Free Accounting Financial Ratios Questions and Answers — Questions and Answers

Question 1: The current asset MINUS the current liabilities is.

Working Capital (Correct answer)
Current Ratio
Net Worth

Correct answer: Working Capital

Working capital is a financial metric calculated by subtracting current liabilities from current assets. It represents the capital available to a business for its day-to-day operations and indicates its short-term liquidity and operational efficiency. A positive working capital suggests a company has sufficient funds to cover its short-term obligations.

Question 2: Which of the following accounts is NOT included in the quick ratio?

Cash
Accounts Receivable
Inventory (Correct answer)

Correct answer: Inventory

The quick ratio (or acid-test ratio) measures a company's ability to meet its short-term obligations with its most liquid assets. It specifically excludes inventory from current assets because inventory is generally considered less liquid and may take longer to convert into cash compared to cash itself or accounts receivable. This provides a more conservative view of liquidity.

Question 3: A current asset account is not which of the following?

Prepaid Insurance
Fixtures (Correct answer)
Inventory

Correct answer: Fixtures

Fixtures are considered long-term assets (or property, plant, and equipment) because they are expected to provide economic benefits for more than one year. Current assets, such as prepaid insurance and inventory, are assets that are expected to be converted into cash, consumed, or used up within one year or one operating cycle. Therefore, fixtures do not fit the definition of a current asset.

Question 4: The current asset value divided by the current liability value is.

Net Worth Ratio
Working Capital
Current Ratio (Correct answer)

Correct answer: Current Ratio

The current ratio is a liquidity ratio that measures a company's ability to cover its short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities, providing an indication of a company's short-term financial health. A higher current ratio generally suggests better short-term liquidity.

Question 5: When a manufacturer's net income exceeds the cash flow from what activities, the quality of its earnings is questioned.

Financing
Operating (Correct answer)
Investing

Correct answer: Operating

The quality of earnings is questioned when a company's net income significantly exceeds its cash flow from operating activities. This discrepancy can indicate aggressive accounting practices, such as recognizing revenue prematurely or delaying expense recognition, which may not be sustainable or reflect true cash-generating ability. Strong operating cash flow is a sign of high-quality earnings.

Question 6: Which of the following balance sheets is most likely to contain reported amounts that are the closest to their actual values?

Long-term Assets
Stockholders' Equity
Current Assets (Correct answer)

Correct answer: Current Assets

Current assets, such as cash, marketable securities, and accounts receivable, are typically reported on the balance sheet at amounts closest to their actual or fair market values. This is because they are expected to be converted into cash or used within a short period, making their historical cost often closely aligned with their current realizable value. Long-term assets, conversely, are subject to depreciation and may have significant differences between cost and market value.

Question 7: True or false: Free cash flow is the difference between the cash used for financing activities and the cash provided by operating activities.

False (Correct answer)
True

Correct answer: False

This statement is false. Free cash flow is typically calculated as cash flow from operating activities minus capital expenditures (investments in property, plant, and equipment). It represents the cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets, and is not primarily defined by the difference between financing and operating activities.

Free Accounting Financial Ratios Questions and Answers

The current asset MINUS the current liabilities is.