IMC Economics and Accounting 2

Question 1

What does the price-to-earnings (P/E) ratio indicate about a company's shares?

Accepted Answer

How much investors are willing to pay per pound of earnings

Answer

The P/E ratio divides the current share price by earnings per share, showing how much investors are prepared to pay for each pound of the company's earnings. A higher P/E may suggest investors expect higher future growth.

Question 2

In the context of monetary policy, what is 'quantitative easing' (QE)?

Accepted Answer

The central bank purchasing government bonds to inject money into the economy

Answer

Quantitative easing involves the central bank (Bank of England) creating new money electronically to purchase government bonds and other securities. This increases the money supply, lowers long-term interest rates, and encourages lending and investment.

Question 3

Which financial statement shows a company's financial position at a specific point in time?

Accepted Answer

The statement of financial position (balance sheet)

Answer

The statement of financial position (balance sheet) provides a snapshot of a company's assets, liabilities, and equity at a specific date. Unlike the income statement and cash flow statement, which cover a period, the balance sheet reflects a moment in time.

Question 4

What is the effect of depreciation on a company's financial statements?

Accepted Answer

It reduces the carrying value of an asset and is charged as an expense

Answer

Depreciation systematically allocates the cost of a tangible asset over its useful life. It reduces the asset's carrying value on the balance sheet and is recorded as an expense on the income statement, reducing reported profit but not affecting actual cash flow.

Question 5

A recession is technically defined in the UK as:

Accepted Answer

Two consecutive quarters of negative GDP growth

Answer

A technical recession in the UK is commonly defined as two consecutive quarters (six months) of negative GDP growth. A single quarter of contraction alone does not meet this threshold.

IMC Practice Test

IMC Practice Test

IMC Economics and Accounting 2