Corporate Finance & Financial Ratios for
Investment Analysis Complete Study Guide–
UP-TO-DATE 2026 EXAM QUESTIONS AND
100% ACCURATE SOLUTIONS | Question And
VERIFIED ANSWERS
SECTION 1: LIQUIDITY RATIOS
Question 1: A firm has current assets of $500,000 and current liabilities of $250,000.
What is its current ratio?
A) 0.5
B) 1.0
C) 1.5
D) 2.0
E) 2.5
Correct Answer: D) 2.0
Explanation: The Current Ratio is calculated as Current Assets ÷ Current Liabilities =
$500,000 ÷ $250,000 = 2.0. This indicates the firm has $2.00 in current assets for every
$1.00 of current liabilities, suggesting strong short-term liquidity .
Question 2: The quick ratio differs from the current ratio in that the quick ratio:
A) Includes inventory in current assets
B) Excludes inventory from current assets
C) Includes long-term investments
D) Excludes accounts payable
E) Includes intangible assets
,Correct Answer: B) Excludes inventory from current assets
Explanation: The Quick Ratio (or Acid-Test Ratio) is calculated as (Current Assets -
Inventory) ÷ Current Liabilities. Inventory is excluded because it may not be easily
convertible to cash in the short term .
Question 3: A firm has current assets of $800,000, inventory of $200,000, and current
liabilities of $400,000. What is its quick ratio?
A) 0.5
B) 1.0
C) 1.5
D) 2.0
E) 2.5
Correct Answer: C) 1.5
Explanation: Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities = ($800,000
- $200,000) ÷ $400,000 = $600,000 ÷ $400,000 = 1.5. The firm has $1.50 in highly liquid
assets for each $1.00 of current liabilities .
Question 4: Which of the following transactions would INCREASE a firm's current ratio?
A) Paying off accounts payable with cash
B) Purchasing inventory on credit
C) Selling inventory at cost for cash
D) Collecting an accounts receivable
E) Writing off a bad debt
Correct Answer: A) Paying off accounts payable with cash
Explanation: Paying accounts payable reduces both current assets and current liabilities
by the same amount. If the current ratio > 1, reducing both numerator and denominator
by the same amount actually increases the ratio. Example: 2.0 becomes 2.1 when both
decrease .
,Question 5: A firm's cash ratio is 0.3. This means:
A) The firm has $0.30 in total current assets for every $1 of current liabilities
B) The firm has $0.30 in cash for every $1 of total assets
C) The firm has $0.30 in cash for every $1 of current liabilities
D) The firm has $0.30 in current liabilities for every $1 of cash
E) The firm has 30% of its assets in cash
Correct Answer: C) The firm has $0.30 in cash for every $1 of current liabilities
Explanation: The Cash Ratio is Cash ÷ Current Liabilities. A cash ratio of 0.3 means the
firm has $0.30 in cash for every $1.00 of current liabilities. This is the most conservative
liquidity ratio .
Question 6: A company has cash of $2,000,000, inventory of $500,000, prepaid
expenses of $100,000, and current liabilities of $1,000,000. Its quick ratio is:
A) 2.0
B) 2.5
C) 1.4
D) 2.6
E) 1.0
Correct Answer: C) 1.4
Explanation: Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) ÷ Current
Liabilities = ($2,000,000 + $500,000 + $100,000 - $500,000 - $100,000) ÷ $1,000,000 =
$1,400,000 ÷ $1,000,000 = 1.4 .
Question 7: Which liquidity ratio is considered the most conservative?
A) Current ratio
B) Quick ratio
C) Cash ratio
, D) Operating cash flow ratio
E) Interval measure
Correct Answer: C) Cash ratio
Explanation: The Cash Ratio (Cash ÷ Current Liabilities) is the most conservative because
it considers only cash, the most liquid asset. It ignores receivables (collection risk) and
inventory (liquidation risk) .
Question 8: If a firm's current ratio is 1.8 and its quick ratio is 0.9, this suggests:
A) The firm has excessive inventory
B) The firm has excessive cash
C) The firm has minimal inventory
D) The firm has excessive accounts receivable
E) The firm has high current liabilities
Correct Answer: A) The firm has excessive inventory
Explanation: A large gap between the current ratio (which includes inventory) and the
quick ratio (which excludes inventory) suggests that inventory represents a significant
portion of current assets .
SECTION 2: PROFITABILITY RATIOS
Question 9: A firm has an ROA of 8%, sales of $100, and total assets of $75. What is its
profit margin?
A) 1.3%
B) 4.3%
C) 6.0%
D) 10.7%
E) 16.7%
Correct Answer: C) 6.0%
Investment Analysis Complete Study Guide–
UP-TO-DATE 2026 EXAM QUESTIONS AND
100% ACCURATE SOLUTIONS | Question And
VERIFIED ANSWERS
SECTION 1: LIQUIDITY RATIOS
Question 1: A firm has current assets of $500,000 and current liabilities of $250,000.
What is its current ratio?
A) 0.5
B) 1.0
C) 1.5
D) 2.0
E) 2.5
Correct Answer: D) 2.0
Explanation: The Current Ratio is calculated as Current Assets ÷ Current Liabilities =
$500,000 ÷ $250,000 = 2.0. This indicates the firm has $2.00 in current assets for every
$1.00 of current liabilities, suggesting strong short-term liquidity .
Question 2: The quick ratio differs from the current ratio in that the quick ratio:
A) Includes inventory in current assets
B) Excludes inventory from current assets
C) Includes long-term investments
D) Excludes accounts payable
E) Includes intangible assets
,Correct Answer: B) Excludes inventory from current assets
Explanation: The Quick Ratio (or Acid-Test Ratio) is calculated as (Current Assets -
Inventory) ÷ Current Liabilities. Inventory is excluded because it may not be easily
convertible to cash in the short term .
Question 3: A firm has current assets of $800,000, inventory of $200,000, and current
liabilities of $400,000. What is its quick ratio?
A) 0.5
B) 1.0
C) 1.5
D) 2.0
E) 2.5
Correct Answer: C) 1.5
Explanation: Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities = ($800,000
- $200,000) ÷ $400,000 = $600,000 ÷ $400,000 = 1.5. The firm has $1.50 in highly liquid
assets for each $1.00 of current liabilities .
Question 4: Which of the following transactions would INCREASE a firm's current ratio?
A) Paying off accounts payable with cash
B) Purchasing inventory on credit
C) Selling inventory at cost for cash
D) Collecting an accounts receivable
E) Writing off a bad debt
Correct Answer: A) Paying off accounts payable with cash
Explanation: Paying accounts payable reduces both current assets and current liabilities
by the same amount. If the current ratio > 1, reducing both numerator and denominator
by the same amount actually increases the ratio. Example: 2.0 becomes 2.1 when both
decrease .
,Question 5: A firm's cash ratio is 0.3. This means:
A) The firm has $0.30 in total current assets for every $1 of current liabilities
B) The firm has $0.30 in cash for every $1 of total assets
C) The firm has $0.30 in cash for every $1 of current liabilities
D) The firm has $0.30 in current liabilities for every $1 of cash
E) The firm has 30% of its assets in cash
Correct Answer: C) The firm has $0.30 in cash for every $1 of current liabilities
Explanation: The Cash Ratio is Cash ÷ Current Liabilities. A cash ratio of 0.3 means the
firm has $0.30 in cash for every $1.00 of current liabilities. This is the most conservative
liquidity ratio .
Question 6: A company has cash of $2,000,000, inventory of $500,000, prepaid
expenses of $100,000, and current liabilities of $1,000,000. Its quick ratio is:
A) 2.0
B) 2.5
C) 1.4
D) 2.6
E) 1.0
Correct Answer: C) 1.4
Explanation: Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) ÷ Current
Liabilities = ($2,000,000 + $500,000 + $100,000 - $500,000 - $100,000) ÷ $1,000,000 =
$1,400,000 ÷ $1,000,000 = 1.4 .
Question 7: Which liquidity ratio is considered the most conservative?
A) Current ratio
B) Quick ratio
C) Cash ratio
, D) Operating cash flow ratio
E) Interval measure
Correct Answer: C) Cash ratio
Explanation: The Cash Ratio (Cash ÷ Current Liabilities) is the most conservative because
it considers only cash, the most liquid asset. It ignores receivables (collection risk) and
inventory (liquidation risk) .
Question 8: If a firm's current ratio is 1.8 and its quick ratio is 0.9, this suggests:
A) The firm has excessive inventory
B) The firm has excessive cash
C) The firm has minimal inventory
D) The firm has excessive accounts receivable
E) The firm has high current liabilities
Correct Answer: A) The firm has excessive inventory
Explanation: A large gap between the current ratio (which includes inventory) and the
quick ratio (which excludes inventory) suggests that inventory represents a significant
portion of current assets .
SECTION 2: PROFITABILITY RATIOS
Question 9: A firm has an ROA of 8%, sales of $100, and total assets of $75. What is its
profit margin?
A) 1.3%
B) 4.3%
C) 6.0%
D) 10.7%
E) 16.7%
Correct Answer: C) 6.0%
