Finance for Non-Finance Managers Financial Statement Analysis 2 — Questions and Answers
Question 1: Which financial ratio measures how efficiently a company uses its assets to generate sales?
- Asset turnover ratio (Correct answer)
- Current ratio
- Debt-to-equity ratio
- Gross margin ratio
Correct answer: Asset turnover ratio
Asset turnover ratio = Net Sales / Average Total Assets, showing how efficiently assets generate revenue.
Question 2: On the income statement, what does 'gross profit' represent?
- Revenue minus operating expenses
- Revenue minus cost of goods sold (Correct answer)
- Net income before taxes
- Operating income minus interest expense
Correct answer: Revenue minus cost of goods sold
Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue.
Question 3: A company reports accounts receivable of $500,000 and annual credit sales of $3,000,000. What is the receivables turnover ratio?
- 3.0
- 4.0
- 6.0 (Correct answer)
- 8.0
Correct answer: 6.0
Receivables turnover = Credit Sales / Accounts Receivable = $3,000,000 / $500,000 = 6.0.
Question 4: What does a declining inventory turnover ratio typically signal?
- Stronger supplier relationships
- Possible excess inventory or weakening demand (Correct answer)
- Improved cash management
- Higher profit margins
Correct answer: Possible excess inventory or weakening demand
A declining inventory turnover ratio suggests that goods are sitting longer before being sold, indicating potential overstocking or slowing sales.
Question 5: Which section of the cash flow statement shows proceeds from issuing stock or repaying debt?
- Operating activities
- Investing activities
- Financing activities (Correct answer)
- Non-cash activities
Correct answer: Financing activities
Financing activities include cash flows from borrowing, repaying debt, issuing stock, and paying dividends.
Question 6: What is the primary purpose of common-size financial statements?
- To adjust figures for inflation
- To express each line item as a percentage for easier comparison (Correct answer)
- To consolidate multiple subsidiaries
- To convert foreign currency balances
Correct answer: To express each line item as a percentage for easier comparison
Common-size statements express each line item as a percentage of a base figure (e.g., revenue), enabling comparison across companies of different sizes.
Question 7: If a company's current liabilities exceed its current assets, what does this indicate?
- Strong long-term investment position
- Potential short-term liquidity problems (Correct answer)
- High profitability
- Efficient use of fixed assets
Correct answer: Potential short-term liquidity problems
When current liabilities exceed current assets, the current ratio falls below 1.0, signaling the company may struggle to meet near-term obligations.
Finance for Non-Finance Managers Financial Statement Analysis 2
Which financial ratio measures how efficiently a company uses its assets to generate sales?