Financial Statement Analysis MCQ Questions With Answers Part 4

Q1) A drag on liquidity is caused by:

A. Obsolete inventory.

B. Accelerating payments.

C. Limits on short-term lines of credit.

Correct Answer: A

Explanation: It is possible for liquidity to be dragged down when cash is delayed in its entry into the company. The other alternatives include a pull on liquidity, which occurs when cash leaves the company at an excessive rate.

Q2) The quick ratio and the debt-to-capital ratio are two financial ratios that are commonly used to evaluate a company's ability to meet its debt obligations.

A) Both are primarily used to determine the company's ability to meet short-term obligations.

B) Both are primarily used to determine the company's ability to meet long-term obligations.

C) In one case, it is used to assess the company's ability to meet short-term obligations, and in the other case, it is used to assess the company's ability to meet long-term obligations

Correct Answer: C

Explanation: A liquidity ratio, the quick ratio is a measure of liquidity. The ability of a company to meet its short-term obligations is measured by its liquidity ratios. The debt-to-capital ratio is a measure of a company's solvency. Using solvency ratios, you can determine a company's ability to meet its long-term financial obligations.

Q3) Which of the following is incorrect an investing activity?

A. A clothing manufacturer received interest on a bond investment that he made.

B. An organization that purchases computer chips on behalf of a computer manufacturer

C. Purchase of automobiles for the company's officers and directors

Correct Answer: B

Explanation: A computer manufacturer's purchase of computer chips is an operating activity for the company.

Q4) Which of the following is the true reason for a company's low receivables turnover?

A. a lower rate of growth in sales than competitors

B. greater sales growth than competitors

C. A history of having more bad debts than competitors

Correct Answer: C

Explanation: A low receivables turnover ratio indicates that the company is having difficulty collecting money from customers on time. High bad debts and credit losses in comparison to competitors will most likely indicate this.

Q5) Amortization of an intangible asset are:

A. Decreases cash flow from investing activities.

B. Decreases retained earnings.

C. Increases owners’ equity.

Correct Answer: B

Explanation: Intangible asset amortization reduces non-current assets, net income, retained earnings, and owners' equity. The cash flow generated by investing activities is unaffected.

Q6) Liabilities are best knows as:

A) Obligations that are expected to necessitate the expenditure of resources in the future.

B) resources with the potential to provide future benefits

C) a residual ownership interest in the assets of a company

Correct Answer: A

Explanation: Liabilities are obligations incurred as a result of past events that are expected to necessitate a future outflow of resources. Assets are resources that are expected to provide benefits in the future. The residual ownership interest in an entity's assets is referred to as equity (i.e., assets minus liabilities).

Q7) The objective of an audit is to

A. Declare that the financial statements are accurate.

B. Give absolute assurance about the financial statements' accuracy or precision.

C. Allow an auditor to express an opinion on the financial statements' fairness and reliability.

Correct Answer: C

Explanation: The ability of an auditor to express an opinion on the fairness and dependability of financial statements is critical to the auditing process's overall effectiveness.

Q8) An audit can be described as:

A. The audit committee, which is comprised of independent directors, conducts an examination of the financial statements.

B. A qualified director of the company conducts an examination of the financial statements in order to express an opinion on their fairness and dependability.

C. An independent examination of the financial statements of the company.

Correct Answer: C

Explanation: An audit is an independent review of a company's financial statements conducted by a certified public accountant.

Q9) Which of the following statements is true regarding the reporting of earnings per share (EPS)?

A) The amount of diluted EPS must be less than or equal to the amount of basic EPS.

B) The amount of basic EPS can be less than the amount of diluted EPS.

C) When antidilutive securities are converted into shares of common stock, the earnings per share (EPS) is less than the basic earnings per share.

Correct Answer: A

Explanation: Antidilutive securities are those that, if exercised or converted into common stock, would result in an increase in earnings per share.

Q10) An increase in DTL (Deferred Tax Liability) has the following consequences:

A. Decrease in the amount of income tax paid.

B. Increase in current assets.

C. Decrease in shareholders’ equity

Correct Answer: C

Explanation: Income Tax Expense = TP + Change in DTL – Change in DTA An increase in DTL increases ITE and results in lower net income and retained earnings.

Q11) Which of the following financial assets/liabilities to be measured at amortized cost?

A. Bonds payable

B. Derivatives

C. Non derivative instruments with face value exposures hedged by derivatives

Correct Answer: A

Explanation: Bonds payable are valued at the amount of interest they will earn over time. The fair value of derivative instruments and non-derivative instruments with face value exposures hedged by derivatives is determined by calculating the difference between their book and market values.

Q12) Which of the following components of the extended DuPont equation (5-parts) best describes the equation EBT / EBIT is the most accurate?

A) Tax burden.

B) Interest burden.

C) Financial leverage.

Correct Answer: B

Explanation: The interest burden, which is the second component of the extended DuPont equation, is equal to EBT / EBIT. It demonstrates that increasing leverage does not always result in higher returns on investment. The interest burden rises in tandem with the increase in leverage. The positive effects of leverage can be countered by the higher interest payments that come with higher levels of debt, which can reduce their effectiveness. The difference between net income and EBT is referred to as the tax burden, and it is equal to (1 – tax rate). The higher the tax rate, the lower the level of return on investment. The ratio of EBIT to revenue is referred to as the EBIT margin or Operating margin.

Q13) If the dividends on convertible preferred stock (if any) are dilutive, the following dividends are included in the calculation of the numerator for diluted earnings per share:

A) a deduction from earnings available to common shareholders that is made without regard to tax consequences

B) without making any adjustments for taxation, to the earnings available to common shareholders

C) added to the earnings available to common shareholders after deducting taxes, and then added back in.

Correct Answer: B

Explanation: Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]

Q14) According to the accounting equation, a firm’s assets are incorrect :

A. Liabilities + Beginning retained earnings – Ending retained earnings – Dividends declared

B. Ending retained earnings + Contributed capital + Liabilities

C. Liabilities + Contributed capital + Beginning retained earnings +Revenues – Expenses – Dividends declared

Correct Answer: A

Explanation: Assets = Liabilities + Owners’ equity

Q15) Tax credits that directly reduce taxes are classified as

A. Deferred tax assets.

B. Deferred tax liabilities.

C. Permanent differences.

Correct Answer: C

Explanation: Permanent differences include tax credits that directly reduce taxes.