CPFM Financial Performance Measurement 2 — Questions and Answers
Question 1: A company reports net income of $200,000 on average total assets of $2,000,000. What is its Return on Assets (ROA)?
- 10% (Correct answer)
- 20%
- 5%
- 0.1%
Correct answer: 10%
ROA equals net income divided by average total assets, so $200,000 / $2,000,000 = 10%.
Question 2: Which ratio best measures a firm's ability to meet short-term obligations using only its most liquid assets?
- Quick ratio (Correct answer)
- Debt-to-equity ratio
- Gross margin
- Inventory turnover
Correct answer: Quick ratio
The quick (acid-test) ratio excludes inventory and focuses on cash, receivables, and marketable securities.
Question 3: In the DuPont framework, ROE is decomposed into net profit margin, asset turnover, and which third component?
- Equity multiplier (Correct answer)
- Current ratio
- Operating margin
- Dividend payout
Correct answer: Equity multiplier
The equity multiplier (assets/equity) captures financial leverage in the three-factor DuPont model.
Question 4: A positive Economic Value Added (EVA) indicates that a company has:
- Earned returns above its cost of capital (Correct answer)
- Reduced its total revenue
- Increased its accounts payable
- Lowered its tax rate
Correct answer: Earned returns above its cost of capital
EVA is positive when net operating profit after tax exceeds the capital charge, meaning value was created.
Question 5: Which performance metric is least affected by differences in capital structure across firms?
- EBIT (Correct answer)
- Net income
- Earnings per share
- Return on equity
Correct answer: EBIT
EBIT is measured before interest, so it is independent of how a firm finances its operations.
Question 6: An increasing inventory turnover ratio generally signals:
- More efficient inventory management (Correct answer)
- Rising obsolete stock
- Lower sales volume
- Higher carrying costs
Correct answer: More efficient inventory management
Higher turnover means inventory is sold and replaced more frequently, indicating efficiency.
Question 7: What does a contribution margin represent in performance analysis?
- Sales revenue minus variable costs (Correct answer)
- Sales revenue minus all costs
- Net income minus dividends
- Gross profit minus taxes
Correct answer: Sales revenue minus variable costs
Contribution margin is sales revenue less variable costs, available to cover fixed costs and profit.
CPFM Financial Performance Measurement 2
A company reports net income of $200,000 on average total assets of $2,000,000.
What is its Return on Assets (ROA)?