About Financial Ratios

Following are some of the multiple choice questions on the Financial Ratios with answers that will help the students in developing their knowledge.

Financial Ratios MCQ

1. Which of the following methods could a business implement to reduce their expenses

  • Minimise loss due to theft by insulating security camera and ensuring no excess cash is kept on the premises.
  • Compare different insurance, electricity and telephone companies to get cheaper plans that are suited to the business’ needs
  • Restructure staffing
  • All of above

2. Which ratio tells you how effective the management team is at keeping the indirect costs low?

  • Effectiveness ratio
  • Management ratio
  • Expense ratio
  • All of the above

3. What is the formula for Gross Profit Margin?

  • Profit / Net sales revenue X 100
  • Gross profit / Net sales revenue X 100
  • Gross profit / COGS X 100
  • Profit / Cost of sales X 100

4. A low Rate of Turnover for Accounts Receivables indicates:

  • Credit sales are low
  • Danger of bad debts
  • Poor credit policy
  • Tight and effective credit and collection policy

5. What does the Net Profit Ratio show us?

  • How much money the business has spent
  • How much money the business owes
  • The percentage of profit in each sale
  • The percentage of assets in each account

6. The account Cost of Goods sold is considered an expense.

  • True
  • False

7. Which of the following shows the number of times a firm sells its average inventory balance during a reporting period?

  • Average Inventory ratio
  • Cost of Goods sold weighted method only
  • average days in inventory ratio
  • Rate of turnover of inventory ratio

8. Which ratio is a more conservative measure than the current ratio, which includes all current assets as coverage for current liabilities.

  • debt ratio
  • currrent ratio
  • quick ratio
  • working capital

9. How do you calculate Gross Profit?

  • Sales - COGS
  • Sales - NP
  • COGS - Expenses
  • COGS - NP

10. Financial ratios that tell how much of each dollar of sales, assets, and owner's investments resulted in net profit.

  • liquidity ratios
  • efficiency ratios
  • profitability ratios
  • leverage ratios

11. Financial ratios that tell how well a company can pay off its short-term debts and meet unexpected needs for cash.

  • liquidity ratios
  • efficiency ratios
  • stability ratios
  • profitability ratios

12. Which of the following is a liquidity ratio?

  • debt to equity ratio
  • Current ratio
  • gross profit ratio
  • return on equity ratio

13. What is the difference between current and non current assets?

  • There is no difference
  • Current assets are the same as current liabilities and non current are not  
  • Current assets tend to be easily converted to cash whereas non current are not 
  • A company will gain more profit if they use non current only 

14. What does COGS stand for?

  • cost of goals scored
  • cost of goods stocked
  • cost of goods sold
  • cost of goods solvent

15. The sources of money generated by the sale of products or services.

  • Sales Revenue
  • Expenses
  • Net Income
  • Net Loss

16. The financial statement that reports whether the business earned a profit and also lists the revenues and expenses is called the: 

  • Balance Sheet
  • Statement of Retained Earnings
  • Statement of Cash Flows
  • Income Statement

17. What is owner equity?

  • The value of the business after liabilities are subtracted from assets; the value of the owner's investment in the business.
  • What a company owes.
  • Documents that are used to record and analyze the financial performance of a business.
  • All income a company receives overtime.

18. What are the 3 basic financial statements?

  • Statement of Cash Flows
  • Income statement, Balance sheet
  • Financial statements
  • Both (a) & (b)

19. When it comes to debt, a company is financially stronger when there is more debt and fewer assets.

  • True
  • False

20. Examples may include salaries, utilities, rent, insurance, and office supplies.

  • Revenue
  • Expense
  • Net Income
  • Net Loss

21. What does liquidity mean?

  • The company's ability to pay its obligations.
  • The company's ability to collect its receivables.
  • The company's ability to increase financing
  • The company's ability to obtain a new loan

22. How do you decide what assets or liabilities are current?

  • Assets that are converted to cash, sold or used up within a year. Liabilities that you expect to settle within one year.
  • Assets that are not Property, Plant or Equipment. Liabilities that are not included in Accounts Payable.
  • Those that are not included in the working capital.
  • none of the above

23. When making business investment decision you should:

  • Look at the Income statement to see if you are making a profit.
  • Consult all financial statements including ratio analysis and benchmarks within the industry.
  • Have a tarot reading.
  • Check your bank account to see how much money you have.

24. Which ratio tells you how much profit does a company generate directly from making its goods /services?

  • debt to equity ratio
  • current ration
  • return on equity ratio
  • Gross profit ratio

25. Which ratio measures how much of each dollar in revenue collected by a company translates into pure profit.

  • Return on Equity
  • Profit Margin
  • Gross Profit Margin
  • Current ratio

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