Financial Statement Analysis MCQ Questions With Answers Part 5

Q1- The operating revenues of a company for a reporting period are to be shown on its financial statements.

A) Income statement.

B) cash flow statement.

C) Balance Sheet.


Correct Answer: A

Explanation: The income statement of a company summarizes the company's revenues for a given reporting period. They can be classified as operating and no operating revenues, but they are not required to be classified as such. Because revenue may be recognized in a different period than cash is collected, cash from operating activities is presented on the company's statement of cash flows, but it is not always the same as operating revenues on the company's balance sheet. It shows the financial position of a company at a specific point in time, known as the balance sheet date.


Q2- Information about extraordinary items and other unusual or infrequent events is most likely found in:

A. Financial statement footnotes.

B. Supplementary schedules.

C. Management Discussion & Analysis.


Correct Answer: C

Explanation: It is customary for management discussion and analysis to include information on extraordinary items, as well as unusual or infrequent occurrences.


Q3- Tax credits that reduce taxes in a direct manner are most likely classified as follows:

A. Deferred tax assets.(DTA)

B. Deferred tax liabilities.(DTL)

C. Permanent differences.


Correct Answer: C

Explanation: Permanent differences include tax credits that reduce taxes in a direct and immediate manner.


Q4- Which of the following statements is true?

A. With the cash to income ratio, you can determine the ability of a business to generate cash from its operations.

B. With the debt coverage ratio, you can see how well a company is doing at covering its interest expenses.

C. This ratio assesses a company's ability to acquire long-term assets by investing cash flows generated from operations.


Correct Answer: A

Explanation: The debt coverage ratio is a financial risk indicator that measures leverage. The reinvestment ratio measures a company's ability to purchase long-term assets that generate operating cash flows.


Q5- Which of the following statements is correct when calculating cash flow from operations (CFO) using the indirect method of calculation?

A) Whenever a gain on the sale of fixed assets is recognized, the amount recognized is deducted from operating cash flows.

B) An additional schedule is required for the indirect method in order to reconcile net income to cash flow.

C) If you choose to use the indirect method, each line item on the income statement is converted to its cash equivalent before being recorded.


Correct Answer: A

Explanation: Whenever a gain on the sale of fixed assets is recognized, the amount recognized is deducted from operating cash flows. This is due to the fact that the gain would be reported twice, once in the investing section and once in net income. As a result, the gain must be deducted from the net income statement. The direct method of cash flow calculation, rather than the indirect method, converts income statement items to their cash equivalents. Aside from that, when using the indirect method, depreciation is added to net income in order to calculate CFO.




Q6- Given stable inventory quantities and falling prices, use of FIFO will ______:

A. Understate replacement costs.

B. Understate profits.

C. Understate inventory.


Correct Answer: B

Explanation: If the first-in, first-out (FIFO) method is used, inventory will be appropriately valued (regardless of whether prices are rising or falling). Replacement costs will be overstated in the cost of goods sold (COGS), while profits will be underestimated.



Q7- If a company's cash conversion cycle is increased in size, which of the following will result in a shorter cash conversion cycle?

A. Number of days of payables

B. Number of days of inventory

C. Number of days of receivables


Correct Answer: A

Explanation: Cash conversion cycle = DSO + DOH − Days of payables.


Q8- Resources that have been obtained as a result of past transactions and which are expected to provide future benefits are categorized as follows:

A) liabilities.

B) assets.

C) equity.


Correct Answer: B

Explanation: An asset is a resource that is expected to provide future benefits and that is controlled as a result of transactions that have occurred in the past. Liabilities are financial obligations resulting from past events that are expected to necessitate the expenditure of resources in the future. After liabilities have been deducted from assets, equity represents the remaining interest in those assets.


Q9- A correct representation of the accounting equation is represented by which of the following statements?

A. Assets + Liabilities = Contributed capital + Beginning retained earnings + Revenue – Expenses – Dividends

B. Assets – Contributed capital – Beginning retained earnings – Revenue + Expenses + Dividends declared = Liabilities

C. Assets – Liabilities = Contributed capital – Beginning retained earnings + Revenue – Expenses – Dividends declared


Correct Answer: B

Explanation: The accounting equation is: Assets = Liabilities + Contributed capital + Beginning retained earnings + Revenue – Expenses – Dividends declared



Q10- A decrease in the valuation allowance results in an

A. Increase in total assets.

B. Decrease in shareholders’ equity.

C. Increase in income tax expense.


Correct Answer: A

Explanation: If the valuation allowance decreases, it implies that the company's DTA (assets) is increasing. An increase in DTA lowers ITE and raises retained earnings at the same time (equity).



Q11- Earnings before interest and taxes (EBIT) is also known as:

A) earnings before income taxes.

B) gross profit.

C) operating profit.


Correct Answer: C

Explanation: Operating profit = earnings before interest and taxes (EBIT)

Gross profit = net sales – COGS

Net income = earnings after taxes = EA


Q12- Which of the following will correct option to a decrease in the number of days of payables?

A. Increasing cost of goods sold

B. Increasing accounts payables

C. Decreasing payables turnover


Correct Answer: A

Explanation: Increasing cost of goods sold will increase the company’s purchases, which will lead to a decrease in the number of days of payables.



Q13- The balance sheet is to provide an analyst with information about a firm

A) operating profitability.

B) solvency.

C) investing and financing activities


Correct Answer: B

Explanation: The balance sheet can be used by an analyst to determine the solvency and liquidity of a company. The income statement can be used to determine the profitability of an operation's operations. Detailed information about a company's investing and financing activities can be found in the company's statement of cash flows.


Q14- What is the most common balance sheet element under which provisions are recorded?

A. Assets

B. Liabilities

C. Equity


Correct Answer: B

Explanation: Provisions are typically presented under liabilities on the balance sheet.


Q15- Owners’ equity are not includes:

A. Retained earnings.

B. Long-term debt.

C. Other comprehensive income.


Correct Answer: B

Explanation: In contrast, retained earnings and other comprehensive income are included in owners' equity, whereas long-term debt is included in noncurrent liabilities.