BBM Financial Management 1 — Questions and Answers
Question 1: Which financial statement shows a company's revenues and expenses over a specific period?
- Balance Sheet
- Income Statement (Correct answer)
- Cash Flow Statement
- Statement of Retained Earnings
Correct answer: Income Statement
The income statement (profit and loss statement) reports revenues, expenses, and net profit over an accounting period.
Question 2: What does the debt-to-equity ratio measure?
- A company's profitability relative to equity
- The proportion of financing from creditors vs. shareholders (Correct answer)
- A company's ability to pay short-term obligations
- The efficiency of asset utilization
Correct answer: The proportion of financing from creditors vs. shareholders
The debt-to-equity ratio compares total liabilities to shareholders' equity, indicating how much of the firm is financed by debt versus equity.
Question 3: Which capital budgeting method accounts for the time value of money?
- Payback Period
- Accounting Rate of Return
- Net Present Value (Correct answer)
- Return on Investment
Correct answer: Net Present Value
Net Present Value (NPV) discounts future cash flows to present value, directly incorporating the time value of money.
Question 4: What is working capital?
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Long-term assets minus long-term liabilities
- Total revenue minus total expenses
Correct answer: Current assets minus current liabilities
Working capital equals current assets minus current liabilities and represents a firm's short-term liquidity position.
Question 5: Which type of cost remains constant regardless of production volume?
- Variable cost
- Marginal cost
- Fixed cost (Correct answer)
- Semi-variable cost
Correct answer: Fixed cost
Fixed costs, such as rent and salaries, do not change with the level of output within a relevant range.
Question 6: What is the primary purpose of a cash flow statement?
- To show the company's net worth
- To report changes in equity
- To track cash inflows and outflows over a period (Correct answer)
- To list all assets and liabilities
Correct answer: To track cash inflows and outflows over a period
The cash flow statement details how cash was generated and used in operating, investing, and financing activities during a period.
BBM Financial Management 1
Which financial statement shows a company's revenues and expenses over a specific period?