt-to-Equity Ratio
D) Return on Investment (ROI)
Answer: A) Times Interest Earned Ratio

The price-to-book (P/B) ratio compares a company’s market value to its:
A) Earnings per share (EPS)
B) Book value per share
C) Dividends per share
D) Retained earnings per share
Answer: B) Book value per share

Which financial statement shows a company’s revenues and expenses categorized by operating, investing, and financing activities?
A) Income Statement
B) Balance Sheet
C) Cash Flow Statement
D) Statement of Retained Earnings
Answer: C) Cash Flow Statement

The formula for calculating the inventory turnover ratio is:
A) Cost of Goods Sold / Average Inventory
B) Sales Revenue / Average Inventory
C) Average Inventory / Cost of Goods Sold
D) Average Inventory / Sales Revenue
Answer: A) Cost of Goods Sold / Average Inventory

A high debt-to-equity ratio may indicate:
A) Low financial risk
B) Conservative financial policy
C) Difficulty in meeting debt obligations
D) Strong profitability
Answer: C) Difficulty in meeting debt obligations

The term “liquidity risk” refers to:
A) The risk of changes in interest rates
B) The risk of not being able to sell an investment quickly without significant loss
C) The risk of changes in the market value of an investment
D) The risk of default by a borrower
Answer: B) The risk of not being able to sell an investment quickly without significant loss

Which of the following financial ratios measures a company’s ability to generate earnings from its shareholders’ investments?
A) Return on Assets (ROA)
B) Return on Equity (ROE)
C) Earnings Per Share (EPS)
D) Price-to-Earnings (P/E) Ratio
Answer: B) Return on Equity (ROE)

Which of the following is a measure of a company’s ability to generate profit from its shareholders’ investments?
A) Return on Assets (ROA)
B) Return on Equity (ROE)
C) Earnings Per Share (EPS)
D) Price-to-Earnings (P/E) Ratio
Answer: B) Return on Equity (ROE)

The formula to calculate the return on equity (ROE) is:
A) Net Income / Total Equity
B) Net Income / Total Assets
C) Net Income / Number of Shares Outstanding
D) Net Income / Total Revenue
Answer: A) Net Income / Total Equity

Which financial ratio measures the efficiency of a company in collecting outstanding payments from its customers?
A) Accounts Receivable Turnover Ratio
B) Debt-to-Equity Ratio
C) Return on Investment (ROI)
D) Quick Ratio
Answer: A) Accounts Receivable Turnover Ratio

The debt ratio is calculated as:
A) Total Debt / Total Assets
B) Total Debt / Total Equity
C) Total Assets / Total Equity
D) Total Liabilities / Total Equity
Answer: A) Total Debt / Total Assets

The formula to calculate the gross profit margin is:
A) (Gross Profit / Total Revenue) x 100
B) (Net Income / Total Revenue) x 100
C) (Gross Profit / Total Assets) x 100
D) (Net Income / Total Equity) x 100
Answer: A) (Gross Profit / Total Revenue) x 100

Which of the following is a measure of a company’s efficiency in utilizing its fixed assets to generate sales?
A) Inventory Turnover Ratio
B) Asset Turnover Ratio
C) Debt-to-Equity Ratio
D) Return on Investment (ROI)
Answer: B) Asset Turnover Ratio

The formula to calculate the debt-to-assets ratio is:
A) Total Debt / Total Assets
B) Total Debt / Total Equity
C) Total Assets / Total Equity
D) Total Liabilities / Total Equity
Answer: A) Total Debt / Total Assets

Which financial ratio measures the proportion of a company’s assets financed by debt?
A) Debt-to-Equity Ratio
B) Quick Ratio
C) Price-to-Book (P/B) Ratio
D) Inventory Turnover Ratio
Answer: A) Debt-to-Equity Ratio

The sustainable growth rate (SGR) represents:
A) The maximum rate at which a company can grow its sales without requiring external financing
B) The maximum rate at which a company can grow its profits without affecting its capital structure
C) The maximum rate at which a company can grow its assets without increasing its liabilities
D) The maximum rate at which a company can increase its dividends without reducing its equity
Answer: A) The maximum rate at which a company can grow its sales without requiring external financing

Which of the following is a measure of a company’s ability to cover its short-term liabilities with its most liquid assets?
A) Debt Ratio
B) Quick Ratio
C) Current Ratio
D) Times Interest Earned Ratio
Answer: B) Quick Ratio