Q: A company’s current ratio is calculated as:

$$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$

Q: A company’s debt-to-equity ratio is calculated as:

$$\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}$$

Q: A company’s interest coverage ratio is calculated as:

$$\text{Interest Coverage Ratio} = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}}$$

Question 1

Which of the following best describes the primary purpose of the statement of financial position (balance sheet)?

Accepted Answer

To list an entity’s assets, liabilities, and equity as of a specific point in time.

Question 2

A company has current assets of $$150,000 and current liabilities of 100$$,000. What is its working capital?

Accepted Answer

$50,000

Question 3

Which of the following is a limitation of the balance sheet?

Accepted Answer

Many accounts are based on estimates rather than determinable amounts.

Question 4

Which of the following is NOT classified as a current asset?

Accepted Answer

Property, plant, and equipment

Question 5

A company’s current ratio is calculated as:

Accepted Answer

$$	ext{Current Ratio} = \frac{	ext{Current Assets}}{	ext{Current Liabilities}}$$

Question 6

Which of the following transactions would be classified as an investing activity on the statement of cash flows?

Accepted Answer

Cash paid to acquire equipment

Question 7

Under the indirect method of preparing the statement of cash flows, which of the following is added to net income?

Accepted Answer

Depreciation expense

Question 8

If a company’s net income is $$40,000, beginning retained earnings are 100$$,000, and dividends declared are $10,000, what are the ending retained earnings?

Accepted Answer

$$130,000 = 100,000 + 40,000 - 10,000$$

Question 9

Which of the following is a required disclosure in the notes to the financial statements?

Accepted Answer

The summary of significant accounting policies

Question 10

A company’s debt-to-equity ratio is calculated as:

Accepted Answer

$$	ext{Debt-to-Equity Ratio} = \frac{	ext{Total Liabilities}}{	ext{Total Equity}}$$

Question 11

Which of the following best describes a subsequent event?

Accepted Answer

An event that occurs after the balance sheet date but before the financial statements are issued

Question 12

Which of the following is an example of a related-party transaction that must be disclosed?

Accepted Answer

A loan to a company executive

Question 13

Which section of the annual report provides management’s perspective on the company’s financial condition and results of operations?

Accepted Answer

Management’s discussion and analysis (MD&A)

Question 14

A company’s interest coverage ratio is calculated as:

Accepted Answer

$$	ext{Interest Coverage Ratio} = \frac{	ext{Earnings Before Interest and Taxes (EBIT)}}{	ext{Interest Expense}}$$

Question 15

Which of the following is a key difference between the direct and indirect methods of reporting cash flows from operating activities?

Accepted Answer

The direct method reports actual cash inflows and outflows for each operating activity.

Question 16

Which of the following best describes financial flexibility?

Accepted Answer

The ability to respond to unexpected needs and opportunities by altering cash flows

Question 17

If a company’s total assets are $$500,000, total liabilities are 300$$,000, and total equity is $200,000, what is the company’s debt-to-equity ratio?

Accepted Answer

$$1.5$$

Question 18

Which of the following is NOT typically included in the annual report?

Accepted Answer

A list of all company customers

Question 19

Which of the following is an example of a noncurrent liability?

Accepted Answer

Bonds payable due in 10 years

Question 20

Which of the following best describes the DuPont Analysis?

Accepted Answer

A tool that separates return on equity into profitability and leverage components

Chapter 6: Statements of Financial Position, Cash Flows, and the Annual Report – Principles of Accounting Study Notes

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