MBA 601 CORE EXAM 2026 TEST QUESTIONS AND
ANSWERS GRADED A+
✔✔A current asset is an asset that is cash or an asset that will be converted into cash
within one year or one operating cycle whichever is shorter. (true/false) - ✔✔false
*whichever is GREATER/LONGER
✔✔Which of the following would not likely appear in the current liabilities section of a
classified balance sheet?
-Taxes payable
-Accounts payable
-Salaries payable
-Bonds payable - ✔✔bonds payable
✔✔A balance sheet that displays assets and liabilities into current versus noncurrent
categories is commonly called a - ✔✔classified balance sheet
✔✔The current ratio is calculated by - ✔✔dividing current assets by current liabilities
✔✔Which of the following statements is true?
-Lower current ratios suggest greater liquidity.
-Companies should maintain the highest current ratio possible.
-Higher current ratios suggest greater liquidity.
-Companies should maintain the lowest current ratio possible. - ✔✔Higher current ratios
suggest greater liquidity.
✔✔The debt to asset ratio is a measure of - ✔✔solvency
✔✔The debt to assets ratio is calculated by - ✔✔dividing total liabilities by total assets.
✔✔Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400
of current liabilities and $2,600 of long-term liabilities on its Year 1 balance sheet.
Based on this information, Omar's current ratio is. - ✔✔2.50
Current Ratio: Current Assets ÷ Current Liabilities = $1,000 ÷ $400 = 2.5
✔✔Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400
of current liabilities and $2,600 of long-term liabilities shown on its Year 1 balance
sheet. Based on this information Omar's debt to assets ratio is - ✔✔0.75
,Debt to Assets Ratio: Total Debt ÷ Total Assets = ($400 + $2,600) ÷ ($1,000 + $3,000)
= .75
✔✔Which of the following industries is likely to have the highest debt to assets ratio? -
✔✔Electric utilities
✔✔Which of the following entities receives cash when a company borrows money
through a bond issue? - ✔✔Issuer
✔✔Both bonds payable and notes payable are obligations that usually arise from
borrowing money. This statement is (true/false) - ✔✔true
✔✔On January 1, Year 1 Residence Company issued bonds with a $50,000 face value.
The bonds were issued at face value. They had a 20 year term and a stated rate of
interest of 7%. Which of the following shows how the BOND ISSUE will affect
Residence's financial statements on January 1, Year 1? - ✔✔Assets = Liability + Equity
50k = 50k + NA
Rev-Exp = Net Income
NA - NA = NA
Statement of Cash Flows:
50k FA
✔✔On January 1, Year 1 Residence Company issued bonds with a $50,000 face value.
The bonds were issued at face value. They had a 20 year term and a stated rate of
interest of 7%. Which of the following shows how the recognition of INTEREST
EXPENSE will affect Residence's financial statements on December 31, Year 14? -
✔✔Assets = Liability + Equity
(3,500) = NA + (3,500)
Rev-Exp = Net Income
NA - 3,500 = (3,500)
Statement of Cash Flows:
(3,500) OA
✔✔On January 1, Year 1 Residence Company issued bonds with a $50,000 face value.
The bonds were issued at face value. They had a 20 year term and a stated rate of
interest of 7%. Which of the following shows how the PAYOFF OF THE BOND
LIABILITY will affect Residence's financial statements on December 31, Year 20 (the
maturity date)? - ✔✔Assets = Liability + Equity
(50k) = (50k) + NA
Rev-Exp = Net Income
, NA - NA = NA
Statement of Cash Flows:
(50k) FA
✔✔Using debt to increase the return on equity is called financial leverage. This
statement is (true/false) - ✔✔true
✔✔Aero Company is able to earn a 12% return on assets. The Company can issue
bonds that have an 8% interest rate. Based on this information alone - ✔✔the
company's return on equity will increase if the company issues bonds and invests the
proceeds.
✔✔Aero Company is able to earn a 12% return on assets (ROA). Assume net income
before interest expense is used to calculate ROA. The Company can issue bonds that
have an 8% interest rate. On January 1, Year 3 the company had assets and
stockholders' equity of $20,000. Also, on January 1, Year 3 the company issued
$10,000 of bonds and invested the proceeds. As a result of financial leverage, the
return on equity (ROE) at the end of Year 3 will - ✔✔increase from 12% to 14%
Since assets and equity were the same ($20,000) on January 1, the return on assets
and the return on equity would be the same (12%)
Assets invested in Year 3 = $20,000 assets before debt issue + $10,000 assets
acquired from debt issue = $30,000 assets invested during Year 3
Return on assets = $30,000 total assets × 12% = $3,600
Interest Expense = 10,000 x 8% =$800
Return on equity = ($3,600-800) ÷ $20,000 = 14%
✔✔If a company pays interest, it can deduct the interest expense on its tax return,
thereby reducing the amount of tax that must be paid. However, if the company pays a
dividend, the dividend cannot be deducted on the tax return. These statements are
(true/false) - ✔✔true
✔✔Highlands Company finances its operations with equity. Lowlands Company
finances its operations with debt. The income statements of both companies show
income before interest and taxes of $50,000. Highlands pays a $10,000 dividend while
Lowlands pays $10,000 of interest expense. Assuming a 30% tax rate, - ✔✔Lowlands
will incur $12,000 of tax expense
Highlands Lowlands
Income before interest and taxes $50,000 $50,000
ANSWERS GRADED A+
✔✔A current asset is an asset that is cash or an asset that will be converted into cash
within one year or one operating cycle whichever is shorter. (true/false) - ✔✔false
*whichever is GREATER/LONGER
✔✔Which of the following would not likely appear in the current liabilities section of a
classified balance sheet?
-Taxes payable
-Accounts payable
-Salaries payable
-Bonds payable - ✔✔bonds payable
✔✔A balance sheet that displays assets and liabilities into current versus noncurrent
categories is commonly called a - ✔✔classified balance sheet
✔✔The current ratio is calculated by - ✔✔dividing current assets by current liabilities
✔✔Which of the following statements is true?
-Lower current ratios suggest greater liquidity.
-Companies should maintain the highest current ratio possible.
-Higher current ratios suggest greater liquidity.
-Companies should maintain the lowest current ratio possible. - ✔✔Higher current ratios
suggest greater liquidity.
✔✔The debt to asset ratio is a measure of - ✔✔solvency
✔✔The debt to assets ratio is calculated by - ✔✔dividing total liabilities by total assets.
✔✔Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400
of current liabilities and $2,600 of long-term liabilities on its Year 1 balance sheet.
Based on this information, Omar's current ratio is. - ✔✔2.50
Current Ratio: Current Assets ÷ Current Liabilities = $1,000 ÷ $400 = 2.5
✔✔Omar Company reported $1,000 of current assets, $3,000 of long-term assets, $400
of current liabilities and $2,600 of long-term liabilities shown on its Year 1 balance
sheet. Based on this information Omar's debt to assets ratio is - ✔✔0.75
,Debt to Assets Ratio: Total Debt ÷ Total Assets = ($400 + $2,600) ÷ ($1,000 + $3,000)
= .75
✔✔Which of the following industries is likely to have the highest debt to assets ratio? -
✔✔Electric utilities
✔✔Which of the following entities receives cash when a company borrows money
through a bond issue? - ✔✔Issuer
✔✔Both bonds payable and notes payable are obligations that usually arise from
borrowing money. This statement is (true/false) - ✔✔true
✔✔On January 1, Year 1 Residence Company issued bonds with a $50,000 face value.
The bonds were issued at face value. They had a 20 year term and a stated rate of
interest of 7%. Which of the following shows how the BOND ISSUE will affect
Residence's financial statements on January 1, Year 1? - ✔✔Assets = Liability + Equity
50k = 50k + NA
Rev-Exp = Net Income
NA - NA = NA
Statement of Cash Flows:
50k FA
✔✔On January 1, Year 1 Residence Company issued bonds with a $50,000 face value.
The bonds were issued at face value. They had a 20 year term and a stated rate of
interest of 7%. Which of the following shows how the recognition of INTEREST
EXPENSE will affect Residence's financial statements on December 31, Year 14? -
✔✔Assets = Liability + Equity
(3,500) = NA + (3,500)
Rev-Exp = Net Income
NA - 3,500 = (3,500)
Statement of Cash Flows:
(3,500) OA
✔✔On January 1, Year 1 Residence Company issued bonds with a $50,000 face value.
The bonds were issued at face value. They had a 20 year term and a stated rate of
interest of 7%. Which of the following shows how the PAYOFF OF THE BOND
LIABILITY will affect Residence's financial statements on December 31, Year 20 (the
maturity date)? - ✔✔Assets = Liability + Equity
(50k) = (50k) + NA
Rev-Exp = Net Income
, NA - NA = NA
Statement of Cash Flows:
(50k) FA
✔✔Using debt to increase the return on equity is called financial leverage. This
statement is (true/false) - ✔✔true
✔✔Aero Company is able to earn a 12% return on assets. The Company can issue
bonds that have an 8% interest rate. Based on this information alone - ✔✔the
company's return on equity will increase if the company issues bonds and invests the
proceeds.
✔✔Aero Company is able to earn a 12% return on assets (ROA). Assume net income
before interest expense is used to calculate ROA. The Company can issue bonds that
have an 8% interest rate. On January 1, Year 3 the company had assets and
stockholders' equity of $20,000. Also, on January 1, Year 3 the company issued
$10,000 of bonds and invested the proceeds. As a result of financial leverage, the
return on equity (ROE) at the end of Year 3 will - ✔✔increase from 12% to 14%
Since assets and equity were the same ($20,000) on January 1, the return on assets
and the return on equity would be the same (12%)
Assets invested in Year 3 = $20,000 assets before debt issue + $10,000 assets
acquired from debt issue = $30,000 assets invested during Year 3
Return on assets = $30,000 total assets × 12% = $3,600
Interest Expense = 10,000 x 8% =$800
Return on equity = ($3,600-800) ÷ $20,000 = 14%
✔✔If a company pays interest, it can deduct the interest expense on its tax return,
thereby reducing the amount of tax that must be paid. However, if the company pays a
dividend, the dividend cannot be deducted on the tax return. These statements are
(true/false) - ✔✔true
✔✔Highlands Company finances its operations with equity. Lowlands Company
finances its operations with debt. The income statements of both companies show
income before interest and taxes of $50,000. Highlands pays a $10,000 dividend while
Lowlands pays $10,000 of interest expense. Assuming a 30% tax rate, - ✔✔Lowlands
will incur $12,000 of tax expense
Highlands Lowlands
Income before interest and taxes $50,000 $50,000
