MULTIPLE CHOICE QUESTIONS

1) What is Horizontal Analysis primarily used for?

A) Comparing financial data over multiple periods

B) Comparing financial data between different companies

C) Evaluating the efficiency of operations

D) Assessing liquidity

2) In Horizontal Analysis, an increase in revenue from one year to the next is shown as:

A) A percentage

B) A dollar amount

C) Both A and B

D) None of the above

3) If the sales in Year 1 were $200,000 and in Year 2 were $250,000, what is the
percentage increase?

A) 20%

B) 25%

C) 30%

D) 10%

4) Horizontal Analysis can help to identify:

A) Trends over time

B) Financial ratios

C) Profit margins

D) Asset liquidity

5) Which of the following is NOT typically analyzed using Horizontal Analysis?

A) Income statement items

B) Balance sheet items

C) Cash flow items

 D) Market share

6) Vertical Analysis expresses each item in a financial statement as a percentage of:

A) Total revenue

B) Total assets

C) Total liabilities

D) A base amount (e.g., total sales or total assets)

7) In an income statement, if total revenue is $500,000 and cost of goods sold is $300,000,
what is the percentage of cost of goods sold?

A) 60%

B) 50%

C) 40%

D) 30%

8) Vertical Analysis is useful for:

A) Comparing across companies of different sizes

B) Evaluating historical performance

C) Analyzing cash flow

D) Assessing future profitability

9) Which financial statement is most commonly analyzed using Vertical Analysis?

A) Balance Sheet

B) Cash Flow Statement

C) Income Statement

D) Statement of Retained Earnings

10) In Vertical Analysis, a decrease in inventory from 20% to 15% of total assets indicates:

A) Improved liquidity

B) Increased profitability

C) Decreased sales
 D) Increased debt

11) What does the current ratio measure?

A) Profitability

B) Liquidity

C) Leverage

D) Efficiency

12) If a company has current assets of $150,000 and current liabilities of $100,000, what is
the current ratio?

A) 1.2

B) 1.5

C) 1.0

D) 2.0

13) The quick ratio is also known as:

A) Cash ratio

B) Acid-test ratio

C) Current ratio

D) Debt ratio

14) A debt-to-equity ratio of 1.5 indicates that:

A) The company has more equity than debt

B) The company has more debt than equity

C) The company is highly profitable

D) The company is liquid

15) Which of the following ratios indicates profitability?

A) Current Ratio

B) Return on Equity

C) Debt Ratio
 D) Quick Ratio

16) The cash flow statement is divided into how many sections?

A) One

B) Two

C) Three

D) Four

17) Operating activities in the cash flow statement typically include:

A) Cash received from sales

B) Cash paid for long-term assets

C) Cash dividends paid

D) Cash borrowed from banks

18) If a company reports a cash inflow from financing activities, it typically indicates:

A) The company is generating profits

B) The company is raising capital

C) The company is paying off debt

D) The company is losing money

19) A negative cash flow from operating activities may indicate:

A) The company is expanding

B) The company is experiencing financial difficulties

C) The company is investing wisely

D) None of the above

20) Which method of cash flow statement preparation focuses on cash receipts and cash
payments?

A) Direct Method

B) Indirect Method

C) Both A and B
 D) None of the above

21) The first step in the accounting cycle is:

A) Preparing financial statements

B) Analyzing transactions

C) Posting to the ledger

D) Closing the books

22) Which of the following is NOT a step in the accounting cycle?

A) Journalizing transactions

B) Preparing a trial balance

C) Conducting an audit

D) Closing the accounts

23) A trial balance is prepared to:

A) Verify the accuracy of the ledger

B) Prepare financial statements

C) Analyze cash flows

D) Evaluate profitability

24) Closing entries are made to:

A) Update the ledger

B) Transfer temporary account balances to retained earnings

C) Prepare for the next accounting period

D) Both B and C

25) Which of the following accounts is closed at the end of the accounting cycle?

A) Cash

B) Accounts Receivable

C) Revenue

D) Equipment
26) Why is it important to analyze financial statements over multiple periods?

A) To compare with competitors

B) To identify trends and patterns

C) To assess management effectiveness

D) All of the above

27) How can Vertical Analysis assist in assessing a company's financial health?

A) By providing a snapshot of financial position

B) By analyzing ratios

C) By comparing against historical data

D) By assessing cash flow

28) What limitations might arise from using Ratio Analysis?

A) It relies on historical data

B) It does not consider qualitative factors

C) It can be misleading if not interpreted correctly

D) All of the above

29) How does the cash flow statement complement the income statement?

A) It provides information on profitability

B) It shows how cash impacts operations

C) It breaks down revenue by source

D) None of the above

30) Why is the Accounting Cycle important for businesses?

A) It helps in preparing accurate financial statements

B) It ensures compliance with regulations

C) It aids in financial decision-making

D) All of the above

31) Discuss the impact of economic downturns on Horizontal Analysis.

A) It may show misleading trends

B) It highlights increasing liabilities

C) It reveals changes in consumer behavior

D) All of the above

32) In what ways can Vertical Analysis be misleading?

A) It does not account for market conditions

B) It may overlook significant changes in absolute values

C) It can create false impressions of financial stability

D) All of the above

33) How can companies improve liquidity ratios during economic crises?

A) By increasing sales

B) By reducing expenses

C) By managing inventory effectively

D) All of the above

34) Evaluate the significance of cash flow from investing activities.

A) It shows a company's growth potential

B) It indicates financial stability

C) It reflects operational efficiency

D) None of the above

35) Why is it essential to close temporary accounts at the end of the accounting cycle?

A) To prepare for audits

B) To ensure accurate reporting

C) To reset balances for the new period

D) All of the above

36) Which financial statement provides insights into a company's performance over a
specific period?

A) Balance Sheet

B) Income Statement

C) Cash Flow Statement

D) Statement of Changes in Equity

37) A company’s ability to pay short-term obligations is assessed through:

A) Profitability Ratios

B) Liquidity Ratios

C) Solvency Ratios

D) Efficiency Ratios

38) Which of the following is an example of an operating activity?

A) Purchasing equipment

B) Issuing stock

C) Paying salaries

D) Taking a loan

39) What is the purpose of a post-closing trial balance?

A) To ensure temporary accounts are closed

B) To prepare for the next accounting period

C) To verify that debits equal credits

D) All of the above

40) Which accounting principle requires that expenses be matched with revenues?

A) Historical Cost Principle

B) Revenue Recognition Principle

C) Matching Principle

D) Conservatism Principle
41) How might a company use Horizontal Analysis to make strategic decisions?

A) By adjusting pricing strategies based on sales trends

B) By forecasting future growth

C) By identifying areas needing improvement

D) All of the above

42) In what scenario is the debt ratio particularly useful for stakeholders?

A) When evaluating profitability

B) When assessing financial risk

C) When analyzing cash flow

D) When comparing operational efficiency

43) Discuss the implications of negative cash flow from financing activities.

A) It indicates a decrease in debt

B) It suggests repayment of loans

C) It may imply reduced financial leverage

D) All of the above

44) Why is it critical to analyze both liquidity and solvency ratios?

A) To ensure long-term success

B) To manage operational risks

C) To maintain investor confidence

D) All of the above

45) How might a company improve its return on equity (ROE)?

A) By increasing net income

B) By reducing shareholder equity

C) By improving operational efficiency

D) All of the above

46) What is the primary purpose of financial statements?

A) To provide tax information

B) To report financial performance and position

C) To facilitate budgeting

D) To inform stakeholders of market trends

47) Which financial statement summarizes a company's assets, liabilities, and equity at a
specific point in time?

A) Income Statement

B) Cash Flow Statement

C) Balance Sheet

D) Statement of Retained Earnings

48) The formula for the acid-test ratio is:

A) Current Assets / Current Liabilities

B) (Current Assets - Inventory) / Current Liabilities

C) Total Assets / Total Liabilities

D) Net Income / Shareholder Equity

49) What does a high inventory turnover ratio indicate?

A) Inefficient inventory management

B) Strong sales performance

C) Excessive stock levels

D) Low demand for products

50) Which of the following is included in cash flow from operating activities?

A) Sale of equipment

B) Dividends received

C) Proceeds from issuing shares

D) Purchase of inventory
51) What is the primary focus of Ratio Analysis?

A) To assess a company's performance and financial health

B) To evaluate employee performance

C) To predict market trends

D) To enhance customer satisfaction

52) A company with a high debt-to-equity ratio is considered:

A) Less risky

B) More risky

C) Financially stable

D) Profitable

53) Which of the following accounts typically appears in the operating activities section of
the cash flow statement?

A) Long-term investments

B) Accounts payable

C) Bonds payable

D) Capital stock

54) In the accounting cycle, the last step is:

A) Preparing financial statements

B) Analyzing transactions

C) Closing the books

D) Conducting audits

55) What is the purpose of the cash flow statement?

A) To assess profitability over time

B) To evaluate cash inflows and outflows

C) To provide a snapshot of financial position

D) To prepare for tax reporting

56) If a company’s cash flow from operations is consistently negative, what could this
indicate?

A) The company is investing heavily in new projects

B) The company is experiencing operational inefficiencies

C) The company is generating significant revenue

D) The company is managing its expenses well

57) A company is analyzing its Vertical Analysis findings and notices that operating expenses
have increased significantly. What should it do next?

A) Increase revenue targets

B) Review and control expense management

C) Expand its operations

D) None of the above

58) When analyzing a company’s financial ratios, why is it important to compare them with
industry averages?

A) To understand competitive positioning

B) To identify potential areas of improvement

C) To ascertain financial health relative to peers

D) All of the above

59) If a company has a negative cash flow from investing activities, what could this imply?

A) The company is acquiring new assets

B) The company is selling off assets

C) The company is not investing in growth

D) None of the above

60) What does a decrease in the Accounts Receivable turnover ratio indicate?

A) Improved collection efficiency

B) Slower collection of receivables

C) Increased sales
 D) Higher credit risk

61) How can financial statement analysis influence investor decisions?

A) It provides insights into company performance

B) It helps assess risk and return

C) It informs investment strategy

D) All of the above

62) Why is cash flow analysis critical for business sustainability?

A) It ensures profitability

B) It assesses liquidity and operational viability

C) It helps forecast future growth

D) It determines asset value

63) How can a company improve its gross profit margin?

A) By reducing cost of goods sold

B) By increasing sales prices

C) By controlling operating expenses

D) Both A and B

64) What role does the accounting cycle play in financial reporting?

A) It minimizes errors in reporting

B) It standardizes financial practices

C) It ensures compliance with regulations

D) All of the above

65) In the context of financial analysis, why is it important to consider qualitative factors
alongside quantitative data?

A) It provides a complete picture of performance

B) It helps in understanding market dynamics

C) It reveals the company’s strategic direction

 D) All of the above

66) How might changes in accounting policies affect financial statement analysis?

A) They can distort comparability across periods

B) They can improve transparency

C) They can enhance understanding of financial health

D) None of the above

67) A company with a current ratio below 1 is considered:

A) Liquid

B) Illiquid

C) Profitable

D) Efficient

68) What does a high return on assets (ROA) signify?

A) Efficient use of assets to generate profit

B) High levels of debt

C) Strong market position

D) Increased operational costs

69) Why is it important for companies to conduct regular financial statement analysis?

A) To comply with legal requirements

B) To assess performance and strategy

C) To attract investors

D) All of the above

70) Which of the following can be considered a liquidity measure?

A) Gross Profit Margin

B) Current Ratio

C) Return on Equity

D) Price to Earnings Ratio

71) A company’s ability to pay long-term obligations is assessed through:

A) Liquidity Ratios

B) Profitability Ratios

C) Solvency Ratios

D) Efficiency Ratios

72) Which of the following is a limitation of Ratio Analysis?

A) It provides a snapshot of financial health

B) It cannot predict future performance

C) It can be affected by accounting policies

D) Both B and C

73) How can a company enhance its cash flow from operations?

A) Increase sales and manage expenses effectively

B) Sell long-term assets

C) Take on more debt

D) Increase inventory purchases

74) A statement of cash flows provides insight into:

A) Financial performance over time

B) The sources and uses of cash

C) The company’s profitability

D) The company's asset values

75) Which financial metric is most useful for understanding a company’s operational
efficiency?

A) Debt-to-Equity Ratio

B) Return on Assets (ROA)

C) Current Ratio

D) Price to Earnings Ratio

76) The purpose of the cash flow statement is to:

A) Show profitability

B) Indicate liquidity and cash management

C) Present a financial position

D) Provide tax information

77) Which analytical method would be best for assessing year-over-year growth?

A) Horizontal Analysis

B) Vertical Analysis

C) Ratio Analysis

D) Cash Flow Analysis

78) A company’s ability to efficiently manage its assets can be evaluated using:

A) Profitability Ratios

B) Liquidity Ratios

C) Efficiency Ratios

D) Solvency Ratios

79) If the cost of goods sold (COGS) was $150,000 last year and $180,000 this year, what is
the increase in COGS?

A) $30,000

B) $20,000

C) $15,000

D) $25,000

80) Which of the following is the formula for calculating the percentage change in
horizontal analysis?

A) (New Value - Old Value) / Old Value × 100

B) (Old Value - New Value) / New Value × 100

C) (New Value + Old Value) / 2

D) (New Value - Old Value) / New Value × 100

81) In a vertical analysis of an income statement, if total sales are $1,000,000 and operating
expenses are $400,000, what percentage do operating expenses represent?

A) 30%

B) 40%

C) 50%

D) 60%

82) If a company’s total liabilities are $300,000 and total assets are $500,000, what is the
percentage of liabilities in a vertical analysis?

A) 50%

B) 60%

C) 70%

D) 80%

83) If a company has current assets of $150,000 and current liabilities of $100,000, what is
its current ratio?

A) 1.5

B) 2.0

C) 1.0

D) 1.2

84) A company’s debt-to-equity ratio is 0.5. If total equity is $400,000, what are total
liabilities?

A) $200,000

B) $300,000

C) $100,000

D) $150,000

85) If a company’s gross profit is $50,000 and sales are $200,000, what is the gross profit
margin?

A) 20%

B) 25%
 C) 30%

D) 40%

86) Which of the following ratios is used to assess a company’s profitability?

A) Quick Ratio

B) Return on Assets

C) Debt Ratio

D) Current Ratio

87) A company sold a piece of equipment for $30,000. If the equipment was originally
purchased for $50,000 and had a book value of $20,000, what is the cash flow from
investing activities?

A) $10,000

B) $30,000

C) $20,000

D) $50,000

88) If a company’s adjusted trial balance shows total debits of $150,000 and total credits of
$145,000, what should be done next?

A) Close the accounts

B) Investigate the discrepancy

C) Prepare the income statement

D) Prepare the balance sheet

89) If a company has a net profit of $200,000 and total assets of $1,000,000, what is the
return on assets (ROA)?

A) 15%

B) 20%

C) 25%

D) 30%

90) In a financial statement, which of the following would be considered an operating

activity?
 A) Issuing bonds

B) Selling products

C) Purchasing equipment

D) Investing in stocks

91) If a company’s total sales are $500,000 and its net income is $50,000, what is the net
profit margin?

A) 5%

B) 10%

C) 15%

D) 20%

92) A company’s inventory decreased from $100,000 to $80,000 in a year. What does this
indicate in terms of cash flow?

A) Cash inflow from operations

B) Cash outflow from operations

C) No impact on cash flow

D) Increase in liabilities

93) If a firm has a quick ratio of 1.5 and current liabilities of $75,000, what are its liquid
assets?

A) $50,000

B) $75,000

C) $112,500

D) $150,000

94) Which financial statement provides a snapshot of a company's financial position at a

specific point in time?

A) Income Statement

B) Cash Flow Statement

C) Balance Sheet
 D) Statement of Retained Earnings

95) If a company has a return on equity (ROE) of 25%, what does this indicate?

A) Strong profitability relative to shareholders' equity

B) High levels of debt

C) Low profitability relative to assets

D) Inefficient use of resources

96) A business has current assets of $120,000, current liabilities of $80,000, and long-term
liabilities of $150,000. What is its debt-to-equity ratio if total equity is $100,000?

A) 1.5

B) 1.0

C) 1.2

D) 2.0

97) If a company’s net income is $250,000 and total equity is $1,000,000, what is the return
on equity (ROE)?

A) 15%

B) 20%

C) 25%

D) 30%

98) If a company has total revenues of $500,000 and total expenses of $450,000, what is its
net income?

A) $50,000

B) $100,000

C) $150,000

D) $200,000

99) If a company’s cash flow from financing activities shows an outflow of $50,000, what
does this likely indicate?

A) The company is paying off debt

 B) The company is issuing new shares

C) The company is increasing its cash reserves

D) The company is purchasing equipment

100) If a company’s total liabilities are $300,000 and total assets are $1,200,000, what is
the debt ratio?

A) 25%

B) 50%

C) 75%

D) 100%