Quiz On Financial Analysis
In the financial world, for a business to be a going concern, it has to be stable, profitable and viable. A financial analyst is therefore, expected to assess these conditions and generate a report on the findings. Are you on your way to becoming a financial analyst? Take the quiz see just how ready you are.
- 1.
Financial analysis includes which of the following steps?
- A.
Establishing facts about an organization
- B.
Comparing facts about an organization over time
- C.
Making decisions on the basis of fact comparisons
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
Financial analysis includes all of the mentioned steps. Establishing facts about an organization involves gathering and analyzing financial data to understand its current financial position. Comparing facts about an organization over time involves analyzing financial statements and performance metrics to identify trends and changes. Making decisions on the basis of fact comparisons involves using the insights gained from financial analysis to make informed decisions about investments, budgeting, and other financial matters. Therefore, all of these steps are integral parts of financial analysis.Rate this question:
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- 2.
The four types of ratios used in financial analysis are
- A.
liquidity, profitability, activity, capital structure
- B.
Capital structure, current, profitability, activity
- C.
Revenue and expense, liquidity, capital structure, activity
- D.
Plant and equipment, activity, capital structure, liquidity
Correct Answer
A. liquidity, profitability, activity, capital structureExplanation
The correct answer is liquidity, profitability, activity, capital structure. These four types of ratios are commonly used in financial analysis to assess different aspects of a company's performance. Liquidity ratios measure a company's ability to meet short-term obligations, profitability ratios evaluate a company's ability to generate profits, activity ratios assess the efficiency of a company's operations, and capital structure ratios analyze the company's financial leverage and risk. By considering these ratios, analysts can gain insights into a company's financial health and make informed decisions.Rate this question:
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- 3.
What is vertical analysis?
- A.
It measures an organization's performance by computing the relationships of important line items in the financial statements.
- B.
It looks at the internal structure of the organization by comparing a base number and percentages of important line items.
- C.
It evaluates the trend in line items by looking at the percentage change in the line items over time.
- D.
None of the above
Correct Answer
B. It looks at the internal structure of the organization by comparing a base number and percentages of important line items.Explanation
Vertical analysis is a method of evaluating an organization's performance by comparing the proportions of important line items in the financial statements. It involves comparing a base number (such as total sales or total assets) with the percentages of various line items (such as cost of goods sold, operating expenses, or net income). This analysis helps to understand the internal structure of the organization and identify any significant changes or trends over time.Rate this question:
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- 4.
The balance sheet displays an organization’s
- A.
Assets, liabilities, and expenses
- B.
revenues, expenses, and assets
- C.
net assets, liabilities, and assets
- D.
Net assets, revenues, and expenses
Correct Answer
C. net assets, liabilities, and assetsExplanation
The balance sheet is a financial statement that shows an organization's financial position at a specific point in time. It includes the organization's assets, which are the resources it owns, liabilities, which are the obligations it owes, and net assets, which is the difference between assets and liabilities. This answer correctly identifies the three main components of a balance sheet: net assets, liabilities, and assets.Rate this question:
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- 5.
What does the statement of changes in net assets tell managers?
- A.
Which assets have been moved from permanently restricted to unrestricted
- B.
Why net assets changed from the beginning of the statement period to the end of the statement period
- C.
Which assets have been moved from temporarily restricted to unrestricted
- D.
Why net assets have changed over the life of the organization
Correct Answer
B. Why net assets changed from the beginning of the statement period to the end of the statement periodExplanation
The statement of changes in net assets tells managers why net assets changed from the beginning of the statement period to the end of the statement period. This statement provides information on the sources and uses of funds during the period, including revenue, expenses, gains, and losses. By analyzing this statement, managers can understand the factors that contributed to the change in net assets and make informed decisions about financial management and planning for the organization.Rate this question:
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- 6.
Which of the following accounts does NOT appear on the statement of operations?
- A.
Shareholders’ equity
- B.
Operating expenses
- C.
Depreciation
- D.
Net assets released from restrictions used for operations
Correct Answer
A. Shareholders’ equityExplanation
Shareholders' equity does not appear on the statement of operations. The statement of operations, also known as the income statement, shows the revenues, expenses, and net income or loss of a company over a specific period of time. Shareholders' equity, on the other hand, is a component of the balance sheet and represents the residual interest in the assets of the company after deducting liabilities. It is not directly related to the revenues and expenses reported on the statement of operations.Rate this question:
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- 7.
How do managers use ratio analysis?
- A.
To make financial decisions
- B.
To determine the profitability of the organization in the future
- C.
To analyze the financial performance of the organization in previous years
- D.
To predict the future and plan strategies that will influence the future
Correct Answer
D. To predict the future and plan strategies that will influence the futureExplanation
Managers use ratio analysis to predict the future and plan strategies that will influence the future. Ratio analysis involves analyzing financial ratios such as profitability ratios, liquidity ratios, and efficiency ratios to gain insights into the financial performance of the organization. By examining these ratios, managers can identify trends, strengths, and weaknesses in the organization's financial performance, which can then be used to make informed decisions and develop strategies that will drive future growth and success.Rate this question:
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- 8.
Which of the following describes liquidity ratios?
- A.
They measure the amount of time an organization takes to turn its assets into cash.
- B.
They are measures of an organization’s ability to meet short-term obligations.
- C.
They reflect an organization’s long-term liquidity.
- D.
They measure an organization’s ability to exist and grow.
Correct Answer
B. They are measures of an organization’s ability to meet short-term obligations.Explanation
Liquidity ratios are financial ratios that measure an organization's ability to meet its short-term obligations. These ratios assess the organization's ability to convert its assets into cash quickly in order to pay off its current liabilities. By analyzing liquidity ratios, such as the current ratio or quick ratio, investors and creditors can evaluate the organization's short-term solvency and determine if it has enough liquid assets to cover its short-term debts. Therefore, the correct answer is "They are measures of an organization's ability to meet short-term obligations."Rate this question:
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- 9.
Which of the following ratios is NOT a liquidity ratio?
- A.
Operating margin
- B.
Current ratio
- C.
Average payment period
- D.
Days cash on hand
Correct Answer
A. Operating margin -
- 10.
A current ratio is
- A.
calculated with current assets and current liabilities
- B.
The basic indicator of financial liquidity
- C.
calculated by dividing total current assets by total current liabilities
- D.
all of the above
Correct Answer
D. all of the aboveExplanation
The correct answer is "all of the above". A current ratio is calculated using current assets and current liabilities, and it is considered the basic indicator of financial liquidity. It is calculated by dividing total current assets by total current liabilities. Therefore, all of the given options are correct in describing the calculation and significance of a current ratio.Rate this question:
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- 11.
Which of the following describes profitability ratios?
- A.
They measure the relationship of revenues to expenses.
- B.
They determine how profitable an organization is.
- C.
They measure an organization’s profitability across years.
- D.
They reflect an organization’s efficiency.
Correct Answer
A. They measure the relationship of revenues to expenses.Explanation
Profitability ratios are financial metrics that measure the relationship between revenues and expenses. These ratios provide insights into how efficiently an organization is generating profits from its operations. By comparing revenues to expenses, profitability ratios help determine the overall profitability of an organization. These ratios can also be used to track an organization's profitability over time and evaluate its efficiency in generating profits.Rate this question:
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- 12.
Which of the following is a profitability ratio?
- A.
Inventory turnover
- B.
Current ratio
- C.
Excess margin
- D.
Debt services coverage
Correct Answer
C. Excess marginExplanation
Excess margin is a profitability ratio that measures the amount of profit a company generates per dollar of sales revenue. It indicates the company's ability to control costs and generate higher profit margins. A higher excess margin ratio implies better profitability and financial performance.Rate this question:
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- 13.
Higher values indicate profitability in which of the following profitability ratios?
- A.
Return on net assets
- B.
Operating margin
- C.
Excess margin
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
The correct answer is "All of the above". This is because higher values indicate profitability in all three profitability ratios mentioned: Return on net assets, operating margin, and excess margin. Return on net assets measures the profitability of a company's assets, operating margin measures the profitability of a company's operations, and excess margin measures the profitability of a company's sales after deducting all expenses. Therefore, higher values in these ratios indicate higher profitability.Rate this question:
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- 14.
Which of the following describes asset efficiency ratios?
- A.
They measure how efficiently assets can be converted into cash.
- B.
They measure the relationship between assets and revenues.
- C.
They indicate the overall liquidity of the organization.
- D.
They measure an organization’s long-term liquidity.
Correct Answer
B. They measure the relationship between assets and revenues.Explanation
Asset efficiency ratios measure the relationship between assets and revenues. These ratios help to evaluate how effectively a company is utilizing its assets to generate revenue. By comparing the amount of revenue generated to the amount of assets invested, these ratios provide insights into the efficiency and productivity of a company's asset utilization.Rate this question:
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- 15.
Which of the following is NOT an asset efficiency ratio?
- A.
Inventory turnover
- B.
Total asset turnover
- C.
Return on net assets
- D.
Current asset turnover
Correct Answer
C. Return on net assetsExplanation
Return on net assets is not an asset efficiency ratio because it measures the profitability of a company's net assets, rather than the efficiency with which the company utilizes its assets to generate sales or revenue. Asset efficiency ratios, such as inventory turnover, total asset turnover, and current asset turnover, focus on the relationship between a company's assets and its sales or revenue to assess how effectively the company is utilizing its assets to generate income.Rate this question:
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- 16.
Lower values are preferable for which of the following asset efficiency ratios?
- A.
Total asset turnover
- B.
Inventory turnover
- C.
Current asset turnover
- D.
Fixed asset turnover
Correct Answer
A. Total asset turnoverExplanation
Total asset turnover is a measure of how efficiently a company is using its total assets to generate revenue. A lower value indicates that the company is not generating enough revenue relative to its total assets, which suggests inefficiency. Therefore, lower values are preferable for total asset turnover because it indicates that the company is utilizing its assets more effectively.Rate this question:
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- 17.
Capital structure ratios measure
- A.
The relationship between an organization’s invested capital and long-term liabilities
- B.
An organization’s ability to meet short-term obligations
- C.
An organization's long-term liquidity
- D.
The amount of profit an organization can earn from capital investments
Correct Answer
C. An organization's long-term liquidityExplanation
Capital structure ratios measure an organization's long-term liquidity. These ratios provide insights into the company's ability to meet its long-term financial obligations and assess the proportion of debt and equity used to finance the organization's operations. By analyzing these ratios, investors and stakeholders can evaluate the company's financial health and its capacity to generate sufficient cash flow to cover its long-term liabilities.Rate this question:
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- 18.
Which of the following is a capital structure ratio?
- A.
Inventory turnover
- B.
Net asset financing
- C.
Debt services coverage
- D.
(b) and (c)
Correct Answer
D. (b) and (c)Explanation
The correct answer is (b) and (c). Net asset financing and debt services coverage are both capital structure ratios. Net asset financing ratio measures the proportion of a company's assets that are financed by its owners, while debt services coverage ratio measures a company's ability to meet its debt obligations. Both ratios are important in analyzing a company's capital structure and financial health.Rate this question:
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- 19.
Which of the following is NOT an operating indicator?
- A.
Average length of stay
- B.
Days cash on hand
- C.
Occupancy rate
- D.
Outpatient revenue as a percentage of total patient revenue
Correct Answer
B. Days cash on handExplanation
Days cash on hand is not an operating indicator because it measures the organization's liquidity or financial health, rather than its operational efficiency. Operating indicators typically focus on key performance metrics related to the organization's core operations, such as average length of stay, occupancy rate, and outpatient revenue as a percentage of total patient revenue.Rate this question:
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- 20.
Good financial reports have which of the following characteristics?
- A.
Accurate
- B.
Meaningful
- C.
Detailed
- D.
(a) and (b)
Correct Answer
D. (a) and (b)Explanation
Good financial reports should have both accuracy and meaningfulness. Accuracy ensures that the information presented is correct and free from errors or misrepresentations. Meaningfulness means that the report provides relevant and useful information that can be easily understood and interpreted by its users. Detailed information is also important in financial reports as it allows for a comprehensive analysis of the financial performance and position of an entity. Therefore, the correct answer is (a) and (b), as both accuracy and meaningfulness are essential characteristics of good financial reports.Rate this question:
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