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Banking and Finance Quiz 11

Ques 1: Lake Products is a retail hardware store. If Lake's sales increase by 25% from Year 1 to Year 2, which accounting item will likely remain unchanged, rather than naturally increase?

(a) inventory

(b) debt

(c) cash

(d) wages

Answer: Option(B): debt

Feedback

Debt will only increase if you actively seek new debt.

Ques 2: For a measure of a company's profitability, you will look at its _____.

(a) return on sales

(b) current ratio

(c) return on equity

(d) asset turnover

Answer: Option(A): return on sales

Feedback

This is net income/total revenue, also known as profit margin, from a company's operations.

Ques 3: ABC Corp has a price-earnings ratio of 33%. How will the market view ABC as an investment opportunity?

(a) Investors will be concerned about ABC's leverage.

(b) Investors expect ABC's earnings to grow slowly in the future.

(c) Investors expect ABC's earnings to grow rapidly in the future.

(d) Investors will also want to know ABC's net income.

Answer: Option(C): Investors expect ABC's earnings to grow rapidly in the future.

Ques 4: You are creating your company's statement of cash flows. Your company bought back $100,000 in stock from shareholders. How will this be recorded?

(a) as a financing activity

(b) as an operating activity

(c) as an investing activity

Answer: Option(A): as a financing activity

Ques 5: ABC Corp. has a current ratio of .75. As an investor, what does this figure tell you?

(a) ABC has a current ratio that will make investors confident it can repay its loans.

(b) ABC does not have enough current assets to pay for liabilities due this year.

(c) ABC has a low level of leverage based on its current ratio.

(d) ABC does not have enough assets on hand to pay for its total liabilities.

Answer: Option(B): ABC does not have enough current assets to pay for liabilities due this year.

Feedback

This means ABC does not have the liquidity to pay its obligations for the coming year.

Ques 6: Why is owners' equity listed on the liabilities side of a balance sheet?

(a) It is money due from the owners that has not yet been paid to the company.

(b) It is money due to the owners if the company is sold or closes.

(c) It cannot be on the asset side because it is money the company cannot spend.

Answer: Option(B): It is money due to the owners if the company is sold or closes.

Ques 7: You have obtained an income statement from one of your competitors and you want to use it make your company more profitable. What information is most relevant?

(a) their consolidated net income

(b) their cost of goods sold percentage

(c) their average daily inventory

(d) their net sales for the previous year

Answer: Option(B): their cost of goods sold percentage

Feedback

If you can achieve a higher markup on what you sell, it is the first step in being more profitable.

Ques 8: What are the three essential financial statements?

(a) the investment sheet, the liability statement, and the risk statement

(b) the balance sheet, the income statement, and the statement of cash flows

(c) the investment sheet, the revenue statement, and the investor contract

(d) the balance sheet, the liability statement, and the investment sheet

Answer: Option(D): the balance sheet, the income statement, and the statement of cash flows

Ques 9: ou are interested in investing in ABC Corp. Why would you pay close attention to ABC's balance sheet?

(a) to review ABC's yearly sales

(b) to review ABC's inventory

(c) to review ABC's assets in relation to their liabilities

(d) to review ABC's loan obligations

Answer: Option(D): to review ABC's loan obligations

Feedback

If ABC has a large amount of debt in loans, you should be concerned that it might not be able to pay its loans.

Ques 10: What is a balance sheet?

(a) a statement of a company's assets and the sources used to purchase those assets

(b) a statement of the amount of money a company made during a given period

(c) a statement that balances the cash coming in with the cash going out

(d) a statement of a company's assets and the revenue the company derives from the assets

Answer: Option(A): a statement of a company's assets and the sources used to purchase those assets

Feedback

A balance sheet "balances" assets with the borrowing, owners equity, or profits used to buy the assets.

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