Business Degree Business Finance 2 — Questions and Answers
Question 1: What is 'depreciation' in financial accounting?
- An increase in asset market value
- The allocation of an asset's cost over its useful life (Correct answer)
- A reduction in company debt
- The loss of inventory value
Correct answer: The allocation of an asset's cost over its useful life
Depreciation systematically allocates the cost of a tangible asset over its expected useful life as an accounting expense.
Question 2: What is the debt-to-equity ratio used to assess?
- A company's revenue growth rate
- The proportion of financing from creditors versus shareholders (Correct answer)
- The value of current assets versus liabilities
- The efficiency of asset utilization
Correct answer: The proportion of financing from creditors versus shareholders
The debt-to-equity ratio compares total liabilities to shareholder equity, indicating how much debt a company uses to finance its assets.
Question 3: What is 'capital budgeting' primarily concerned with?
- Managing day-to-day expenses
- Evaluating long-term investment projects (Correct answer)
- Setting employee salaries
- Calculating quarterly taxes
Correct answer: Evaluating long-term investment projects
Capital budgeting is the process of evaluating and selecting long-term investments that are expected to generate returns over multiple years.
Question 4: Which type of cost does NOT change with the level of production output?
- Variable cost
- Marginal cost
- Fixed cost (Correct answer)
- Direct cost
Correct answer: Fixed cost
Fixed costs remain constant regardless of production volume, such as rent, insurance, and salaries for permanent staff.
Question 5: What does 'accounts receivable' represent on a balance sheet?
- Money a company owes to suppliers
- Money owed to the company by customers (Correct answer)
- Cash held in company bank accounts
- Investments in other companies
Correct answer: Money owed to the company by customers
Accounts receivable is money owed to a company by its customers for goods or services already delivered but not yet paid for.
Question 6: What is the primary purpose of a cash flow statement?
- To show the net worth of a company
- To track the inflow and outflow of cash over a period (Correct answer)
- To list all company assets and liabilities
- To calculate annual tax obligations
Correct answer: To track the inflow and outflow of cash over a period
A cash flow statement records all cash inflows and outflows from operating, investing, and financing activities during a reporting period.
Business Degree Business Finance 2
What is 'depreciation' in financial accounting?