Financial Statement Analysis MCQ Questions With Answers Part 8

Q1- Which of the following sentences is an incorrect statement about a limitation of the ratio analysis technique?

A) It is possible for a company to have several divisions that operate in various industries.

B) The majority of businesses throughout the world adhere to the same set of accounting standards.

C) There are no predefined ranges within which specific company ratios must fall in order to be considered acceptable.


Correct Answer: B

Explanation: Despite the growing convergence between the International Financial Reporting Standards (IFRS) and the United States generally accepted accounting principles (GAAP), significant differences between the two sets of standards remain, making comparisons across firms difficult.



Q2- For a company with a straightforward capital structure, all of the following are required in order to calculate basic earnings per share (EPS), with the exception of:

A) dividends paid to preferred shareholders.

B) the timing and number of shares issued or repurchased during the year.

C) dividends paid to common shareholders.


Correct Answer: C

Explanation: Basic earnings per share (EPS) is calculated by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Profits available to common shareholders are calculated by deducting net income from preferred dividends.


Q3- Which part of the cash flow statement is most closely associated with noncurrent assets on the balance sheet?

A) Financing cash flows.

B) Investing cash flows.

C) Operating cash flows.


Correct Answer: B

Explanation: The cash flows generated by investing are the ones that are most closely associated with a company's noncurrent assets. Purchasing and selling of real estate, plant, and equipment, for example, are classified as investing cash flow transactions.


Q4- The following is the best description of comparing a company's ratios with those of its competitors:

A) longitudinal analysis.

B) cross-sectional analysis.

C) common-size analysis.


Correct Answer: B

Explanation: Cross-sectional analysis is the process of comparing a company's financial ratios with those of its competitors.



Q5- When calculating the following, it should be assumed that antidilutive securities have been converted to common shares:

A) basic EPS but not diluted EPS.

B) diluted EPS but not basic EPS.

C) neither basic nor diluted EPS.


Correct Answer: C

Explanation: If anti-dilutive securities were exercised or converted into common stock, the EPS would increase. Therefore, when calculating diluted EPS, we do not assume that they have been converted. The basic earnings per share (EPS) is calculated before any potentially dilutive securities are converted.



Q6- Which of the following will most likely result in a tax liability being deferred for the time being?

A) When comparing the income statement and the tax return, the income statement shows higher expenses.

B) Pre-tax profit is greater than taxable profit in most cases.

C) The tax base of an asset is greater than the asset's carrying value.


Correct Answer: B

Explanation: A deferred tax liability arises when: When comparing the income statement and the tax return, the income statement shows lower expenses. Pre-tax profit is greater than taxable profit in most cases. The tax base of an asset is less than the asset's carrying value.



Q7- Amounts for which of the following items are not included in the financing cash flow section of the statement of cash flows:

A) Change in long-term debt.

B) Change in retained earnings.

C) Dividends paid.


Correct Answer: B

Explanation: In the calculation of financing cash flows, changes in retained earnings are not taken into consideration.

Q8- The quick ratio is regarded as a more conservative measure of liquidity than the current ratio because it excludes the following items from consideration:

A) inventories.

B) marketable securities.

C) accounts receivable.


Correct Answer: A

Explanation: It is usual to define the quick ratio as (current assets – inventories) divided by current liabilities. Because inventories are not always liquid, the quick ratio excludes them from the definition of current assets in the first place. It is a more restrictive measure of liquidity than the current ratio, which is equal to current assets minus current liabilities (current assets minus current liabilities). Money market funds, cash and cash equivalents, accounts receivable, and short-term marketable securities are examples of current assets that remain in the numerator of the quick ratio.


Q9- Which of the following is a metric used to assess a company's liquidity?

A) Net Profit Margin.

B) Equity Turnover.

C) Current Ratio.


Correct Answer: C

Explanation: The current ratio is a measure of liquidity in a financial institution. The turnover of a company's equity and its net profit margin are primarily used as indicators of the company's operating performance.


Q10- A high cash conversion cycle indicates that a company's investment in working capital is in the following areas:

A) too low.

B) too high.

C) appropriate.


Correct Answer: B

Explanation: The average days of receivables plus the average days of inventory minus the average days of payables equals the average days of cash conversion cycle. It is considered undesirable to have high cash conversion cycles when compared to those of comparable firms. An excessively long cash conversion cycle indicates that the company has made an excessive amount of investment in working capital.




Q11- When a company pays cash before it recognizes the associated expense, it is referred to as a cash-flow problem.

A. Unearned revenue liability.

B. Accounts receivable asset.

C. Prepaid expense asset.


Correct Answer: C

Explanation: When a company pays cash before it recognizes the associated revenue, the company creates a prepaid expense asset to account for the cash payment.


Q12- A common shareholder's shares are most likely referred to as one of the following terms:

A) Outstanding shares.

B) Issued shares.

C) Authorized shares.


Correct Answer: A

Explanation: The maximum number of shares that can be sold under the terms of the company's Articles of Incorporation is known as the authorized share count. The total number of shares that have been sold to shareholders is referred to as the number of issued shares. The number of outstanding shares equals the sum of the number of shares that have been issued less the number of shares that have been repurchased.


Q13- The average number of days it takes a company to convert raw materials into cash proceeds is referred to as the:

A) inventory turnover cycle.

B) receivables cycle.

C) operating cycle.


Correct Answer: C

Explanation: The operating cycle is calculated as the sum of days of inventory plus days of receivables, and it represents the number of days it takes to convert raw materials into cash from sales.


Q14- Which of the following ratios is most likely to improve if a company decides to write down inventory?

A) Debt-to-equity ratio.

B) Operating profit margin.

C) Total asset turnover.


Correct Answer: C

Explanation: Total asset turnover should improve as a result of the fact that the numerator (sales) will not be affected while the denominator (total assets) will be reduced. As a result of lower profits and lower equity as a result of the inventory write-down, profitability ratios and the debt-to-equity ratio would both deteriorate further.


Q15- Which method of expense recognition is the most appropriate for intangible assets with an indefinite useful lives, and why?

A) Test for impairment but do not amortize.

B)Use accelerated amortization for tax reporting and straight-line amortization for financial reporting.

C) Use straight-line amortization.


Correct Answer: A

Explanation: In accordance with International Financial Reporting Standards (IFRS) and United States generally accepted accounting principles (GAAP), intangible assets with indefinite lives (for example, goodwill) are not amortized but are tested for impairment at least once a year.