Financial Statement Analysis MCQ Questions With Answers Part 6

Q1- A company that capitalizes an expense reports the following information:

A. Higher net income over the asset's useful life when compared to a company that depreciates and amortizes the cost.

B. When compared to a company that expenses the cost, a company that retains its shareholders' equity over the life of the asset.

C. When compared to a company that expenses the cost, the cash flow from operations is higher.


Correct Answer: C

Explanation: No matter whether a company capitalizes or expenses a cost, the amount of shareholders' equity and net income over the life of the asset remains the same for all shareholders. The cash flow from operations of a company that chooses to capitalize the cost, on the other hand, is higher because the cash outflow associated with the decision is classified as an investing activity.


Q2- The following is the difference between cash flow from operations (CFO) using the direct method and CFO using the indirect method:

A) Always equal to zero.

B) The difference in cash flow from investing is balanced by an opposite difference in cash flow.

C) In the footnotes to the cash flow statement, this is disclosed as a reserve.


Correct Answer: A

Explanation: The direct and indirect methods both present the same total for cash from operations.


Q3- Which of the following debt securities issued by a company would result in its capital structure becoming complex?

A) Floating rate notes.

B) Convertible bonds.

C) Asset-backed securities.


Correct Answer: B

Explanation: Having a complex capital structure means that a company has securities outstanding that can be converted into common shares, and as a result, the company's earnings per share has the potential to be diluted. Convertible bonds, convertible preferred stock, options, and warrants, for example, have the potential to dilute earnings per share upon conversion or exercise of the underlying securities.

Q4- Which of the following true formula represents the cash conversion cycle?

A) average days of receivables + average days of inventory + average days of payables.

B)average days of payables + average days of inventory – average days of receivables.

C) average days of receivables + average days of inventory – average days of payables.


Correct Answer: C

Explanation: The cash conversion cycle, also called the net operating cycle is: average days of receivables + average days of inventory – average days of payables.

Generally speaking, the cash conversion cycle measures how long it takes a company to convert its cash investment in inventory back into cash generated by selling the inventory back to its customers. Short cash conversion cycles are desirable because they indicate a low level of working capital investment on the part of the company.

Q5- To calculate the cash ratio, the total of cash and marketable securities is divided by:

A) Total assets.

B) Total liabilities.

C) Current liabilities.


Correct Answer: C

Explanation: Current liabilities are used in the denominator for the: current, quick, and cash ratios.




Q6- An analyst will compute the following numbers in order to assess a company's ability to meet its short-term obligations:

A. Profitability ratios.

B. Liquidity ratios.

C. Solvency ratios.


Correct Answer: B

Explanation: Long-term solvency ratios assess a company's ability to meet long-term obligations, whereas short-term liquidity ratios assess the company's ability to meet short-term obligations.


Q7- The following are examples of long-lived assets that are classified as held-for-sale:

A. Recorded at the lower of cost or carrying value.

B. Not depreciated by the company.

C. Impaired if fair value is less than its historical cost.


Correct Answer: B

Explanation: An asset classified as held-for-sale is valued at the lower of cost or fair value less selling costs when it is recorded in the books. It is not depreciated and is considered impaired if its fair value (after deducting selling costs) is less than its carrying value at the time of purchase.

Q8- Which of the following classifications of ratios is incorrect to be used to evaluate a firm’s operating efficiency?

A. Profitability ratios

B. Solvency ratios

C. Activity ratios


Correct Answer: B

Explanation: Solvency ratios are used to assess a company's ability to pay its long-term debt obligations. However, they are not particularly important in determining the operational efficiency of a company.

Q9- As opposed to reporting a classified balance sheet, which of the following companies is required to present a liquidity-based balance sheet?

A) Retail stores.

B) Banking institution.

C) Manufacturing industries .


Correct Answer: B

Explanation: Due to the fact that banks typically present liquidity-based balance sheets, in which all assets and liabilities are listed in order of liquidity, rather than classified balance sheets, this format is more relevant and reliable for banks than classified balance sheets. Firms in the majority of other industries present classified balance sheets on a regular basis.

Q10- When converting a statement of cash flows from the indirect to the direct method, an analyst starts with the following information to compute cash collections from customers:

A) It takes net income and subtracts non-cash expenses from it.

B) It takes the increase in sales and subtracts any increase in accounts receivable, then adds any increase in unearned revenue.

C) The cost of goods sold is calculated by subtracting any increase in accounts payable, adding any increase in inventory, and subtracting any inventory write-offs from the cost of goods sold.


Correct Answer: B

Explanation: To compute cash collections from customers, start with net sales from the income statement and subtract (add) any increase (decrease) in accounts receivable. Then add (subtract) any increase (decrease) in unearned revenue, and you have your cash collections from customers.




Q11- The effect of a write-down of inventory to net realizable on a firm's total asset turnover is:

A) a decrease.

B) an increase.

C) no change.


Correct Answer: B

Explanation: Total asset turnover is calculated by dividing revenue by total assets. Inventory written down to net realizable value (NRV) reduces total assets but has no effect on revenue. As a result, the total amount of assets being traded increases.


Q12- When it comes to inventory-related costs, which of the following is to be expensed on an as-needed basis?

A. Cost of raw materials

B. Normal costs of material wastage

C. Selling and marketing expenses


Correct Answer: C

Explanation: Selling and marketing expenses are deducted as they are incurred.


Q13- According to which of the following statements best describes the function of the income statement?

A. It provides information about the financial performance of a company over a period of time.

B. It provides information about the financial position of the company at a specific point in time.

C. It provides information on the cash inflows and outflows of the company.


Correct Answer: A

Explanation: During a given period of time, the income statement provides information about a company's financial performance. The balance sheet summarizes the financial position of the company at a given point in time, while the cash inflows and outflows of the company are detailed in the cash flow statement.


Q14- Liquidity-based presentation of a balance sheet is to be used by a:

A) bank.

B) manufacturer.

C) retailer.


Correct Answer: A

Explanation: In the banking industry, the liquidity-based format of balance sheet presentation is the most commonly used format.


Q15- An accrued expense liability is recognized when one or more of the following conditions are met:

A. An expense is recorded before a cash payment is received.

B. Cash is received prior to the recording of expenses.

C. When a company receives cash, revenue is recognized before cash is received.


Correct Answer: A

Explanation: When an expense is recognized prior to the receipt of cash payment, an accrued expense liability is recorded on the balance sheet.