Finance for Non-Finance Managers Financial Statement Analysis 4

Question 1

What is the difference between depreciation and amortization?

Accepted Answer

Depreciation applies to tangible assets; amortization applies to intangible assets

Answer

Depreciation allocates the cost of tangible fixed assets over time, while amortization does the same for intangible assets like patents.

Question 2

Which ratio best measures a company's ability to cover its interest payments from operating income?

Accepted Answer

Interest coverage ratio

Answer

Interest coverage ratio = EBIT / Interest Expense, showing how many times operating earnings can cover interest obligations.

Question 3

On a balance sheet, which item is typically listed under 'long-term liabilities'?

Accepted Answer

Bonds payable due in 10 years

Answer

Long-term liabilities are obligations due beyond one year, such as bonds or long-term loans, unlike accounts payable which are short-term.

Question 4

What does a negative free cash flow indicate?

Accepted Answer

The company is spending more cash than it generates from operations

Answer

Negative free cash flow means operating cash flow is insufficient to cover capital expenditures, which may signal heavy investment or financial strain.

Question 5

Which accounting method results in lower net income during a period of rising prices — FIFO or LIFO?

Accepted Answer

LIFO, because newer higher-cost items are expensed first

Answer

Under LIFO, the most recently purchased (higher-cost) inventory is sold first, increasing COGS and reducing net income when prices are rising.

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Financial Statement Analysis 4