B. Acy Bachelor of Accountancy Financial Statement Analysis 1 — Questions and Answers
Question 1: The current ratio is calculated as:
- Net income divided by total assets
- Current assets divided by current liabilities (Correct answer)
- Total assets divided by total liabilities
- Cash divided by current liabilities
Correct answer: Current assets divided by current liabilities
The current ratio measures short-term liquidity by comparing current assets to current liabilities.
Question 2: Earnings per share (EPS) is calculated by dividing net income available to common shareholders by:
- Total shares authorized
- Weighted average shares outstanding (Correct answer)
- Shares issued
- Total shares outstanding at year-end
Correct answer: Weighted average shares outstanding
Basic EPS uses the weighted average shares outstanding, reflecting share changes throughout the year.
Question 3: A high accounts receivable turnover ratio generally indicates:
- Slow collection of receivables
- Efficient collection of credit sales (Correct answer)
- High levels of bad debt
- Excessive credit extended to customers
Correct answer: Efficient collection of credit sales
A high receivable turnover means the company collects its receivables quickly, indicating good credit management.
Question 4: The debt-to-equity ratio measures:
- A company's liquidity
- Relative use of debt versus equity financing (Correct answer)
- Profitability of operations
- Asset utilization efficiency
Correct answer: Relative use of debt versus equity financing
The debt-to-equity ratio shows how much the company relies on borrowed funds relative to shareholder equity.
Question 5: Common-size financial statements express each line item as a percentage of:
- Net income
- Total equity for balance sheets; net sales for income statements (Correct answer)
- Total assets for both statements
- Prior year amounts
Correct answer: Total equity for balance sheets; net sales for income statements
Common-size income statements use net sales as the base; balance sheets use total assets, enabling cross-company comparisons.
Question 6: The price-to-earnings (P/E) ratio is most useful for:
- Measuring operational efficiency
- Comparing a stock's market price relative to earnings (Correct answer)
- Assessing short-term liquidity
- Evaluating dividend policy
Correct answer: Comparing a stock's market price relative to earnings
The P/E ratio shows how much investors pay per dollar of earnings, reflecting market expectations for growth.
B. Acy Bachelor of Accountancy Financial Statement Analysis 1
The current ratio is calculated as: