CPFM Financial Statement Analysis 2 — Questions and Answers
Question 1: The current ratio is calculated as which of the following?
- Current assets divided by current liabilities (Correct answer)
- Current liabilities divided by current assets
- Cash divided by current liabilities
- Current assets minus inventory divided by current liabilities
Correct answer: Current assets divided by current liabilities
The current ratio equals current assets divided by current liabilities.
Question 2: The quick ratio differs from the current ratio because it excludes which asset?
- Cash
- Accounts receivable
- Inventory (Correct answer)
- Marketable securities
Correct answer: Inventory
The quick ratio removes inventory because it is the least liquid current asset.
Question 3: A company's gross profit margin is best calculated as which formula?
- Net income divided by revenue
- Gross profit divided by revenue (Correct answer)
- Operating income divided by assets
- Revenue divided by cost of goods sold
Correct answer: Gross profit divided by revenue
Gross profit margin equals gross profit divided by revenue.
Question 4: Which financial statement reports a company's revenues and expenses over a period?
- Balance sheet
- Income statement (Correct answer)
- Statement of cash flows
- Statement of retained earnings
Correct answer: Income statement
The income statement summarizes revenues and expenses over a reporting period.
Question 5: Return on equity (ROE) measures profitability relative to which item?
- Total assets
- Total liabilities
- Shareholders' equity (Correct answer)
- Total revenue
Correct answer: Shareholders' equity
ROE equals net income divided by shareholders' equity.
Question 6: The debt-to-equity ratio is primarily used to assess a company's:
- Liquidity
- Financial leverage (Correct answer)
- Inventory turnover
- Profit margin
Correct answer: Financial leverage
Debt-to-equity measures the degree of financial leverage and capital structure risk.
Question 7: Horizontal analysis of financial statements compares data across:
- Different line items within one period
- Multiple periods to identify trends (Correct answer)
- Industry benchmarks only
- Cash versus accrual basis
Correct answer: Multiple periods to identify trends
Horizontal analysis examines changes in financial data over multiple periods to reveal trends.
CPFM Financial Statement Analysis 2
The current ratio is calculated as which of the following?