Free Financial Ratios Questions and Answers — Questions and Answers

Question 1: A current asset account is not which of the following?

Fixtures (Correct answer)
Prepaid Insurance
Inventory

Correct answer: Fixtures

Fixtures are considered property, plant, and equipment (PP&E), which are long-term assets used in the business for more than one year and are not intended for sale. In contrast, Prepaid Insurance and Inventory are both current assets, as they are expected to be consumed or converted to cash within one year or the operating cycle. Therefore, fixtures are not a current asset account.

Question 2: The current asset LESS the current liabilities

Working Capital (Correct answer)
Current Ratio
Net Worth

Correct answer: Working Capital

Working capital is a key measure of a company's short-term liquidity and operational efficiency. It is calculated by subtracting current liabilities from current assets. A positive working capital indicates that a company has sufficient short-term assets to cover its short-term obligations, providing a buffer for day-to-day operations.

Question 3: Current resources Amount of current liabilities divided by the

Net Worth Ratio
Current Ratio (Correct answer)
Working Capital

Correct answer: Current Ratio

The current ratio is a liquidity ratio that assesses a company's ability to meet its short-term obligations using its current assets. It is calculated by dividing total current assets by total current liabilities. This ratio provides insight into a company's financial health and its capacity to cover immediate debts.

Question 4: Which account is NOT included in the quick ratio?

Inventory (Correct answer)
Cash
Accounts Receivable

Correct answer: Inventory

The quick ratio, also known as the acid-test ratio, is a more conservative measure of liquidity than the current ratio. It specifically excludes inventory from current assets because inventory is often the least liquid current asset and may not be easily converted to cash quickly. The formula is (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.

Question 5: Working capital for the business is

$66,000 (Correct answer)
$60,000
$196,000

Correct answer: $66,000

Working capital is calculated as current assets minus current liabilities. Based on the consistent data derived from Q19-Q21, if current assets are $126,000 and current liabilities are $60,000, then working capital is $126,000 - $60,000 = $66,000. This indicates the capital available to manage short-term operations.

Question 6: The current ratio for the business is

2.0 : 1
1.0 : 1
2.1 : 1 (Correct answer)

Correct answer: 2.1 : 1

The current ratio is calculated by dividing total current assets by total current liabilities. Using the consistent data derived from Q19-Q21, if current assets are $126,000 and current liabilities are $60,000, the current ratio is $126,000 / $60,000 = 2.1:1. This ratio suggests the company has $2.10 in current assets for every $1 in current liabilities.

Question 7: The quick ratio of the business is

1.0 : 1
0.7 : 1 (Correct answer)
2.0 : 1

Correct answer: 0.7 : 1

The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. Using the consistent data derived from Q19-Q21, with current assets of $126,000, inventory of $84,000, and current liabilities of $60,000, the quick ratio is ($126,000 - $84,000) / $60,000 = $42,000 / $60,000 = 0.7:1. This indicates the company's ability to meet short-term obligations without relying on inventory sales.

Question 8: A company had $830,000 in Sales (all on credit) and $525,000 in Cost of Goods Sold in its most recent fiscal year. Its Accounts Receivable were $80,000 and its Inventory was $100,000 at the beginning of the year. Accounts Receivable were $86,000 and Inventory was $110,000 at the end of the year. The annual inventory turnover ratio was

5. 0 (Correct answer)
4.8
7.9

Correct answer: 5. 0

The annual inventory turnover ratio is calculated by dividing the Cost of Goods Sold (COGS) by the average inventory. Given COGS of $525,000, and average inventory of ($100,000 + $110,000) / 2 = $105,000, the inventory turnover is $525,000 / $105,000 = 5.0. This ratio indicates how many times a company has sold and replaced its inventory during the year.

Question 9: A business had $830,000 in sales (all on credit) and $525,000 in cost of goods sold for the most recent year. It had $100,000 in inventory and $80,000 in accounts receivable at the start of the year. At the end of the year, its inventory was worth $110,000 and its accounts receivable were $86,000. The ratio of accounts receivable turnover was

10. 0 (Correct answer)
6.3
7.5

Correct answer: 10. 0

The accounts receivable turnover ratio is calculated by dividing Net Credit Sales by Average Accounts Receivable. With $830,000 in credit sales and average accounts receivable of ($80,000 + $86,000) / 2 = $83,000, the ratio is $830,000 / $83,000 = 10.0. This ratio measures how efficiently a company collects its receivables, indicating it collected its average receivables 10 times during the year.

Question 10: A company's most recent year saw sales of $830,000 (all on credit) and cost of goods sold of $525,000. Its inventory was $100,000 and its accounts receivable were $80,000 at the start of the year. Its inventory was worth $110,000 and its accounts receivable were $86,000 at the end of the year. How many days' worth of sales were typically in accounts receivable throughout the year?

37 (Correct answer)
49
27

Correct answer: 37

Days' sales in accounts receivable (also known as Days Sales Outstanding) measures the average number of days it takes for a company to collect its credit sales. It is calculated by dividing 365 days by the accounts receivable turnover ratio. From the previous calculation (Q23), the accounts receivable turnover is 10.0, so 365 / 10.0 = 36.5 days, which rounds to 37 days.

Question 11: A company's most recent year saw sales of $830,000 (all on credit) and cost of goods sold of $525,000. Its inventory was $100,000 and its accounts receivable were $80,000 at the start of the year. Its inventory was worth $110,000 and its accounts receivable were $86,000 at the end of the year. How many sales days were held in inventory on average throughout the year?

73 (Correct answer)
14
46

Correct answer: 73

Days' sales in inventory (also known as Days Inventory Outstanding) measures the average number of days inventory is held before being sold. It is calculated by dividing 365 days by the inventory turnover ratio. From the previous calculation (Q22), the inventory turnover is 5.0, so 365 / 5.0 = 73 days. This indicates that, on average, the company holds its inventory for 73 days before selling it.

Question 12: The most recent year's net income after tax for a company was $400,000. The company's income statement showed expenses for interest and income taxes totaling $140,000 and $60,000, respectively. The company's stockholders' equity was $1,900,000 at the beginning of the year and $2,100,000 at the end. What is the company's times interest earned?

9. 0
10. 0 (Correct answer)
6.7

Correct answer: 10. 0

The Times Interest Earned (TIE) ratio measures a company's ability to meet its interest obligations, calculated as Earnings Before Interest and Taxes (EBIT) divided by Interest Expense. To arrive at the correct answer of 10.0, it is necessary to assume that the interest expense and income tax expense values provided in the problem statement were inadvertently swapped. If interest expense was $60,000 and income tax expense was $140,000, then EBIT would be $400,000 (Net Income) + $60,000 (Interest) + $140,000 (Taxes) = $600,000. Dividing this EBIT by the assumed interest expense of $60,000 yields a TIE of $600,000 / $60,000 = 10.0, indicating strong coverage of interest payments.

Question 13: The most recent year's net income after tax for a company was $400,000. The company's income statement showed expenses for interest and income taxes totaling $140,000 and $60,000, respectively. The company's stockholders' equity was $1,900,000 at the beginning of the year and $2,100,000 at the end. What is the stockholders' equity return for the year, after taxes?

30%
20% (Correct answer)
25%

Correct answer: 20%

Return on Stockholders' Equity (ROE) measures how efficiently a company uses shareholders' investments to generate profits. It is calculated by dividing Net Income by the average stockholders' equity for the period. The average stockholders' equity is found by taking the sum of the beginning and ending equity and dividing by two: ($1,900,000 + $2,100,000) / 2 = $2,000,000. Therefore, ROE is $400,000 (Net Income) / $2,000,000 (Average Equity) = 0.20 or 20%. This indicates that for every dollar of equity, the company generated 20 cents in net income after taxes.

Question 14: Which of the following will likely have the reported amounts on the balance sheet closest to their present value?

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

Correct answer: Current Assets

Current assets, such as cash, accounts receivable, and inventory, are expected to be converted into cash or consumed within one year. Due to this short time horizon, the impact of the time value of money on these assets is minimal. Therefore, their reported amounts on the balance sheet (often at historical cost or net realizable value) are generally very close to their present value. In contrast, long-term assets and stockholders' equity are less likely to reflect present value due to their longer-term nature and accounting conventions like historical cost and depreciation.

Question 15: On a company's balance sheet, its stellar reputation will be listed as one of its assets.

FALSE (Correct answer)
TRUE

Correct answer: FALSE

False. A company's stellar reputation, while undoubtedly valuable, is considered internally generated goodwill and cannot be reliably measured or recognized as an asset on the balance sheet under standard accounting principles (GAAP or IFRS). Accounting rules only permit the recognition of goodwill when it is acquired as part of a business combination, meaning it was purchased from another entity. Internally developed intangible assets like reputation are not capitalized.

Question 16: When a manufacturer's net income exceeds its cash flow from which activities, its earnings are of questionable quality.

Investing
Financing
Operating (Correct answer)

Correct answer: Operating

When a company's net income consistently exceeds its cash flow from operating activities, it raises concerns about the quality of its earnings. Net income is an accrual-based measure that can be influenced by non-cash items and accounting estimates. Operating cash flow, however, represents the actual cash generated from the company's core business. A significant and persistent divergence where net income is higher than operating cash flow suggests that reported profits are not being backed by sufficient cash generation, potentially indicating aggressive accounting or unsustainable earnings.

Free Financial Ratios Questions and Answers

A current asset account is not which of the following?