Financial Statement Analysis MCQs 2026

A declining gross profit margin over several years may indicate

1. A improved efficiency ✓
2. B lower costs ✓
3. C rising costs or falling selling prices ✓
4. D higher liquidity ✓

Financial statement analysis is the process of

1. A preparing corporate tax returns ✓
2. B evaluating a firm's financial statements to assess performance and position ✓
3. C auditing accounts only ✓
4. D recording journal entries ✓

The three main financial statements are the income statement, the balance sheet, and the

1. A statement of cash flows ✓
2. B trial balance ✓
3. C ledger ✓
4. D bank statement ✓

The balance sheet is based on the accounting equation: assets equals

1. A revenue minus expenses ✓
2. B cash plus sales ✓
3. C liabilities plus owners' equity ✓
4. D net profit ✓

The current ratio equals current assets divided by

1. A total assets ✓
2. B sales ✓
3. C equity ✓
4. D current liabilities ✓

The quick (acid-test) ratio differs from the current ratio by excluding

1. A cash ✓
2. B receivables ✓
3. C inventory ✓
4. D payables ✓

A liquidity ratio measures a firm's ability to

1. A earn a profit ✓
2. B meet its short-term obligations ✓
3. C grow its sales ✓
4. D pay dividends ✓

Inventory turnover is calculated as cost of goods sold divided by

1. A sales ✓
2. B current assets ✓
3. C total assets ✓
4. D average inventory ✓

A high inventory turnover generally indicates

1. A efficient inventory management and fast-moving stock ✓
2. B obsolete stock ✓
3. C low sales ✓
4. D excess inventory ✓

The receivables (debtors) turnover ratio measures how quickly a firm

1. A collects cash from its credit customers ✓
2. B pays its suppliers ✓
3. C sells its assets ✓
4. D issues new shares ✓

The average collection period (debtor days) equals 365 divided by

1. A inventory turnover ✓
2. B the current ratio ✓
3. C gross margin ✓
4. D receivables turnover ✓

Gross profit margin equals gross profit divided by

1. A total assets ✓
2. B net sales (revenue) ✓
3. C equity ✓
4. D cost of goods sold ✓

Net profit margin equals net profit divided by

1. A equity ✓
2. B total assets ✓
3. C net sales (revenue) ✓
4. D cost of sales ✓

Return on assets (ROA) equals net income divided by

1. A sales ✓
2. B equity ✓
3. C current assets ✓
4. D total assets ✓

Return on equity (ROE) equals net income divided by

1. A total assets ✓
2. B sales ✓
3. C shareholders' equity ✓
4. D total liabilities ✓

The debt-to-equity ratio measures a firm's

1. A financial leverage (proportion of debt to equity) ✓
2. B liquidity ✓
3. C profitability ✓
4. D inventory efficiency ✓

The times-interest-earned (interest coverage) ratio measures a firm's ability to

1. A pay dividends ✓
2. B meet its interest obligations from operating profit ✓
3. C sell inventory ✓
4. D collect receivables ✓

Profitability ratios measure a firm's ability to

1. A pay short-term debts ✓
2. B generate earnings relative to sales, assets or equity ✓
3. C turn over inventory ✓
4. D meet interest payments ✓

Earnings per share (EPS) equals net income available to shareholders divided by

1. A the number of outstanding shares ✓
2. B total assets ✓
3. C sales ✓
4. D dividends ✓

The price-earnings (P/E) ratio is a

1. A liquidity ratio ✓
2. B leverage ratio ✓
3. C activity ratio ✓
4. D market (valuation) ratio ✓

Vertical (common-size) analysis expresses each item as a percentage of

1. A the previous year ✓
2. B sales growth ✓
3. C a base figure such as total assets or total sales ✓
4. D the industry average ✓

Horizontal analysis compares financial statement items

1. A within one year only ✓
2. B to the industry average ✓
3. C across two or more periods to identify trends ✓
4. D to the tax return ✓

The primary purpose of financial ratio analysis is to

1. A prepare the audit report ✓
2. B interpret relationships in the financial data to support decisions ✓
3. C calculate taxes ✓
4. D record transactions ✓

Trend analysis is most useful for

1. A a single ratio in isolation ✓
2. B a single year of data ✓
3. C auditing transactions ✓
4. D tracking a firm's performance over several years ✓

The DuPont analysis decomposes ROE into profit margin, asset turnover and

1. A the current ratio ✓
2. B the equity multiplier (financial leverage) ✓
3. C gross margin ✓
4. D the quick ratio ✓

The statement of cash flows classifies cash flows into operating, investing and

1. A financing activities ✓
2. B tax activities ✓
3. C audit activities ✓
4. D selling activities ✓

Cash generated from a company's main business operations appears under

1. A operating activities ✓
2. B investing activities ✓
3. C financing activities ✓
4. D owners' equity ✓

Purchase of new machinery appears in the cash flow statement under

1. A operating activities ✓
2. B investing activities ✓
3. C financing activities ✓
4. D revenue ✓

Issuing new shares or repaying a loan appears under

1. A operating activities ✓
2. B investing activities ✓
3. C financing activities ✓
4. D cost of sales ✓

The total asset turnover ratio measures

1. A profitability ✓
2. B liquidity ✓
3. C leverage ✓
4. D how efficiently assets generate sales ✓

A very high current ratio may indicate

1. A imminent insolvency ✓
2. B high leverage ✓
3. C low profits only ✓
4. D inefficient use of current assets (idle funds) ✓

Working capital equals current assets minus

1. A current liabilities ✓
2. B fixed assets ✓
3. C equity ✓
4. D long-term debt ✓

Dividend cover is calculated as earnings per share divided by

1. A sales per share ✓
2. B dividend per share ✓
3. C book value per share ✓
4. D price per share ✓

Common-size income statements typically express each item as a percentage of

1. A net income ✓
2. B total assets ✓
3. C net sales ✓
4. D equity ✓

A limitation of ratio analysis is that it

1. A uses only cash data ✓
2. B relies on historical accounting data that may be affected by different policies ✓
3. C cannot be computed ✓
4. D ignores the balance sheet ✓

Window dressing refers to

1. A advertising ✓
2. B external auditing ✓
3. C manipulating financial statements to make them look better ✓
4. D physical inventory counting ✓

The book value per share is based on

1. A shareholders' equity from the balance sheet ✓
2. B the market price ✓
3. C sales revenue ✓
4. D dividends paid ✓

Solvency (leverage) ratios primarily assess a firm's ability to

1. A collect receivables ✓
2. B turn over inventory ✓
3. C earn a profit ✓
4. D meet its long-term debt obligations ✓

Which of the following is an activity (efficiency) ratio

1. A current ratio ✓
2. B net profit margin ✓
3. C inventory turnover ✓
4. D debt-equity ratio ✓

The operating profit margin is operating profit divided by

1. A net sales ✓
2. B total assets ✓
3. C equity ✓
4. D cost of sales ✓

Comparing a company's ratios with those of other firms in the same industry is called

1. A trend analysis ✓
2. B vertical analysis ✓
3. C horizontal analysis ✓
4. D cross-sectional (benchmark) analysis ✓

The main users of financial statement analysis include

1. A only tax officers ✓
2. B investors, creditors, managers and analysts ✓
3. C only auditors ✓
4. D only customers ✓

An acid-test ratio of less than 1 may suggest that a firm

1. A could struggle to meet short-term liabilities without selling inventory ✓
2. B is highly liquid ✓
3. C has no debt ✓
4. D is very profitable ✓

Financial statements in most countries are prepared following

1. A tax law only ✓
2. B accounting standards such as IFRS or GAAP ✓
3. C stock exchange rules only ✓
4. D no fixed rules ✓

The income statement primarily reports a firm's

1. A assets and liabilities ✓
2. B cash balances ✓
3. C share prices ✓
4. D revenues, expenses and profit over a period ✓