FA Financial Reporting & Analysis 2

Question 1

What does the current ratio measure?

Accepted Answer

A company's ability to meet short-term obligations using current assets

Answer

The current ratio (current assets ÷ current liabilities) measures a company's short-term liquidity and ability to pay near-term obligations.

Question 2

If a company's accounts receivable turnover is 8, what is the approximate average collection period (days sales outstanding)?

Accepted Answer

45.6 days

Answer

Days Sales Outstanding = 365 ÷ Accounts Receivable Turnover = 365 ÷ 8 ≈ 45.6 days.

Question 3

Which profitability ratio measures how effectively a company uses its total assets to generate net income?

Accepted Answer

Return on Assets (ROA)

Answer

Return on Assets (ROA) = Net Income ÷ Total Assets, directly measuring asset efficiency in generating profit.

Question 4

The quick ratio differs from the current ratio primarily by excluding which asset?

Accepted Answer

Inventory

Answer

The quick ratio excludes inventory because it is the least liquid current asset and may not be quickly converted to cash.

Question 5

Under DuPont analysis, Return on Equity (ROE) is decomposed into which three components?

Accepted Answer

Profit margin × Asset turnover × Equity multiplier

Answer

The DuPont formula breaks ROE into Net Profit Margin × Asset Turnover × Equity Multiplier, revealing the drivers of shareholder returns.

FA - Financial Analyst Practice Test