B. Acy Bachelor of Accountancy Financial Statement Analysis 2 — Questions and Answers
Question 1: The quick ratio differs from the current ratio by excluding:
- Cash and cash equivalents
- Accounts receivable
- Inventory and prepaid expenses (Correct answer)
- Short-term investments
Correct answer: Inventory and prepaid expenses
The quick ratio excludes inventory and prepaid expenses because they are less liquid than cash and receivables.
Question 2: Return on equity (ROE) is calculated as:
- Net income divided by total assets
- Net income divided by average shareholders' equity (Correct answer)
- Operating income divided by total equity
- Net income divided by total revenue
Correct answer: Net income divided by average shareholders' equity
ROE measures how efficiently a company generates profit from shareholders' equity investment.
Question 3: Horizontal analysis compares financial data:
- Between different companies in the same period
- As a percentage of a base amount within one period
- Across multiple periods to identify trends (Correct answer)
- Using industry average benchmarks
Correct answer: Across multiple periods to identify trends
Horizontal (trend) analysis tracks changes in financial statement items over multiple accounting periods.
Question 4: The inventory turnover ratio equals cost of goods sold divided by:
- Ending inventory
- Beginning inventory
- Average inventory (Correct answer)
- Total inventory purchases
Correct answer: Average inventory
Using average inventory smooths out seasonal fluctuations and provides a more representative turnover measure.
Question 5: Which ratio best measures a company's ability to meet its long-term debt obligations from operating cash flows?
- Current ratio
- Times interest earned ratio (Correct answer)
- Debt-to-assets ratio
- Cash flow to debt ratio
Correct answer: Times interest earned ratio
Times interest earned (EBIT divided by interest expense) measures how many times operating earnings cover interest charges.
Question 6: Diluted EPS differs from basic EPS because diluted EPS includes the effect of:
- Preferred stock dividends
- Stock splits during the year
- Potentially dilutive securities like options and convertible bonds (Correct answer)
- Treasury stock repurchases
Correct answer: Potentially dilutive securities like options and convertible bonds
Diluted EPS assumes all dilutive securities are exercised or converted, showing the worst-case dilution to earnings per share.
B. Acy Bachelor of Accountancy Financial Statement Analysis 2
The quick ratio differs from the current ratio by excluding: