B. Acy Bachelor of Accountancy Financial Statement Analysis 2

Question 1

The quick ratio differs from the current ratio by excluding:

Accepted Answer

Inventory and prepaid expenses

Answer

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:

Accepted Answer

Net income divided by average shareholders' equity

Answer

ROE measures how efficiently a company generates profit from shareholders' equity investment.

Question 3

Horizontal analysis compares financial data:

Accepted Answer

Across multiple periods to identify trends

Answer

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:

Accepted Answer

Average inventory

Answer

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?

Accepted Answer

Times interest earned ratio

Answer

Times interest earned (EBIT divided by interest expense) measures how many times operating earnings cover interest charges.

B. Acy Bachelor of Accountancy Practice Test