Free Accounting Financial Ratios Questions and Answers

Question 1

The current asset MINUS the current liabilities is.

Accepted Answer

Working Capital

Answer

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?

Accepted Answer

Inventory

Answer

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?

Accepted Answer

Fixtures

Answer

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.

Accepted Answer

Current Ratio

Answer

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.

Accepted Answer

Operating

Answer

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.

Accounting Online Program Practice Test

Accounting Online Program Practice Test

Free Accounting Financial Ratios Questions and Answers