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Quizzes > Quizzes for Business > Finance

Financial Ratios Knowledge Test Challenge

Sharpen Your Ratio Analysis Skills with This Quiz

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art displaying questions for a Financial Ratios Knowledge Test quiz.

Ready to take on a financial ratios quiz that boosts your ratio analysis skills? This assessment is ideal for accounting students and finance professionals eager to evaluate liquidity, profitability, and leverage through practical ratio analysis. You can easily customize questions in our editor to align with specific learning goals. For broader practice, explore the Financial Accounting Knowledge Test or dive into the Financial Literacy Quiz. Browse more quizzes to discover additional free tools you can adapt.

What is the formula for the current ratio?
Current Liabilities / Current Assets
Total Assets / Total Liabilities
Current Assets / Current Liabilities
Quick Assets / Current Liabilities
The current ratio measures a firm's ability to cover short-term obligations by dividing current assets by current liabilities. It shows liquidity by comparing resources available within a year to obligations due in the same timeframe.
Which ratio indicates a company's ability to meet short-term obligations without selling inventory?
Quick Assets / Current Liabilities
Cash / Current Liabilities
Inventory / Current Liabilities
Current Assets / Current Liabilities
The quick ratio, or acid-test ratio, excludes inventory and measures a company's ability to meet short-term obligations using its most liquid assets. It divides quick assets by current liabilities to assess liquidity without relying on inventory sales.
Which item is excluded from the quick ratio calculation?
Marketable Securities
Accounts Receivable
Cash
Inventory
Inventory is omitted from the quick ratio because it may not be easily converted into cash in the short term. The ratio focuses on highly liquid assets like cash, receivables, and marketable securities.
What does the debt-to-equity ratio compare?
Total Liabilities to Total Assets
Shareholders' Equity to Total Liabilities
Total Assets to Shareholders' Equity
Total Liabilities to Shareholders' Equity
Debt-to-equity ratio measures the proportion of a company's financing that comes from debt compared to equity. It compares total liabilities to shareholders' equity, indicating the degree of financial leverage.
Return on assets (ROA) is calculated as:
Operating Income / Sales
Net Income / Shareholders' Equity
Net Income / Total Assets
Sales / Total Assets
ROA shows how efficiently a company uses its assets to generate profit by dividing net income by total assets. It measures overall asset efficiency and profitability.
If a company has current assets of $200,000 and current liabilities of $80,000, what is its current ratio?
2.5
0.4
1.0
1.6
Current ratio equals current assets divided by current liabilities, so $200,000 / $80,000 = 2.5. This indicates the company has $2.50 in current assets for every dollar of current liabilities.
A firm has cash of $30,000, receivables of $70,000, inventory of $50,000, and current liabilities of $200,000. What is its quick ratio?
0.4
1.0
0.75
0.5
Quick ratio is calculated as (Cash + Receivables + Marketable Securities) / Current Liabilities. Here it is ($30,000 + $70,000) / $200,000 = 0.5, excluding inventory.
If cost of goods sold is $600,000 and average inventory is $150,000, what is the inventory turnover ratio?
4.0
150,000
450,000
0.25
Inventory turnover is COGS divided by average inventory, so $600,000 / $150,000 = 4. This means the company sells and replaces its inventory four times per year.
How is the asset turnover ratio calculated?
Sales / Equity
Total Assets / Sales
Sales / Total Assets
Net Income / Total Assets
Asset turnover ratio measures the efficiency of asset use by dividing sales by total assets. A higher ratio indicates greater efficiency in generating revenue from assets.
A company reports net income of $80,000 and sales of $400,000. What is its net profit margin?
50%
5%
20%
200%
Net profit margin is net income divided by sales, so $80,000 / $400,000 = 0.20 or 20%. This shows the percentage of sales converted into profit.
What does a low interest coverage ratio most likely indicate?
Difficulty covering interest obligations
High profitability
Strong liquidity
Low financial leverage
Interest coverage ratio equals EBIT divided by interest expense. A low ratio suggests the company may struggle to meet interest payments and could face solvency issues.
If a company has total debt of $300,000 and shareholders' equity of $150,000, what is its debt-to-equity ratio?
2.0
0.5
1.5
450,000
Debt-to-equity ratio is total debt divided by shareholders' equity: $300,000 / $150,000 = 2.0. This indicates $2 of debt for every $1 of equity.
Which ratio measures how efficiently a company collects its receivables?
Receivables turnover ratio
Inventory turnover ratio
Current ratio
Asset turnover ratio
Receivables turnover ratio calculates how often receivables are collected in a period. It is typically total credit sales divided by average accounts receivable.
A high receivables turnover ratio indicates that a company:
Struggles with liquidity
Has low sales
Holds high levels of receivables
Collects receivables quickly
A high receivables turnover means the company collects outstanding credit sales rapidly, improving cash flow. It reflects efficient credit and collection policies.
Which of the following is NOT considered a leverage ratio?
Debt-to-equity ratio
Debt ratio
Interest coverage ratio
Current ratio
Leverage ratios assess a company's debt levels relative to equity or assets. The current ratio is a liquidity measure, not a leverage ratio.
In DuPont analysis, which two ratios are multiplied to derive return on assets (ROA)?
Debt ratio and interest coverage
Equity multiplier and profit margin
Profit margin and asset turnover
Current ratio and quick ratio
DuPont analysis breaks ROA into profit margin (net income/sales) and asset turnover (sales/assets). Multiplying these shows how profitability and efficiency drive ROA.
A company has an ROE of 15% and a dividend payout ratio of 40%. What is its sustainable growth rate?
6.0%
9.0%
15.0%
40.0%
The sustainable growth rate is ROE × (1 - payout ratio): 15% × (1 - 0.4) = 9%. This rate can be maintained without changing leverage.
A firm's debt-to-equity ratio has been rising while its interest coverage ratio has been declining. What does this trend most likely imply?
Stable leverage and profitability
Improved liquidity position
Decreasing debt and stronger interest coverage
Increasing leverage with reduced ability to cover interest
Rising debt-to-equity indicates more borrowing relative to equity, while a declining interest coverage ratio shows reduced capability to meet interest payments. Together, they signal increased financial risk.
Company A has a quick ratio of 1.0 and Company B has a quick ratio of 0.6. Which company has stronger short-term liquidity when excluding inventory?
Both are equal
Company A
Company B
Cannot determine
A higher quick ratio means more liquid assets relative to liabilities, excluding inventory. Therefore, Company A's quick ratio of 1.0 indicates stronger short-term liquidity than Company B.
Which ratio is most appropriate to assess how effectively a company uses its plant and equipment?
Current ratio
Debt-to-equity ratio
Quick ratio
Fixed asset turnover ratio
Fixed asset turnover ratio measures sales generated per dollar of fixed assets, such as plant and equipment. It gauges how efficiently these long-term assets are utilized.
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Learning Outcomes

  1. Analyse liquidity and solvency ratios to gauge financial stability.
  2. Evaluate profitability metrics for performance insights.
  3. Identify leverage and efficiency ratios in financial statements.
  4. Apply ratio calculations to real case studies.
  5. Interpret ratio trends for strategic decision-making.
  6. Master selecting appropriate ratios for analysis.

Cheat Sheet

  1. Understand the Current Ratio - This liquidity ratio measures a company's ability to cover short-term obligations with its current assets. A ratio above 1 means you've got more assets than debts due soon - like having extra cash in your wallet. It's calculated by dividing Current Assets by Current Liabilities. Learn more about the Current Ratio
  2. Master the Quick Ratio (Acid-Test) - Think of this as the "liquid-only" version of the current ratio, excluding inventory. It shows whether a company can meet short-term debts without selling stockpiled goods, using (Current Assets - Inventory) ÷ Current Liabilities. A quick ratio of 1 or higher is generally solid. Explore the Quick Ratio
  3. Calculate Earnings Per Share (EPS) - EPS tells you how much profit is earned for each share outstanding, shining a spotlight on profitability. Divide Net Income by Weighted Average Shares Outstanding to get the figure - higher is usually better. It's like slicing a pizza: more slices per profit pie means more value per shareholder. Understand EPS
  4. Analyze the Price-to-Earnings (P/E) Ratio - This valuation metric compares a company's share price to its earnings per share, revealing market expectations. Calculate it by dividing Market Price per Share by EPS - a P/E of 15 means investors pay $15 for every $1 of earnings. It's a quick way to see if a stock is cheap or pricey. Learn about the P/E Ratio
  5. Evaluate the Debt-to-Equity (D/E) Ratio - Measuring financial leverage, this ratio divides Total Liabilities by Shareholders' Equity. A lower D/E means less reliance on borrowed money - think of it as driving with less debt in the trunk. Companies with a D/E below 1 are often seen as more stable. Explore the D/E Ratio
  6. Understand Return on Equity (ROE) - ROE reveals how much profit you get from each dollar of shareholders' equity. Calculated as Net Income ÷ Shareholders' Equity, a higher percentage indicates efficient use of investments. Imagine turning $1 of equity into $0.20 of profit - that's a 20% ROE! Learn more about ROE
  7. Grasp the Inventory Turnover Ratio - This efficiency ratio shows how often inventory is sold and replaced over a period. Use Cost of Goods Sold ÷ Average Inventory to calculate it - a higher number means goods are flying off the shelves. It's like checking how fast your snack stash disappears. Understand Inventory Turnover
  8. Learn the Gross Profit Margin - This profitability ratio indicates what percentage of revenue exceeds the cost of goods sold. Calculate it by (Revenue - COGS) ÷ Revenue; the higher, the merrier. A 40% margin means $0.40 of every dollar in sales is profit before other expenses. Explore Gross Profit Margin
  9. Interpret the Return on Assets (ROA) - ROA measures how effectively a company uses its assets to generate profit. It's Net Income ÷ Total Assets - higher values show smarter asset use. If $1 million net income comes from $10 million assets, you've got a tidy 10% ROA. Learn about ROA
  10. Apply Ratio Analysis to Real Case Studies - Put your skills into action by calculating and interpreting these ratios using actual financial statements. This hands-on approach cements knowledge and prepares you for real-world scenarios. Practice makes perfect! Explore Financial Ratio Analysis
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