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1 Which of the following items are not included when determining income from operations?
Your Answer
Taxes
Correct Answer
Taxes
Explanation
Tax expenses are not part of operating costs, and is not considered when determining the profits from
operations.
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2 Which ratio would you use to determine the profitability of the goods sold by a company?
Your Answer
Gross profit margin
Correct Answer
Gross profit margin
Explanation
Profitability from goods sold is determined by gross profit margin, which is (revenue - cost of goods sold) / Sales.
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3 When performing a vertical analysis which income statement item do you use to determine the cost
contribution for each expense category? (What is the denominator?)
Your Answer
Sales
Correct Answer
Sales
Explanation
Sales is the most common denominator used in vertical analysis.
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Your Answer
Time
Correct Answer
Time
Explanation
Horizontal analysis analyzes variance across time.
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5 When calculating the quick ratio or "acid test" which current asset or liability is omitted?
Your Answer
Inventory
Correct Answer
Inventory
Explanation
Inventory is removed from quick ratio because it assumes that inventories cannot be sold as fast as other
current assets.
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6 For which organization would you expect to see the highest inventory turnover ratio?
Your Answer
Grocery retailer
Correct Answer
Grocery retailer
Explanation
Grocery retailer would have the highest inventory turnover because it sells its inventory the fastest.
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7 What actions could a company take to reduce its working capital funding gap?
Your Answer
Tighten customer credit terms
Correct Answer
Tighten customer credit terms
Explanation
Increasing inventory would mean more working capital is tied up, so it would not decrease working capital.
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Your Answer
The proportion of the company financed by lenders versus owners
Correct Answer
The proportion of the company financed by lenders versus owners
Explanation
Debt to equity ratio looks at the percentage of debt and the percentage of equity in a company.
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Your Answer
Short term investments
Correct Answer
Short term investments
Explanation
The 3 components that affect working capital is receivables, payables and inventory.
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10 When calculating turnover of property plant & equipment and receivables, which item from the income
statement do we use?
Your Answer
Sales
Correct Answer
Sales
Explanation
When calculating asset turnovers, we divide it by sales.
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11 If a company wanted to finance the purchase of equipment without diluting shareholders equity, which of
the following operation could it consider?
Your Answer
Obtaining a loan from a bank
Correct Answer
Obtaining a loan from a bank
Explanation
Only pure debt does not dilute equity. All other options would increase shareholder's equity.
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12 Working capital movement is included in which section of the cash flow statement?
Your Answer
Operating activities
Correct Answer
Operating activities
Explanation
Working capital is used in operations, so it should be included in the operations section of the cash flow
statement.
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Your Answer
Interest Bearing Liabilities / (Equity - Intangible Assets)
Correct Answer
Interest Bearing Liabilities / (Equity - Intangible Assets)
Explanation
Debt to tangible net worth ratio = Interest bearing liabilities / (Equity - Intangible assets)
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Your Answer
The company is increasing the use of debt and getting higher financial leverage
Correct Answer
The company is increasing the use of debt and getting higher financial leverage
Explanation
When the total assets to equity ratio is increasing, it is possible that the company is increasing the use of debt
and getting higher financial leverage.
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15 Which ratio is not one of the three ratios that multiply together to produce the return on equity ratio?
Your Answer
Operating profit margin
Correct Answer
Operating profit margin
Explanation
ROE = Total asset turnover x Financial leverage x Net profit margin.
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16 Which financial leverage ratio is used with two other ratios to mathematically produce the return on
equity ratio?
Your Answer
Total Assets / Equity
Correct Answer
Total Assets / Equity
Explanation
Financial leverage ratio = total assets / equity
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Your Answer
SG&A Expense / Sales
Correct Answer
SG&A Expense / Sales
Explanation
Only SG&A Expense / Sale is a tertiary ratio.
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18 Which ratios indicate how efficiently the company generates sales from its assets?
Your Answer
Working capital turnover
Correct Answer
Working capital turnover
Explanation
Working capital turnover = net sales / average working capital, so it signifies how much profit that is made
compared to the working capital that is employed.
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19 The net profit margin ratio can mathematically be broken down as "Tax impact x Capital structure impact
x..."
Your Answer
EBIT / Sales
Correct Answer
EBIT / Sales
Explanation
Tax Impact x Capital Structure Impact (i.e. Interest) x EBIT = Net Profit
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20 Based on the following information from ABC Company’s financial analysis, which one of the following
statements is NOT true?
Your Answer
The company’s ability to cover its short-term obligations is getting higher over the five years.
Correct Answer
The company’s ability to cover its short-term obligations is getting higher over the five years.
Explanation
Inventory turnover ratios measures how quickly the company sells the inventory. The higher the ratio, the
quicker the company is at selling its inventory.
Debt to equity ratio measures how much leverage the company has. When the ratio is very low, it means that
the company has little debt and maybe underleveraged.
Gross profit ratio shows how much revenue is left over after paying the cost of goods sold. When this ratio
decreases, it means the company is spending more on goods sold.
Current ratio measures the ability of a company to cover its short-term obligations. The lower the ratio, the
lower ability the company has to cover its short-term obligations.
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