Financial Statements sample questions

Question: Because the U.S. tax system is a progressive tax system, a taxpayer’s marginal and average tax rates are the same.

Answer Choices:

Answer: B – False

Question: The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

Answer Choices:

Answer: A – True

Question: The time dimension is important in financial statement analysis. The balance sheet shows the firm’s financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.

Answer Choices:

Answer: A – True

Question: In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. a. True b. False

Answer Choices:

Answer: B – False

Question: The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time. a. True b. False

Answer Choices:

Answer: A – True

Question: If a firm’s fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. a. True b. False

Answer Choices:

Answer: B – False

Question: Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage. a. True b. False

Answer Choices:

Answer: A – True

Question: The more conservative a firm’s management is, the higher its total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is likely to be. a. True b. False

Answer Choices:

Answer: B – False

Question: Other things held constant, the higher a firm’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)), the higher its TIE ratio will be. a. True b. False

Answer Choices:

Answer: B – False

Question: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs. a. True b. False

Answer Choices:

Answer: A – True

Question: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results. a. True b. False

Answer Choices:

Answer: A – True

Question: The Basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects. a. True b. False

Answer Choices:

Answer: B – False

Question: The operating margin measures operating income per dollar of assets. a. True b. False

Answer Choices:

Answer: B – False

Question: The profit margin measures net income per dollar of sales. a. True b. False

Answer Choices:

Answer: A – True

Question: The return on invested capital measures the total return that a company has provided for its investors. a. True b. False

Answer Choices:

Answer: A – True

Question: The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed. a. True b. False

Answer Choices:

Answer: A – True

Question: Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods. a. True b. False

Answer Choices:

Answer: A – True

Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False

Answer Choices:

Answer: A – True

Question: Is it appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if the firms being compared have the same proportion of fixed assets to total assets.

Answer Choices:

Answer: B – False