Example Possible Multiple Choice Questions

Financial Reporting & Auditing – Own possible exam questions

1. Investors are more interested in
a. Financial strength of the company as the creditor’s main risk is that the
company fails to repay the loan
b. Long-term solvency, the company’s ability to generate cash in order to meet
long-term financial obligations
c. Short-term liquidity, the company’s ability to generate cash to meet its short-
term obligations
d. Profitability, (future) performance of the company
e. NO ANSWER

2. Creditors are more interested in
a. Financial strength of the company as the creditor’s main risk is that the
company fails to repay the loan
b. Long-term solvency, the company’s ability to generate cash in order to meet
long-term financial obligations
c. Short-term liquidity, the company’s ability to generate cash to meet its short-
term obligations
d. All of the above
e. NO ANSWER

3. Vertical analysis
a. Allows (internal) structural analysis of the financial statements of a company
(relative magnitude)
b. Indicates the direction a business is taking by looking at trends
c. Tries to identify links between changes in different accounts
d. All of the above
e. NO ANSWER

4. Which statement about the current ratio is false
a. Measures the ability to pay current liabilities with current assets
b. The higher the current ratio, the lower the company’s ability to pay its
obligations
c. In general, a higher current ratio indicates a stronger financial position
d. A ratio under 1 indicates that the company’s debts due in a year or less are
greater than its assets
e. NO ANSWER

5. If the NWC would be negative, this means that
a. There is not enough current assets to fulfil current liabilities
b. Long lived assets would be financed with current liabilities
c. The current ratio is between 0 and 1
d. All of the above
e. NO ANSWER

, 6. The quick ratio or acid test ratio
a. Is the time period between cash payment to suppliers and cash receipts from
customers
b. Measures the ability to collect cash from credit customers
c. The quick ratio indicates the short-term liquidity of a company's capacity to
pay its current liabilities without needing to sell its inventory or get additional
financing.
d. Measures the number of times per year the entity pays off its account payable
e. NO ANSWER

7. The cash conversion cycle
a. Is the time span during which goods and services enter the company and the
company receives cash for it from customers
b. Can be both positive and negative
c. Measures the ability to collect cash from credit customers
d. All of the above
e. NO ANSWER

8. If we consider Financial Leverage, which capital structure is preferred by
shareholders if the EBIT is close to zero? And when the EBIT is high?
a. Financing with Equity when EBIT is low, and Debt financing when EBIT is
high
b. Financing with Debt when EBIT is low, and financing with Equity when EBIT
is high
c. Shareholder’s always avoid debt financing because of the financial risk it
entails
d. Shareholders are indifferent
e. NO ANSWER

9. Earnings Per Share (EPS)
a. Are always positive (or zero)
b. Can be negative
c. Can only be negative when using Debt financing
d. Can only be negative when using Equity financing
e. NO ANSWER

10. The concept of financial leverage
a. States the relationship between return on investment, profit margin and asset
turnover
b. Links the return on equity ratio analytically to the return on assets ratio
c. Equals zero if you take no debt in your capital structure
d. Has a positive effect on shareholders when ROA% < Interest %
e. NO ANSWER