Ratio Analysis & Financial Statement Analysis
1. The current ratio is defined as:
A. Total assets ÷ Total liabilities
B. Current assets ÷ Current liabilities
C. Current liabilities ÷ Current assets
D. Working capital ÷ Total assets
Answer: B
Rationale: The current ratio measures a firm’s ability to
meet short-term obligations by dividing current assets by
current liabilities cite turn5search5 .
2. A high quick (acid-test) ratio indicates:
A. Strong long-term solvency
B. Excess inventory levels
C. Ability to meet short-term liabilities without selling
inventory
D. Poor liquidity
Answer: C
Rationale: The quick ratio excludes inventory, showing if
liquid assets alone cover current liabilities
cite turn5search1 .
3. Which ratio assesses how effectively a company
uses its assets to generate sales?
A. Debt-equity ratio
B. Inventory turnover ratio
C. Current ratio
D. Earnings per share
, Answer: B
Rationale: Inventory turnover (Cost of Goods Sold ÷
Average Inventory) measures how often inventory is sold
and replaced, indicating operational efficiency
cite turn5news14 .
4. A debt-equity ratio above 1 implies:
A. More equity financing than debt
B. A leveraged capital structure with more debt than equity
C. Strong liquidity
D. Low financial risk
Answer: B
Rationale: Debt-equity ratio = Total debt ÷ Total equity;
above 1 means debt exceeds equity, increasing financial
leverage cite turn4search1 .
Working Capital Management
5. Working capital is calculated as:
A. Current assets + Current liabilities
B. Current assets − Current liabilities
C. Total assets − Total liabilities
D. Inventories + Receivables
Answer: B
Rationale: Net working capital equals current assets
minus current liabilities, reflecting liquidity
cite turn5search0 .
1. The current ratio is defined as:
A. Total assets ÷ Total liabilities
B. Current assets ÷ Current liabilities
C. Current liabilities ÷ Current assets
D. Working capital ÷ Total assets
Answer: B
Rationale: The current ratio measures a firm’s ability to
meet short-term obligations by dividing current assets by
current liabilities cite turn5search5 .
2. A high quick (acid-test) ratio indicates:
A. Strong long-term solvency
B. Excess inventory levels
C. Ability to meet short-term liabilities without selling
inventory
D. Poor liquidity
Answer: C
Rationale: The quick ratio excludes inventory, showing if
liquid assets alone cover current liabilities
cite turn5search1 .
3. Which ratio assesses how effectively a company
uses its assets to generate sales?
A. Debt-equity ratio
B. Inventory turnover ratio
C. Current ratio
D. Earnings per share
, Answer: B
Rationale: Inventory turnover (Cost of Goods Sold ÷
Average Inventory) measures how often inventory is sold
and replaced, indicating operational efficiency
cite turn5news14 .
4. A debt-equity ratio above 1 implies:
A. More equity financing than debt
B. A leveraged capital structure with more debt than equity
C. Strong liquidity
D. Low financial risk
Answer: B
Rationale: Debt-equity ratio = Total debt ÷ Total equity;
above 1 means debt exceeds equity, increasing financial
leverage cite turn4search1 .
Working Capital Management
5. Working capital is calculated as:
A. Current assets + Current liabilities
B. Current assets − Current liabilities
C. Total assets − Total liabilities
D. Inventories + Receivables
Answer: B
Rationale: Net working capital equals current assets
minus current liabilities, reflecting liquidity
cite turn5search0 .
