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Multiple choice questions related to ratio analysis

1.The quick ratio is considered more useful than the current ratio for

1. Evaluating the profitability of a business that sells inventory very quickly, such as a restaurant.
2. Evaluating the solvency of a business that turns inventory into cash very slowly, such as a shipbuilder.
3. Evaluating long-term credit risk.
4. Evaluating investors’ expectations concerning future earnings.

2. The debt ratio is a measure of

1. Net cash flows relating to financing activities.
2. Long-term credit risk.
3. Short-term solvency.
4. Profitability, independent of the manner in which assets are financed

3. In the long-run, it is most important for a business to generate an inflow of cash from its:

1. Operating activities.
2. Stockholders.
3. Investing activities.
4. Creditors.

4. Return on assets measures the efficiency with which management

1. Generates earnings from the assets under its control, regardless of how these assets are financed.
2. Generates earnings from the assets under its control, giving consideration to any costs of financing these assets.
3. Generates cash from the assets under its control, regardless of accrual-based measures of profitability.
4. Converts its current assets into cash.

5. A transaction that will increase the quick ratio but cause the current ratio to decline is:

1. Short-term borrowing.
2. Investing cash in plant assets.
3. Sale of inventory at a price below cost.
4. Collection of an account receivable.

6. All payments out of the petty cash are debited to miscellaneous expense.

1. Materiality
2. economic entity
3. Representational Faithfulness
4. Historical cost

7. Periodic payments of $1,500 per month for services of H. Hay, who is the sole proprietor of the company, are reported as withdrawals.

1. Materiality
2. economic entity
3. Representational Faithfulness
4. Historical cost

8. Investments in equity securities are initially recorded at cost.

1. Materiality
2. economic entity
3. Representational Faithfulness
4. Historical cost

9. A note describing the company’s possible liability in a lawsuit is included with the financial statements even though no formal liability exists at the balance sheet date.

1. Materiality
2. economic entity
3. Representational Faithfulness
4. Historical cost

10.The payment of a dividend

1. Investment by owners
2. distributions to owners
3. owners equity
4. Revenues

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