AAFM MCQ 2 — Questions and Answers
Question 1: Which financial statement reports a company's revenues and expenses over a specific period?
- Balance sheet
- Income statement (Correct answer)
- Statement of cash flows
- Statement of retained earnings
Correct answer: Income statement
The income statement summarizes revenues and expenses over a period to show net profit or loss.
Question 2: What does the term 'liquidity' primarily measure for a business?
- Long-term profitability
- Ability to meet short-term obligations (Correct answer)
- Market share growth
- Total asset value
Correct answer: Ability to meet short-term obligations
Liquidity measures how easily a firm can cover its short-term liabilities with available assets.
Question 3: In portfolio management, diversification primarily aims to reduce which type of risk?
- Systematic risk
- Unsystematic risk (Correct answer)
- Inflation risk
- Interest rate risk
Correct answer: Unsystematic risk
Diversification reduces unsystematic (company-specific) risk by spreading investments across assets.
Question 4: The time value of money concept holds that a dollar today is worth:
- Less than a dollar in the future
- More than a dollar in the future (Correct answer)
- The same as a dollar in the future
- Only relevant during inflation
Correct answer: More than a dollar in the future
A dollar today can be invested to earn returns, making it worth more than the same dollar later.
Question 5: Which ratio measures a company's total debt relative to its shareholders' equity?
- Current ratio
- Debt-to-equity ratio (Correct answer)
- Gross margin
- Return on assets
Correct answer: Debt-to-equity ratio
The debt-to-equity ratio compares total liabilities to shareholders' equity to gauge leverage.
Question 6: A bond's price generally moves in which direction when market interest rates rise?
- Rises
- Falls (Correct answer)
- Stays constant
- Doubles
Correct answer: Falls
Bond prices move inversely to interest rates, so rising rates push existing bond prices down.
Question 7: Which of the following best describes 'fiduciary duty' for a financial advisor?
- Maximizing firm commissions
- Acting in the client's best interest (Correct answer)
- Following only legal minimums
- Avoiding all documentation
Correct answer: Acting in the client's best interest
A fiduciary duty legally obligates an advisor to prioritize the client's interests above their own.
AAFM MCQ 2
Which financial statement reports a company's revenues and expenses over a specific period?