Question 1

Which of the following best describes the purpose of the Current Ratio in financial analysis?

Accepted Answer

To assess a company's ability to pay its short-term obligations using all current assets.

Question 2

A company has total current assets of $120,000 and total current liabilities of $80,000. What is its Current Ratio?

Accepted Answer

$ \frac{120,000}{80,000} = 1.5 $

Question 3

Which formula correctly calculates the Quick (Acid-Test) Ratio?

Accepted Answer

$ \frac{Cash + Accounts Receivable}{Total Current Liabilities} $

Question 4

If a company has cash of $20,000, accounts receivable of $30,000, inventory of $50,000, and current liabilities of $40,000, what is its Quick Ratio?

Accepted Answer

$ \frac{20,000 + 30,000}{40,000} = 1.25 $

Question 5

Which ratio would be most useful for evaluating how efficiently a company collects its receivables?

Accepted Answer

Receivables Turnover

Question 6

A company has net sales of $500,000 and average accounts receivable of $100,000. What is its Receivables Turnover?

Accepted Answer

$ \frac{500,000}{100,000} = 5 $

Question 7

Which formula is used to calculate Inventory Turnover?

Accepted Answer

$ \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory} $

Question 8

A company has cost of goods sold of $300,000 and average inventory of $60,000. What is its Inventory Turnover?

Accepted Answer

$ \frac{300,000}{60,000} = 5 $

Question 9

Which ratio best measures how quickly a company pays its suppliers?

Accepted Answer

Accounts Payable Turnover

Question 10

If a company has cost of goods sold of $400,000 and average accounts payable of $80,000, what is its Accounts Payable Turnover?

Accepted Answer

$ \frac{400,000}{80,000} = 5 $

Question 11

Which formula correctly represents the Cash Conversion Cycle (CCC)?

Accepted Answer

$ Days\ Inventory\ Outstanding + Days\ Receivables\ Outstanding - Days\ Payables\ Outstanding $

Question 12

A company has Days Inventory Outstanding (DIO) of 40 days, Days Receivables Outstanding (DSO) of 30 days, and Days Payables Outstanding (DPO) of 20 days. What is its Cash Conversion Cycle?

Accepted Answer

$ 40 + 30 - 20 = 50\ days $

Question 13

Which formula is used to calculate Return on Assets (ROA)?

Accepted Answer

$ \frac{Net\ Income}{Average\ Total\ Assets} $

Question 14

A company has net income of $50,000 and average total assets of $250,000. What is its Return on Assets (ROA)?

Accepted Answer

$ \frac{50,000}{250,000} = 0.20\ or\ 20\% $

Question 15

Which formula is used to calculate Return on Common Shareholders' Equity (ROE)?

Accepted Answer

$ \frac{Net\ Income}{Average\ Common\ Shareholders'\ Equity} $

Question 16

A company has net income of $60,000 and average common shareholders' equity of $300,000. What is its Return on Equity (ROE)?

Accepted Answer

$ \frac{60,000}{300,000} = 0.20\ or\ 20\% $

Question 17

Which formula is used to calculate Earnings Per Share (EPS)?

Accepted Answer

$ \frac{Net\ Income}{Average\ Common\ Shares\ Outstanding} $

Question 18

A company has net income of $100,000 and average common shares outstanding of 50,000. What is its Earnings Per Share (EPS)?

Accepted Answer

$ \frac{100,000}{50,000} = 2 $

Question 19

Which formula is used to calculate the Price/Earnings (P/E) Ratio?

Accepted Answer

$ \frac{Market\ Price\ per\ Share}{Earnings\ per\ Share} $

Question 20

A company's market price per share is $40 and its earnings per share is $2. What is its P/E Ratio?

Accepted Answer

$ \frac{40}{2} = 20 $

Key Financial Ratios and Their Applications in Financial Accounting

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