Financial Statement Analysis MCQ Questions With Answers Part 3

Q1) The term "liquidity" refers to a company's ability to pay its debts.

A. Meet its long-term debt obligations.

B. Meet its short-term obligations.

C. Issue bonds in the capital market.

Correct Answer: B

Explanation: The ability of a company to meet its short-term obligations is referred to as its liquidity.


Q2) For the purpose of understanding the financial statement effects of capitalization on a company, which of the following statements about capitalization is correct?

A. The company's reported total asset turnover is reduced as a result of capitalization.

B. The company's reported debt-to-asset ratio increases as a result of capitalization.

C. The company's outflows from investing activities are reduced as a result of capitalization.


Correct Answer: A

Explanation: The capitalization of an expense results in an increase in non-current assets, which results in a decrease in the total asset turnover ratio (sales divided by assets) and the debt-to-assets ratio (debt divided by assets). CFI decreases due to capitalization while outflows from investing activities increase as a result of the process.

Q3) The following segments of a company's business must have their own financial information reported separately:

A) consists of a business line that accounts for more than 10% of the firm's assets and exhibits unique risk and return characteristics when compared to the company's other lines of business.

B) is located in a country other than the country in which the company was founded.

C) It accounts for more than 20% of a company's total revenue.


Correct Answer: A

Explanation: Financial statement items must be reported separately for any segment of a company's business that accounts for more than 10% of total revenue or assets and has risk and return characteristics that are distinguishable from those of the company's other lines of business, according to accounting standards. The requirements for reporting geographic segments have the same size threshold as the requirements for reporting other segments of the company, and the segment must operate in a business environment that is distinct from the other segments of the company.



Q4) Which of the following items would have an impact on the owners' equity and would also appear on the income statement is correct?

A) Unrealized gains and losses on trading securities.

B) Unrealized gains and losses on available-for-sale securities.

C) Dividends paid to shareholders.


Correct Answer: A

Explanation: Unrealized gains and losses resulting from the trading of securities are recorded in the income statement and have an impact on shareholders' equity. Unrealized gains and losses from securities that are available for sale, on the other hand, are included in other comprehensive income. = Dividends paid to shareholders reduce owners' equity but do not affect net income. = Transactions included in other comprehensive income have an impact on equity but do not have an impact on net income.


Q5) The difference between the amount of depreciation recognized on the income statement and the amount recognized on the tax return will result in a:

A. Deferred tax liability. (DTL)

B. Deferred tax asset.(DTA)

C. Permanent difference.


Correct Answer: A

Explanation: Higher depreciation expense is being recognized on the tax return, and this disparity in expense recognition across the income statement and the tax return is expected to disappear in the future. As a result, a deferred tax liability is created.




Q6) A change in accounts payable will necessitate which of the following when using the indirect method to calculate cash flow from operating activities?

A) When accounts payable increase, there is a negative (positive) adjustment to net income (decreases).

B) Regardless of whether accounts payable increase or decrease, a negative adjustment to net income will be applied.

C) When accounts payable increase, a positive (or negative) adjustment to net income is made (decreases).


Correct Answer: C

Explanation: In accounting terms, an outflow is represented by a decrease in accounts payable. As a result, a negative adjustment will be necessary. An increase, on the other hand, represents an inflow of funds and a positive adjustment.


Q7) The operating income of a company is particularly useful in the analysis of:

A. The operating income of a company is particularly useful in the analysis of:

B. The impact of taxes on the company's financial results.

C. Because of this, its underlying performance is not influenced by the use of financial leverage.


Correct Answer: C

Explanation: The operating income of a company provides insight into the underlying performance of the company, regardless of whether or not the company is using financial leverage.


Q8) What is the difference between calculating cash flow from operations using the direct method and calculating it using the indirect method?


A) When using the direct method, balance sheet items are excluded from the calculation of cash flow from operations, whereas they are included when using the indirect method.

B) Sales are recorded in the direct method, and cash is followed as it flows through the income statement, whereas the indirect method records net income and adjusts for noncash charges and other items.

C) While the indirect method calculates cash flows from operations by starting with gross income and adjusting for inflation, the direct method calculates cash flows from operations by starting with gross profit and flowing through the income statement.


Correct Answer: B

Explanation: One of the most significant distinctions between the direct and indirect methods of calculating cash flows is the manner in which cash flow from operations is calculated in each. The direct method begins with sales and follows cash as it flows through the income statement, whereas the indirect method begins with income after taxes and adjusts backwards for non-cash and other items as it flows through the income statement. When it comes to operating cash flows, both methods will produce the same results. There is no difference in how the direct and indirect methods calculate the financing and investing cash flows; therefore, both methods will produce the same cash flow figure.


Q9) What is the purpose of financial reporting?

A. The purpose of this tool is to assist users in making predictions about the future performance of the company.

B. We want to provide information that will be useful to a broad range of users when making economic decisions.

C. The purpose of this report is to provide historical trends about the company's performance.


Correct Answer: B

Explanation: When it comes to making economic decisions, the role of financial reporting is to provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users.


Q10) Deferred tax liabilities (DTL) should be treated as equity when?

A. They are not expected to reverse.

B. They are caused by permanent differences.

C. The amount of tax payments is uncertain.


Correct Answer: A

Explanation: When it is not expected that the temporary differences that caused the deferred tax liabilities will be reversed, deferred tax liabilities should be treated as equity.



Q11) The cash conversion cycle is the:

A) the amount of time it takes for inventory to sell

B) The time it takes to sell inventory plus the time it takes to collect accounts receivable is called the sales cycle.

C) a calculation based on the sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases


Correct Answer: C

Explanation: Cash conversion cycle = (average receivables collection period) + (average inventory processing period) – (payables payment period)



Q12) Owners’ equity is best known for as:

A. Liabilities that are greater than the company's assets.

B. After deducting the liabilities of an entity, the residual interest in the assets of the entity is owned by the owners.

C. The difference between a company's noncurrent assets and its noncurrent liabilities.


Correct Answer: B

Explanation: In accounting, owners' equity is defined as the owners' remaining interest in the assets of a company after all liabilities have been paid out.


Q13) Selling short-term assets and renegotiating debt agreements are the best ways to describe a company's liquidity strategy.

A) primary sources of liquidity.

B) pulls and drags on liquidity.

C) secondary sources of liquidity.


Correct Answer: C

Explanation: In addition to liquidating short-term or long-term assets, renegotiating debt agreements, or filing for bankruptcy and reorganizing the company are all options for obtaining additional liquidity. Generally speaking, primary sources of liquidity are those sources of cash that a company uses in the course of its normal operations. Pulls and drags on liquidity are terms used to describe factors that cause a company's liquidity position to deteriorate.


Q14) Which of the following is incorrect option another name for the income statement?

A. Statement of earnings

B. Statement of operations

C. Statement of financial position


Correct Answer: C

Explanation: Statement of financial position refers to the balance sheet. Statement of operations and earnings are known as income statement.



Q15) When a company has an excessive amount of resources locked up in inventory, which of the following is the most likely indicator?

A. Inventory turnover ratios that are relatively high

B. Having a large amount of inventory on hand for a long period of time

C. A net operating cycle that is relatively short.


Correct Answer: B

Explanation: Because the company has a relatively high number of days of inventory on hand, it has a low inventory turnover ratio, which suggests that the company has an excessive amount of inventory on hand.