Financial Statement Analysis MCQs

1. . Which of the following is not a main financial statement?
(A) Balance Sheet
(B) Income Statement
(C) Cash Flow Statement
(D) Budget Forecast

2. . The Balance Sheet shows:
(A) Revenues and expenses
(B) Assets, liabilities, and equity
(C) Cash inflows and outflows
(D) Profit and loss

3. . What does the income statement measure?
(A) The cash balance at year-end
(B) The changes in equity
(C) The financial position
(D) Profitability over a period

4. . Which financial statement shows cash from operations, investing, and financing?
(A) Balance Sheet
(B) Trial Balance
(C) Cash Flow Statement
(D) Statement of Retained Earnings

5. . The accounting equation is:
(A) Assets = Revenues – Expenses
(B) Assets = Liabilities + Equity
(C) Liabilities = Assets – Equity
(D) Equity = Assets + Liabilities

6. . A high current ratio indicates:
(A) Liquidity problems
(B) High debt
(C) Strong short-term financial position
(D) Negative equity

7. . Which ratio measures profitability?
(A) Quick ratio
(B) Debt-equity ratio
(C) Return on equity (ROE)
(D) Current ratio

8. . Which ratio measures how efficiently a company uses its assets to generate revenue?
(A) Asset turnover ratio
(B) Debt ratio
(C) Earnings per share
(D) Price to earnings ratio

9. . The debt-to-equity ratio is used to evaluate:
(A) Liquidity
(B) Market value
(C) Solvency
(D) Profitability

10. . A high inventory turnover ratio means:
(A) Low sales
(B) High inventory levels
(C) Efficient inventory management
(D) Overstocking

11. . Earnings per share (EPS) is calculated as:
(A) Net income / Total assets
(B) Net income / Number of shares outstanding
(C) Sales / Number of shares
(D) Gross profit / Total equity

12. . A quick ratio excludes:
(A) Inventory
(B) Cash
(C) Accounts receivable
(D) Marketable securities

13. . The Price-to-Earnings (P/E) ratio helps investors assess:
(A) Book value
(B) Earning power relative to share price
(C) Market capitalization
(D) Gross margin

14. . The DuPont Analysis breaks ROE into three components. Which is NOT one of them?
(A) Profit Margin
(B) Asset Turnover
(C) Equity Multiplier
(D) Net Working Capital

15. . Which of these is a horizontal analysis?
(A) Comparing a company’s ratios with industry average
(B) Analyzing year-over-year change in sales
(C) Comparing assets and liabilities
(D) Ratio of net income to equity

16. . Vertical analysis expresses each item as a percentage of:
(A) Net income
(B) Total revenue or total assets
(C) Retained earnings
(D) Cash balance

17. . Which is a limitation of financial statement analysis?
(A) Easy comparison across firms
(B) No need for historical data
(C) Use of estimates and judgment
(D) Provides future performance guarantees

18. . Which financial statement helps in assessing cash-generating ability?
(A) Statement of Changes in Equity
(B) Trial Balance
(C) Income Statement
(D) Cash Flow Statement

19. . A company with high operating leverage:
(A) Has high fixed costs
(B) Has low variable costs
(C) Has low break-even point
(D) None of the above

20. . What does the gross profit margin measure?
(A) Profit after tax
(B) Operating efficiency
(C) Difference between sales and COGS
(D) Net income

21. . Trend analysis involves:
(A) One-year data comparison
(B) Forecasting economic conditions
(C) Studying data over several periods
(D) Comparing with competitors

22. . What does “liquidity” measure?
(A) Ability to earn profits
(B) Ability to pay short-term obligations
(C) Ability to expand market share
(D) Return on investment

23. . Which is a solvency ratio?
(A) Acid-test ratio
(B) Current ratio
(C) Debt to total assets
(D) Receivables turnover

24. . Which ratio is used to evaluate efficiency in collecting receivables?
(A) Inventory turnover
(B) Receivables turnover
(C) Debt ratio
(D) Gross margin

25. . Financial statements are primarily intended for:
(A) Government use only
(B) Internal auditors only
(C) Stakeholders and decision-makers
(D) Tax officers only

26. . What is the formula for current ratio?
(A) Current assets / Total assets
(B) Current liabilities / Current assets
(C) Current assets / Current liabilities
(D) Total assets / Current liabilities

27. . Net profit margin is calculated as:
(A) Net income / Total equity
(B) Net income / Net sales
(C) Net income / Total assets
(D) Net income / Gross profit

28. . A low quick ratio may indicate:
(A) Strong liquidity
(B) Excess cash
(C) Difficulty in meeting short-term obligations
(D) High profitability

29. . Total Asset Turnover Ratio =
(A) Net sales / Average total assets
(B) Net income / Total liabilities
(C) Total assets / Total liabilities
(D) Net income / Average assets

30. . Retained earnings represent:
(A) Net profit before taxes
(B) Profits not distributed as dividends
(C) Share capital
(D) Non-current assets

31. . The statement of changes in equity shows:
(A) Changes in cash flows
(B) Dividends and retained earnings
(C) Assets and liabilities
(D) Revenue breakdown

32. . Interest coverage ratio =
(A) EBIT / Interest expense
(B) Net income / Interest paid
(C) Sales / Interest expense
(D) Gross profit / Interest

33. . Common-size analysis expresses financial statement items:
(A) As fixed amounts
(B) As percentages
(C) As index numbers
(D) As ratios

34. . If total liabilities increase, equity will:
(A) Increase
(B) Decrease
(C) Stay the same
(D) Can’t be determined

35. . Ratio analysis is used to:
(A) Prepare journal entries
(B) Create financial statements
(C) Interpret financial performance
(D) Conduct audits

36. . A company’s financial year is also called its:
(A) Tax cycle
(B) Fiscal year
(C) Audit term
(D) Operating budget

37. . A “going concern” assumption means:
(A) The business will close soon
(B) Business is operating legally
(C) Business will continue indefinitely
(D) Company is government-owned

38. . Which accounting principle ensures consistency?
(A) Matching principle
(B) Consistency principle
(C) Prudence principle
(D) Revenue recognition principle

39. . The main purpose of financial statement analysis is to:
(A) Meet tax obligations
(B) Record transactions
(C) Evaluate performance and financial health
(D) Create reports for competitors

40. . What is included in equity?
(A) Only retained earnings
(B) Liabilities + Assets
(C) Share capital + retained earnings
(D) Liabilities – assets

41. . A negative cash flow from operations usually indicates:
(A) Growth
(B) Declining business health
(C) Profit
(D) High dividends

42. . Cash flow from investing includes:
(A) Issuing shares
(B) Buying equipment
(C) Paying salaries
(D) Borrowing funds

43. . What does an auditor provide in relation to financial statements?
(A) Guarantee of profit
(B) Absolute accuracy
(C) Reasonable assurance
(D) Management guidance

44. . Capital structure refers to:
(A) Mix of current assets
(B) Mix of long-term debt and equity
(C) Inventory control methods
(D) Depreciation policy

45. . If liabilities exceed assets, the company has:
(A) Positive net worth
(B) Negative equity
(C) High liquidity
(D) High profitability

46. . Gross profit =
(A) Sales – Net income
(B) Net income – Expenses
(C) Sales – Cost of goods sold
(D) Sales – Operating expenses

47. . Working capital =
(A) Current assets – Current liabilities
(B) Total assets – Total liabilities
(C) Cash – Inventory
(D) Revenue – Expenses

48. . An increase in accounts receivable is shown in cash flow as:
(A) Operating inflow
(B) Operating outflow
(C) Financing inflow
(D) Investing inflow

49. . The book value of a company =
(A) Market capitalization
(B) Assets – Liabilities
(C) Share price × Shares outstanding
(D) Revenue – Expenses

50. . A low P/E ratio may suggest:
(A) Overvaluation
(B) Strong growth potential
(C) Undervaluation or risk
(D) Guaranteed returns