Financial Statement Analysis Multiple Choice Questions#1

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

In the vertical analysis of income statement, all the accounts are expressed as a
percentage of which of the following?
o A) Net sales
o B) Gross sales
o C) Net income
o D) Total expenses

INCORRECT

Right Answer is the option "A"

2. 2)

A company has a cost of goods sold of Rs. 530,000; the beginning inventory is Rs.
120,000, and ending inventory is Rs. 180,000. Calculate the number of days to sell the
inventory. (Round the figures to the nearest whole)

o A) 83 days
o B) 125 days
o C) 104 days
o D) 100 days

INCORRECT

Right Answer is the option "C"

Average inventory = opening inv +ending inv / 2
= 120000+180000/ 2
= 150000
Inventory turnover = CGS / average inventory
= 530,000 / 150000
 = 3.53
Number of day to sell the inventory = 365 / 3.53
= 103.39

3. 3)

Which of the following equations properly represents a derivation of the fundamental

accounting equation?

o A) Assets + liabilities = owner's equity

o B) Assets = owner's equity
o C) Cash = assets
o D) Assets - liabilities = owner's equity

INCORRECT

Right Answer is the option "D"

4. 4)

What will be effect of purchase of inventory on open account on quick ratio of the
company?

o A) Increase
o B) No effect
o C) Decrease

CORRECT

Right Answer is the option "B"

5. 5)

Which of the following statement is the LEAST LIKELY to be correct?

 o A) A firm that has a high degree of business risk is less likely to want to incur
financial risk
o B) There exists little or no negotiation with suppliers of capital regarding the
financing needs of the firm
o C) Financial ratios are relevant for making internal comparisons
o D) It is important to make external comparisons or financial ratios

CORRECT

Right Answer is the option "B"

6. 6)

Which of the following provides the basis for the trial balance?

o A) Income statement
o B) Statement of cash flow
o C) Ledger
o D) Adjusting entries

INCORRECT

Right Answer is the option "C"

7. 7)

In order to know the percentage of assets financed by creditors, which of the following
ratio is calculated?

o A) Debt Ratio
o B) Equity Ratio
o C) Operating credit Ratio
o D) Quick Ratio

INCORRECT
 Right Answer is the option "A"

8. 8)

The cash flow from investing activities shows the cash effects of which of the following?

o A) Income statement items

o B) Long term assets items
o C) Long term liability & stockholder’s equity
o D) Long term liability and long term assets

INCORRECT

Right Answer is the option "B"

9. 9)

In a perpetual inventory system, which of the following is NOT part of the series of
journal entries made when merchandise is sold on credit?

o A) Credit the Cost of Goods Sold account

o B) Credit the Sales account
o C) Credit the Merchandise Inventory account
o D) Debit the Accounts Receivable account

INCORRECT

Right Answer is the option "A"

10. 10)

As stated in the audit report, or Report of Independent Accountants, the primary

responsibility for a company's financial statements lies with which of the following?
 o A) The owners of the company
o B) Independent financial analysts
o C) The auditors
o D) The company's management

INCORRECT

Right Answer is the option "D"

Financial Statement Analysis Multiple Choice Questions#2

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

Nishat Corporation had net income of Rs. 100,000, paid income taxes of Rs. 30,000, and
had interest expense of Rs. 8,000. What was Nishat's times interest earned ratio?

o A) 12.5
o B) 16.25
o C) 17.25
o D) 17.85

INCORRECT

Right Answer is the option "C" Times interest earned (TIE) ratio = EBIT/interest.
= 138000/8000
= 17.25

2. 2)

Operating cycle belongs to which group of ratios?

 o A) Leverage ratios
o B) Liquidity ratios
o C) Profitability ratios
o D) Activity ratios

INCORRECT

Right Answer is the option "D"

3. 3)

Assume that a company has current assets of Rs. 60,000, current liabilities of Rs. 35,000
and prepaid expenses of Rs. 5,000. Calculate the quick ratio of the company?

o A) 1.57
o B) 1.71
o C) 1.86
o D) 0.58

INCORRECT

Right Answer is the option "A" Quick ratio = current assets – inventory – prepaid
expenses / current liabilities
= 60000 – 5000 / 35000
= 55000 / 35000
= 1.57

4. 4)

Which of the following is NOT normally required for revenue to be recognized according
to the revenue principle for accrual basis accounting?

o A) The price is fixed or determinable

o B) Services have been performed
o C) Cash that has already been collected
o D) Evidence of an arrangement for customer payment exists
 INCORRECT

Right Answer is the option "C"

5. 5)

Which of the following is a type of preferred stock that entitles the holder to a fixed
dividend and, in addition, to the right to get any surplus profits after payment of agreed
levels of dividends to holders of common stock?

o A) In arrears preferred shares

o B) Call able preferred shares
o C) Cumulative preferred shares
o D) Participating preferred shares

INCORRECT

Right Answer is the option "D"

6. 6)

To financial analysts, "working capital" means the same thing as which of the following?

o A) Total assets
o B) Fixed assets
o C) Current assets
o D) Current assets minus current liabilities

INCORRECT

Right Answer is the option "C"

7. 7)

What are the effects of an adjusting entry on the financial statements?

 o A) Match revenues and expenditures
o B) Increase net income
o C) Increase the accuracy of balance sheet and income statement
o D) Match revenues and assets

INCORRECT

Right Answer is the option "C"

8. 8)

ABC Company has a cost of goods sold of Rs. 500,000. During the year the inventory
increased by Rs. 10,000 and accounts payable increased by Rs.C15, 000. The interest
expense was Rs. 15,000 for the year and dividends of Rs.C11, 000 were paid during the
year. What would be the cash payments for the purchase of the merchandise?

o A) Rs. 505,000
o B) Rs. 516,000
o C) Rs. 490,000
o D) Rs. 495,000

INCORRECT

Right Answer is the option "D"

9. 9)

Which of the following valuation methods can distort the comparison between
companies?

o A) Inventory valuation methods

o B) Assets valuation methods
o C) Sales valuation methods
o D) Expenses valuation methods

INCORRECT
 Right Answer is the option "A"

10. 10)

When dividends are paid to the shareholders they must be approved by which of the
following authority?

o A) Board of directors
o B) Management
o C) Common Stockholders
o D) Preferred Stockholders

INCORRECT

Right Answer is the option "A"

Financial Statement Analysis Multiple Choice Questions#3

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

Which of the following statements (in general) is CORRECT?

o A) A low receivables turnover is desirable

o B) The lower the total debt-to-equity ratio, the lower the financial risk for a firm
o C) An increase in net profit margin with no change in sales or assets means a
weaker ROI
o D) The higher the tax rate for a firm, the lower the interest coverage ratio

INCORRECT

Right Answer is the option "B"

2. 2)

Oliver Incorporated has a current ratio equal to 1.6 and a quick ratio equal to 1.2. The
company has Rs. 2 million in sales and its current liabilities are Rs. 1 million. what is the
value of company's current assets?

o A) 1,600,000
o B) 1,200,000
o C) 3,200,000
o D) 2,400,000

INCORRECT

Right Answer is the option "A"

Current ratio = current assets / current liabilities
Current assets = current ratio * current liabilities
= 1.6*1,000,000
= 1,600,000

3. 3)

Which one of the following statements is TRUE regarding distributions to stockholders?

o A) The payment of dividends is not directly related to the profits of a given peri
o B) Shareholders can individually decide on their distributions
o C) To receive a corporate dividend, stock must be owned on the date of
declaration
o D) Corporate dividends reduce contributed capital and therefore, stockholders’
equity

INCORRECT

Right Answer is the option "A"

4. 4)
 Cash flow relating to investing activities does NOT present the cash effects of which of
the following?

o A) Plant assets
o B) Intangible assets
o C) Investments
o D) Debt financing

INCORRECT

Right Answer is the option "D"

5. 5)

Office supplies are purchased on account. The company uses a perpetual inventory
system. What is the correct journal entry for this purchase of office supplies?

o A) Debit - Purchases; Credit - Cash

o B) Debit - Merchandise Inventory; Credit - Cost of Goods Sold
o C) Debit - Office Supplies; Credit - Accounts Payable
o D) Debit - Merchandise Inventory; Credit - Accounts Payable

CORRECT

Right Answer is the option "C"

6. 6)

Which of the following is NOT true about the specific identification method?

o A) It requires a very detailed physical count

o B) This method allows management to easily manipulate ending inventory cost
o C) This method is very hard to use on interchangeable goods
o D) This results in an overstated inventory account during the period of inflation

INCORRECT
 Right Answer is the option "D"

7. 7)

Which of the following statements best describes the nature of depreciation?

o A) Regular reduction of asset value to correspond to the decline in market value

as the asset ages
o B) A process of correlating the book value of an asset with its gradual decline in
physical efficiency
o C) Allocation of the cost in a manner that will ensure that plant and equipment
items are not carried on the balance sheet at amounts in excess of net realizable
value

o D) Allocation of the cost of a plant asset to the periods in which benefits are
received

INCORRECT

Right Answer is the option "D"

8. 8)

Warner Corporation reported net income in excess of its net cash flow from operations. A
possible explanation of this difference is:

o A) Depreciation expense
o B) Non operating gains
o C) A decrease in income tax rates
o D) A decrease in accounts receivable over the period

INCORRECT

Right Answer is the option "A"

 9. 9)

Which of the following opinions state that the financial statements do not present fairly
the financial position, results of operations etc, in conformity with GAAP?

o A) Unqualified opinion
o B) Qualified opinion
o C) adverse opinion
o D) Disclaimer of opinion

INCORRECT

Right Answer is the option "C"

10. 10)

In a statement of cash flows, the acquisition of land by issuing capital stock:

o A) Is not shown at all, since no cash was received or disbursed

o B) Is shown as an investing activity
o C) Is shown as a financing activity
o D) Is shown in a supplementary schedule as a non-cash investing and financing
transaction

INCORRECT

Right Answer is the option "D"

Financial Statement Analysis Multiple Choice Questions#4

NOTE: Attempt all Questions to see the Result at the bottom of this page.
1. 1)

Which one of the following is NOT a limitation of financial statements?

o A) They always present past

o B) They always present the monetary terms
o C) They help in assessment of future profitability
o D) They give no information about management and employee relations

CORRECT

Right Answer is the option "C"

2. 2)

Which of the following business owner is personally liable for its debts?

o A) Sole proprietorship
o B) Corporations
o C) General partnership
o D) Limited liability company

INCORRECT

Right Answer is the option "A" Sole proprietorship A business entity owned by a single
individual, which is unincorporated. The owner of a sole proprietorship is personally
liable for any debts or obligations of the business.

3. 3)

Which of the following characteristics is NOT generally regarded as right of common

shareholders?

o A) Preemptive right
o B) Voting rights
o C) Preference in liquidation
 o D) Transferability of shares

INCORRECT

Right Answer is the option "C" Common shareholders are entitled only to the residual
interest in a liquidation; creditors and preferred shareholders have the preference. In the
absence of modification, common shares hold a preemptive right, have voting privileges,
and are readily transferable.

4. 4)

In the vertical analysis of income statement, all the accounts are expressed as a
percentage of which of the following?

o A) Net sales
o B) Gross sales
o C) Net income
o D) Total expenses

INCORRECT

Right Answer is the option "A"

5. 5)

The changes in the financial statement items from a base year to following years are often
expressed as which of the following?

o A) Trend percentages
o B) Component percentages
o C) Common percentages
o D) Both trend and component percentages

INCORRECT

Right Answer is the option "A"

6. 6)

Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity ratio?

o A) 2%
o B) 7%
o C) 6%
o D) 3%

INCORRECT

Right Answer is the option "C"

7. 7)

Which of the following could account for a company's gross profit ratio increasing from
one period to the next?

o A) An increase in the cost of sales which has not been accompanied by an

increase in the selling price of goods sold

o B) An increase in the selling price of goods sold which has not been accompanied
by an increase in the cost of sales

o C) A change in the mix of goods sold so that lower profit margin goods take a
greater proportion of total sales
o D) A change in stock valuation method at the year end which leads to a decrease
in the closing stock figure

CORRECT

Right Answer is the option "B"

8. 8)

A company has a cost of goods sold of Rs. 530,000; the beginning inventory is Rs.
120,000, and ending inventory is Rs. 180,000. Calculate the number of days to sell the
inventory. (Round the figures to the nearest whole)

o A) 83 days
o B) 125 days
o C) 104 days
o D) 100 days

INCORRECT

Right Answer is the option "C" Average inventory = opening inv +ending inv / 2
= 120000+180000/ 2
= 150000
Inventory turnover = CGS / average inventory
= 530,000 / 150000
= 3.53
Number of day to sell the inventory = 365 / 3.53
= 103.39

9. 9)

Which one of the following statement indicates the Inventory turnover ratio?

o A) How quickly company prepared its inventory

o B) How quickly company converts its inventory into cash
o C) How quickly company purchases its inventory
o D) How quickly company sells its inventory

INCORRECT

Right Answer is the option "D"

10. 10)

Operating cycle belongs to which group of ratios?

 o A) Leverage ratios
o B) Liquidity ratios
o C) Profitability ratios
o D) Activity ratios

INCORRECT

Right Answer is the option "D"

Financial Statement Analysis Multiple Choice Questions#5

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

The actions taken by the management to make company appear as strong as possible in
its financial statements is termed as which of the following?

o A) Window dressing
o B) Understanding
o C) Comprehensiveness
o D) Materiality

CORRECT

Right Answer is the option "A" Firms can employ “window dressing” techniques to make
their financial statements look stronger.

2. 2)

ABC Company selected ‘Abdullah and Ahmad Charted Accountants’ as its auditors /
 accountancy firm. After audit the auditors stated company’s audit report as: We have
examined the accounts of ABC Company up to the year ended 30th June, 2009, and other
record based on these accounts and we got all the information required by us. In our
opinion the financial statements and the accounts on which they are based have been
prepared in conformity with GAAP and present a true and fair position of the affairs of
ABC Company.

What do you think the above case is which type of following audit reports?

o A) Qualified Audit Opinion

o B) Un-qualified Audit Opinion
o C) Adverse Audit Opinion
o D) Disclaimer Audit Opinion

CORRECT

Right Answer is the option "B"

3. 3)

All of the following users are very much concerned with the ratio analysis EXCEPT?

o A) Credit analyst, including banks who want to know the credibility of company
o B) Bond rating companies, who analyze ratios to help ascertain a company’s
ability to pay its debts
o C) Customers, who want to know the designs and quality of the products offered
o D) Managers, to analyze, control, and thus improve their working operations

INCORRECT

Right Answer is the option "C" Ratio analysis is used by three main groups: (1)
managers, who employ ratios to help analyze, control, and thus improve their firms’
operations; (2) credit analyst, including bank loan officers and bond rating analysts, who
analyze ratios to help ascertain a company’s ability to pay its debts; and (3) stock analyst,
who are interested in a company’s efficiency, risk, and growth prospects.

4. 4)
 In order to know the percentage of assets financed by creditors, which of the following
ratio is calculated?

o A) Debt Ratio
o B) Equity Ratio
o C) Operating credit Ratio
o D) Quick Ratio

INCORRECT

Right Answer is the option "A"

5. 5)

Which of the following statement is the LEAST LIKELY to be correct?

o A) A firm that has a high degree of business risk is less likely to want to incur
financial risk
o B) There exists little or no negotiation with suppliers of capital regarding the
financing needs of the firm
o C) Financial ratios are relevant for making internal comparisons
o D) It is important to make external comparisons or financial ratios

INCORRECT

Right Answer is the option "B"

6. 6)

After recording the transactions in journal, posting is made to which of the following?

o A) Trial Balance
o B) Financial Statements
o C) Ledger
o D) After-closing Trial Balance
 INCORRECT

Right Answer is the option "C"

7. 7)

Prepaid Expense is a(n) _________ account and has a _________ normal balance.

o A) Revenue, credit
o B) Liability, credit
o C) Asset, debit
o D) Expense, debit

INCORRECT

Right Answer is the option "C"

8. 8)

One purpose of closing entries is to give zero balances to which of the following
accounts?

o A) Asset and liability accounts

o B) Liability and capital accounts
o C) Revenue and expense accounts
o D) Expense and capital accounts

CORRECT

Right Answer is the option "C"

9. 9)

Which of the following would be considered as cash flow from investing activities?
 o A) Proceeds from issuance of long-term debt
o B) Expenditure for sale of plant and equipment
o C) Payments to suppliersPayments to suppliers
o D) Receipts from sale of goods or services

INCORRECT

Right Answer is the option "B"

10. 10)

The cash flow from investing activities shows the cash effects of which of the following?

o A) Income statement items

o B) Long term assets items
o C) Long term liability & stockholder’s equity
o D) Long term liability and long term assets

CORRECT

Right Answer is the option "B"

Financial Statement Analysis Multiple Choice Questions#6

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

In a perpetual inventory system, which of the following is NOT part of the series of
journal entries made when merchandise is sold on credit?
 o A) Credit the Cost of Goods Sold account
o B) Credit the Sales account
o C) Credit the Merchandise Inventory account
o D) Debit the Accounts Receivable account

INCORRECT

Right Answer is the option "A"

2. 2)

Which of the following is NOT an example of accelerated depreciation method?

o A) Straight-line method
o B) Sum-of-the-years digit method
o C) Double-declining balance method
o D) Modified Accelerated Cost Recovery System

CORRECT

Right Answer is the option "A" Accelerated-Depreciation method: In this method higher
depreciation rate is charged in early years and lower rate in later years.

3. 3)

As stated in the audit report, or Report of Independent Accountants, the primary

responsibility for a company’s financial statements lies with which of the following?

o A) The owners of the company

o B) Independent financial analysts
o C) The auditors
o D) The company’s management

INCORRECT

Right Answer is the option "D" Audit of financial statements is independent of the
business issuing these. Financial Statements preparation is Management’s responsibility
4. 4)

Capital stock is normally listed on which of the following financial statements of a

business enterprise?

o A) Cash flow Statement

o B) Income Statement
o C) Statement of Retained Earnings
o D) Balance Sheet

INCORRECT

Right Answer is the option "D" Capital Stock is a preferred stock that a company is
authorize to issue, according to their corporate charter. Capital stock is normally listed on
a company’s balance sheet

5. 5)

The money that a company gets from potential investors in addition to the stated value of
the stock is referred to which of the following?

o A) Paid in capital
o B) Additional paid in capital
o C) Capital stock
o D) Contributed capital

INCORRECT

Right Answer is the option "B"

6. 6)

Generally , investors want to buy shares at which of the following prices?

 o A) At face value
o B) Below face value
o C) Above face value
o D) At market value

CORRECT

Right Answer is the option "B"

7. 7)

By computing component percentages for several successive balance sheets, which of the
following can NOT be found?

o A) The increasing items

o B) The decreasing items
o C) The unchanged items
o D) The future profitable items

INCORRECT

Right Answer is the option "D"

8. 8)

Which of the following are the ratios that are used to determine an entity’s short-term
debt paying ability?

o A) Times interest earned, inventory turnover, current ratio, and receivables

turnover
o B) Times interest earned, acid-test ratio, current ratio, and inventory turnover
o C) Current ratio, acid-test ratio, receivables turnover, and inventory turnover
o D) Asset turnover, times interest earned, current ratio, and receivables turnover

INCORRECT

Right Answer is the option "C"

 9. 9)

If a company had a current ratio of 0.5, then which of the following statements regarding
that company's working capital would be true?

o A) The company's working capital would be positive

o B) The company's working capital would be zero
o C) The company's working capital would be negative
o D) The company's working capital would be 2:1

INCORRECT

Right Answer is the option "C"

10. 10)

A company has an inventory turnover ratio of 1.05 times, and cost of goods sold of Rs.
50,000. Calculate the average inventory of the company

o A) Rs. 47, 500

o B) Rs. 47, 619
o C) Rs. 47, 500
o D) Rs. 47, 650

CORRECT

Right Answer is the option "B"

Inventory turnover ratio = CGS/ average inventory
= 50,000 / 1.05
= 47619

Financial Statement Analysis Multiple Choice Questions#7

 NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

Which of the following is a possible reason for company's average debtor’s collection
period falling from one year to the next?

o A) An improvement in the state of the economy

o B) A large credit customer facing severe cash shortages
o C) Economic recession
o D) A shortening of the credit period offered by suppliers

INCORRECT

Right Answer is the option "A"

2. 2)

Which of the following ratio is calculated in order to know the liquidity of the accounts
receivables?

o A) Accounts receivables turnover

o B) Accounts receivables turnover in days
o C) Operating cycle
o D) Activity ratios

INCORRECT

Right Answer is the option "A" Liquidity of Receivables: It shows have quickly
Accounts Receivables are collected i.e. converted into cash. It is determined by
Receivable Turnover Ratio (RTO). It is number of times “Receivables” are converted
into cash during the year.
3. 3)

A company can improve (lower) its debt-to-total asset ratio by doing which of the
following?

o A) Borrow more
o B) Shift short-term to long-term debt
o C) Shift long-term to short-term debt
o D) Sell common stock

INCORRECT

Right Answer is the option "D"

4. 4)

Nishat Corporation had net income of Rs. 100,000, paid income taxes of Rs. 30,000, and
had interest expense of Rs. 8,000. What was Nishat's times interest earned ratio?

o A) 12.5
o B) 16.25
o C) 17.25
o D) 17.85

INCORRECT

Right Answer is the option "D"

Times interest earned (TIE) ratio = EBIT/interest.

= 138000/8000
= 17.25

5. 5)

Most consumer-oriented stores and catalogue companies are an example of which of the
following type of business?
 o A) Manufacturing
o B) Service
o C) Merchandise
o D) Both merchandise and manufacturing

INCORRECT

Right Answer is the option "C"

6. 6)

All of the following statements are true regarding ratios that measure a company's ability
to pay short-term and long-term debt EXCEPT:

o A) The average debt ratio is between 0.57 and 0.67

o B) High times-interest-earned ratio indicates a company can pay interest expense
easily
o C) Debt ratio of 60% indicates 60% of assets are financed with debt
o D) Debt ratio of 90% indicates lower financial risk than a debt ratio of 60%

INCORRECT

Right Answer is the option "D"

7. 7)

Which of the following performance measures would be of most direct interest to

shareholders?

o A) Return on net assets

o B) Gross profit margin
o C) Debt ratio
o D) Dividend yield

INCORRECT

Right Answer is the option "D"

8. 8)

The total legal capital of the company consists of which of the following?

o A) Only common stocks issued

o B) Only preferred stocks issued
o C) Common stocks and preferred stocks
o D) Common stocks and retained earnings

INCORRECT

Right Answer is the option "C"

9. 9)

Which of the following options indicate how quickly accounts receivables are converted
into cash?

o A) Accounts receivable turnover

o B) Days to collect accounts receivable
o C) Working capital
o D) Total assets turnover

INCORRECT

Right Answer is the option "A" Liquidity of Receivables: It shows have quickly
Accounts Receivables are collected i.e. converted into cash. It is determined by
Receivable Turnover Ratio (RTO). It is number of times “Receivables” are converted
into cash during the year.

10. 10)

Operating cycle belongs to which group of ratios?

 o A) Leverage ratios
o B) Liquidity ratios
o C) Profitability ratios
o D) Activity ratios

INCORRECT

Right Answer is the option "D"

Financial Statement Analysis Multiple Choice Questions#8

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

If current assets are Rs. 15.6 million, current liabilities Rs. 11.2 million and stocks Rs. 1.8
million, what is the acid test ratio?

o A) 1.39
o B) 1.23
o C) 1.65
o D) 0.89

CORRECT

Right Answer is the option 'B'

Acid Test Ratio = Current assets- Inventories/ Current Liabilities

= 15.6 – 1.8 /11.2
= 1.23

2. 2)
 What will be the effect of conversion of a portion of bonds payable into common stock
on the interest coverage ratio of the company?

o A) Increase
o B) Decrease
o C) No effect
o D) Can not be found from the given information

INCORRECT

Right Answer is the option "A"

3. 3)

What will be the effect on the inventory turnover ratio of the company, if it changed from
FIFO to LIFO during the period of inflation?

o A) Increase
o B) Decrease
o C) No effect
o D) Can not be found from the given information

CORRECT

Right Answer is the option "A"

4. 4)

Assume that a company has current assets of Rs. 60,000, current liabilities of Rs. 35,000
and prepaid expenses of Rs. 5,000. Calculate the quick ratio of the company?

o A) 1.57
o B) 1.71
o C) 1.86
o D) 0.58
 INCORRECT

Right Answer is the option "A"

Quick ratio = current assets – inventory – prepaid expenses / current liabilities = 60000 –
5000 / 35000
= 55000 / 35000
= 1.57

5. 5)

A complete set of financial statements for Hartman Company, at December 31, 1999,
would include each of the following, EXCEPT:

o A) Balance sheet as of December 31, 1999

o B) Income statement for the year ended December 31, 1999
o C) Statement of projected cash flows for 2000
o D) Notes containing additional information that is useful in interpreting the
financial statements

INCORRECT

Right Answer is the option "C"

6. 6)

Failure to record the receipt of a utility bill for services already received will result in
which of the following?

o A) An overstatement of assets
o B) An overstatement of liabilities
o C) An overstatement of equity
o D) An understatement of assets

INCORRECT

Right Answer is the option "C"

7. 7)

Which of the following is the proper journal entry to record Ransom Company's billing
of clients for Rs. 500 of services rendered?

o A) Debit Cash 500; Credit Accounts Receivable 500

o B) Debit Accounts Receivable 500; Service Revenue 500
o C) Debit Accounts Receivable 500; Credit Capital Stock 500
o D) Cash 500; Credit Service Revenue 500

INCORRECT

Right Answer is the option "B"

8. 8)

Which of the following transaction have an effect on expense account?

o A) Purchase of office equipment on credit

o B) Payment on accounts payable
o C) Repayment of principle of bank loan
o D) Payment of wages

INCORRECT

Right Answer is the option "D"

9. 9)

A business has purchased machinery on credit, what will be its journal entry?

o A) Cash - (Debit); Machinery - (Credit)

o B) Machinery - (Debit) ; Accounts payable - (Credit)
o C) Accounts payable - (Debit) ; Machinery - (Credit)
 o D) Machinery - (Debit) ;Cash - (Credit)

CORRECT

Right Answer is the option "B"

10. 10)

Which of the following is NOT normally required for revenue to be recognized according
to the revenue principle for accrual basis accounting?

o A) The price is fixed or determinable

o B) Services have been performed
o C) Cash that has already been collected
o D) Evidence of an arrangement for customer payment exists

INCORRECT

Right Answer is the option "C"

Financial Statement Analysis Multiple Choice Questions#9

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

ABC Company now wants to further raise its capital; it is going to offer its shares first to
current shareholders. The issuance of further capital to Present Shareholders is called:

o A) Paid-in capital
o B) Preferred-stock Issue
 o C) Right Issue
o D) Additional capital

INCORRECT

Right Answer is the option "C" When a company wants to issue further capital (called
raising the capital), shares are first offered to current shareholders. The issuance of
further capital to Present Shareholders is called Right Issue

2. 2)

Which of the following is MORE concerned with the short-term solvency?

o A) Short term Creditors

o B) Long term Creditors
o C) Short term Debtors
o D) Long term Debtors

INCORRECT

Right Answer is the option "C" Analysis by short-term creditors: Interest of short-term
creditors is to watch the ability of business to meet its debts as these become due; i.e.
Short-term solvency.

3. 3)

The increasing Return on Sales (ROS) shows:

o A) Company is facing financial troubles

o B) Company is retaining more than 65% of its profit for operational efficiency
o C) Company is paying dividends consistently over the past years
o D) Company is growing by leaps and bounds

INCORRECT

Right Answer is the option "D"

4. 4)

Which of the following represents the main step(s) of accounting cycle?

o A) Recording the transactions

o B) Classifying the transactions
o C) Ordering, summarizing, counting the transactions
o D) Recording, classifying, summarizing transactions

INCORRECT

Right Answer is the option "D"

5. 5)

Blankenship Company pays its employees every Friday for work rendered that week. The
payroll is typically Rs.10,000 per week. Which of the following journal entries would
Blankenship ordinarily record on the Friday payday?

o A) Salary expense Rs. 10,000 - Debit; Salary payable Rs. 10,000 - Credit
o B) Salary expense Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
o C) Salary payable Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
o D) Salary payable Rs. 10,000 - Debit; Salary expense Rs. 10,000 - Credit

CORRECT

Right Answer is the option "B"

6. 6)

Retained earnings change over time because of several factors. Which of the following
factors would explain an INCREASE in retained earnings?

o A) Net Income
o B) Dividends payment
o C) Investment by the stockholders
 o D) Net Loss

CORRECT

Right Answer is the option "A"

7. 7)

When using the perpetual inventory system, each time a sale is recorded the:

o A) Inventory account is increased

o B) Inventory account is decreased
o C) Cost of Goods Sold account is decreased
o D) Cost of goods available for sale decreases

CORRECT

Right Answer is the option "B"

8. 8)

In perpetual inventory system, a return of defective merchandise is recorded by crediting

__________.

o A) Purchases
o B) Purchase Returns
o C) Purchase Allowance
o D) Merchandise Inventory

INCORRECT

Right Answer is the option "D"

9. 9)

Audit opinions can NOT be classified as which of the following?

 o A) Adverse opinion
o B) Unqualified opinion
o C) Qualified opinion
o D) Disagreement of opinion

INCORRECT

Right Answer is the option "D"

10. 10)

Which of the following is a type of preferred stock that entitles the holder to a fixed
dividend and, in addition, to the right to get any surplus profits after payment of agreed
levels of dividends to holders of common stock?

o A) In arrears preferred shares

o B) Call able preferred shares
o C) Cumulative preferred shares
o D) Participating preferred shares

INCORRECT

Right Answer is the option "D"

Financial Statement Analysis Multiple Choice Questions#10

NOTE: Attempt all Questions to see the Result at the bottom of this page.

1. 1)

Which of the following is NOT a feature of preferred shares?

 o A) Distributive
o B) Callable
o C) In arrears
o D) Cumulative

INCORRECT

Right Answer is the option "A"

2. 2)

Which one of the following represents the value of shares in the market at any point of
time?

o A) Par value
o B) Book value
o C) Face value
o D) Market value

INCORRECT

Right Answer is the option "D"

3. 3)

Which of the following would NOT improve the current ratio?

o A) Issue long-term debt to buy inventory

o B) Sell common stock to reduce current liabilities
o C) Sell fixed assets to reduce accounts payable
o D) Borrow short term to finance additional fixed assets

CORRECT

Right Answer is the option "B"

4. 4)

Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity ratio?

o A) 2%
o B) 7%
o C) 6%
o D) 3%

CORRECT

Right Answer is the option "C"

5. 5)

A company experiences a dramatic fall in its gross profit ratio. This could be the result of
which of the following?

o A) An increase in competition in the company's main product market

o B) An increase in the incidence of bad debts
o C) An increase in overhead expenses
o D) An increase in demand for the company's products

INCORRECT

Right Answer is the option "A"

6. 6)

Which of the following is NOT an objective of fundamental analysis?

o A) To make projection on its business performance

o B) To predict the future stock price
o C) To evaluate its management and make internal business decisions
 o D) To calculate its credit risk

CORRECT

Right Answer is the option "B" Fundamental analysis is performed on historical and
present data, but with the goal of making financial forecasts. There are several possible
objectives: to conduct a company stock valuation and predict its probable price evolution,
to make a projection on its business performance, to evaluate its management and make
internal business decisions, to calculate its credit risk.

7. 7)

Which of the following is NOT a goal of analysis of financial statement?

o A) Assess the past performance

o B) Asses the current financial position
o C) Predict the future performance of the company
o D) Asses the working of management in the future

INCORRECT

Right Answer is the option "D" Financial statements should reflect an accurate picture of
the financial position and performance of a business, and should convey information
useful to assess the past and predict the future

8. 8)

In isolation, which of the following is TRUE about a financial ratio?

o A) Useless piece of information

o B) Useful piece of information
o C) Useful only for past performance
o D) Useful only for future predictions

CORRECT

Right Answer is the option "A" Financial ratios are calculated from one or more pieces of
information from a company's financial statements. For example, the "gross margin" is
 the gross profit from operations divided by the total sales or revenues of a company,
expressed in percentage terms. In isolation, a financial ratio is a useless piece of
information

9. 9)

Financial statement ratio analysis may be undertaken to study liquidity, turnover,

profitability, and other indicators. To which does the current ratio most relate?

o A) Liquidity
o B) Turnover
o C) Profitability
o D) Other indicator

CORRECT

Right Answer is the option "A"

10. 10)

Which of the following is the ideal position of debt ratio?

o A) 30%
o B) 60%
o C) 50%
o D) 45%

CORRECT

Right Answer is the option "B" Debt ratio indicates the proportion of a company's assets
that is financed with debt. This ratio measures a business's ability to pay both current and
long-term debts (total liabilities). Low debt ratio is safer than a high debt ratio. normal
debt ratio in US is 60% to 70%