Finance for Non-Finance Managers Basic Finance 2 — Questions and Answers
Question 1: A company has current assets of $500,000 and current liabilities of $250,000. What is its current ratio?
- 0.5
- 1.0
- 2.0 (Correct answer)
- 4.0
Correct answer: 2.0
Current ratio = Current Assets / Current Liabilities = $500,000 / $250,000 = 2.0.
Question 2: 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 Equity
Correct answer: Income Statement
The Income Statement (also called Profit & Loss statement) reports revenues, expenses, and net income over a period.
Question 3: What does 'accounts payable' represent on a balance sheet?
- Money owed to the company by customers
- Money the company owes to suppliers (Correct answer)
- Long-term debt obligations
- Prepaid expenses
Correct answer: Money the company owes to suppliers
Accounts payable is a current liability representing amounts owed to suppliers for goods or services received but not yet paid.
Question 4: A manager wants to know how efficiently a company turns inventory into sales. Which ratio is most relevant?
- Debt-to-equity ratio
- Inventory turnover ratio (Correct answer)
- Current ratio
- Return on equity
Correct answer: Inventory turnover ratio
Inventory turnover ratio = Cost of Goods Sold / Average Inventory, measuring how quickly inventory is sold.
Question 5: Fixed costs are best described as costs that:
- Change in direct proportion to output
- Remain constant regardless of production volume (Correct answer)
- Are always controllable by management
- Vary only with direct labor hours
Correct answer: Remain constant regardless of production volume
Fixed costs remain constant within a relevant range regardless of changes in production or sales volume.
Question 6: What is the primary purpose of a cash flow statement?
- Show the company's net worth
- Report profit for the period
- Track actual cash inflows and outflows (Correct answer)
- List all assets and liabilities
Correct answer: Track actual cash inflows and outflows
The cash flow statement tracks actual cash movement across operating, investing, and financing activities.
Question 7: Gross profit is calculated as:
- Revenue minus all operating expenses
- Revenue minus cost of goods sold (Correct answer)
- Net income plus taxes
- Operating income minus interest expense
Correct answer: Revenue minus cost of goods sold
Gross profit = Revenue − Cost of Goods Sold (COGS), representing profit before operating expenses.
Finance for Non-Finance Managers Basic Finance 2
A company has current assets of $500,000 and current liabilities of $250,000.
What is its current ratio?