Financial Statement Quiz

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  • 1/10 Questions

    Price-earnings ratio is not useful for investors to evaluate a company's prospects in the stock market.

    • True
    • False
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About This Quiz

We have brought you a financial statement quiz. This quiz includes several simple questions about financial statement analysis. It should take you a short time to go through all the questions in the quiz. A financial statement is not as easy as it may seem. The questions here will not only help you test yourself, but they also give you a great opportunity to learn more. So, give your best and try to score as high as you can!

Financial Statement Quiz - Quiz

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  • 2. 

    Evaluating companies of different sizes MUST use a common size analysis technique in order to make them comparable.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    In order to make companies of different sizes comparable, it is essential to use a common size analysis technique. This technique involves expressing financial information as a percentage of a common base, such as sales or total assets. By doing so, it eliminates the influence of company size and allows for a more accurate comparison of their financial performance. This is important because comparing raw financial numbers without adjusting for size can lead to misleading conclusions. Therefore, it is true that evaluating companies of different sizes must use a common size analysis technique to ensure comparability.

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  • 3. 

    The issuance of common stock for cash at year-end will make an increase in both denominators: total assets and equity.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    When common stock is issued for cash at year-end, it is recorded as an increase in total assets because cash is received. Additionally, it is recorded as an increase in equity because common stock represents ownership in the company. Therefore, both the total assets and equity denominators will increase as a result of the issuance of common stock for cash at year-end.

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  • 4. 

    Acid-test ratio reflects the direct benefits that stockholders can gain from a company.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The acid-test ratio, also known as the quick ratio, is a measure of a company's ability to pay off its current liabilities with its most liquid assets. It does not directly reflect the benefits that stockholders can gain from a company. Instead, it focuses on the company's short-term liquidity position. Therefore, the statement is false.

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  • 5. 

    Most stockholders would ordinarily be least concerned with which of the following ratios:

    • Earnings per share

    • Dividend yield ratio

    • Price-earnings ratio

    • Acid-test ratio

    Correct Answer
    A. Acid-test ratio
    Explanation
    Stockholders are typically least concerned with the acid-test ratio because it measures a company's short-term liquidity and ability to meet immediate financial obligations. Stockholders are more interested in profitability and returns on their investment, which are reflected in ratios such as earnings per share, dividend yield ratio, and price-earnings ratio. The acid-test ratio is more relevant for creditors and suppliers who want to assess a company's ability to pay off its short-term debts.

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  • 6. 

    The denominator of "return on common stockholder's equity" is the biggest if a company earns a profit.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The denominator of "return on common stockholder's equity" is not the biggest if a company earns a profit. The denominator of this ratio is the average common stockholder's equity, which includes the company's net income. Therefore, if a company earns a profit, it would increase the numerator (net income) and the denominator (average common stockholder's equity) by the same amount, resulting in no significant change in the ratio.

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  • 7. 

    Common size financial statements help an analyst to:

    • Evaluate financial statements of companies within a given industry of the same approximate size.

    • Determine which companies in similar industry are at approximately the same stage of development.

    • Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over a period of time or between companies within a given industry without respect to size.

    • Ascertain the relative potential of companies of similar size in different industries.

    Correct Answer
    A. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over a period of time or between companies within a given industry without respect to size.
    Explanation
    Common size financial statements allow an analyst to compare the composition of a company's assets, liabilities, capital, revenue, and expenses over a period of time or between companies within the same industry, regardless of their size. This helps in identifying trends, patterns, and differences in financial performance, and allows for a more meaningful comparison and evaluation of companies within the industry. It provides insights into the financial structure and performance of companies, allowing for better decision-making and analysis.

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  • 8. 

    Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities?

    • Current ratio

    • Acid-test ratio

    • Price-earnings ratio

    • Times interest earned ratio

    Correct Answer
    A. Price-earnings ratio
    Explanation
    The price-earnings ratio is a measure of a company's stock price relative to its earnings per share. It is commonly used by investors to assess the valuation of a company's stock. However, it is not directly related to a company's ability to pay its expenses and liabilities. Instead, the current ratio and acid-test ratio are more relevant in determining a company's liquidity and ability to meet its short-term obligations. The times interest earned ratio is also important in assessing a company's ability to cover its interest expenses.

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  • 9. 

    If a company is profitable and is effectively using leverage, which one of the following ratios is likely to be the largest?

    • Return on total assets

    • Return on total liabilities

    • Return on common stockholders' equity

    • Cannot be determined

    Correct Answer
    A. Return on common stockholders' equity
    Explanation
    Return on common stockholders' equity is likely to be the largest ratio if a company is profitable and effectively using leverage. This is because return on common stockholders' equity measures the profitability of a company's operations in relation to the investment made by common stockholders. If the company is profitable and effectively using leverage, it means that it is generating higher returns on the equity invested by common stockholders, resulting in a larger return on common stockholders' equity ratio.

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  • 10. 

    What effect will the issuance of common stock for cash at year-end have on the following ratios?

    • Increases Return on Total Assets and increases Debt-to-Equity Ratio.

    • Increases Return on Total Assets and decreases Debt-to-Equity Ratio.

    • Decreases Return on Total Assets and increases Debt-to-Equity Ratio.

    • Decreases Return on Total Assets and decreases Debt-to-Equity Ratio.

    Correct Answer
    A. Decreases Return on Total Assets and decreases Debt-to-Equity Ratio.
    Explanation
    Issuing common stock for cash at year-end will decrease the return on total assets because it increases the denominator (total assets) without a corresponding increase in the numerator (net income). This will result in a lower return on assets ratio. Additionally, issuing common stock for cash will also decrease the debt-to-equity ratio as it increases the equity portion of the ratio while keeping the debt portion constant. Therefore, both ratios will decrease as a result of this transaction.

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Quiz Review Timeline (Updated): Aug 28, 2023 +

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  • Current Version
  • Aug 28, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Nov 27, 2010
    Quiz Created by
    Phamthuy
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