D 775 / D775 Objective Assessment
(Latest Update ) Introduction
to Business Finance | Questions &
Answers | 100% Correct | Grade A - WGU
1. Which financial statement reports a company’s revenues and
expenses over a period of time?
✅ Answer: Income Statement
Rationale: The income statement measures profitability over a specific
period (e.g., quarter, year) by matching revenues against expenses.
2. What does the balance sheet equation represent?
✅ Answer: Assets = Liabilities + Equity
Rationale: This is the fundamental accounting equation; it shows that
everything the company owns (assets) is financed either by debt
(liabilities) or owner’s funds (equity).
3. Which ratio measures a company’s ability to pay short-term
obligations with its most liquid assets?
✅ Answer: Quick Ratio (Acid-Test)
Rationale: Quick Ratio = (Cash + Marketable Securities + Receivables)
/ Current Liabilities – it excludes inventory to focus on truly liquid
assets.
4. A company has current assets of $500,000 and current liabilities
of $250,000. What is its current ratio?
✅ Answer: 2.0
,Rationale: Current Ratio = Current Assets / Current Liabilities =
500,,000 = 2.0. This indicates strong short-term liquidity.
5. Which ratio indicates how efficiently a company uses its assets to
generate sales?
✅ Answer: Total Asset Turnover
Rationale: Total Asset Turnover = Net Sales / Average Total Assets – it
measures sales generated per dollar of assets.
6. A firm has net income of $100,000 and average total assets of
$500,000. What is its Return on Assets (ROA)?
✅ Answer: 20%
Rationale: ROA = Net Income / Average Total Assets = 100,000 /
500,000 = 0.20 (20%).
7. Which financial statement shows the sources and uses of cash
during a period?
✅ Answer: Statement of Cash Flows
Rationale: It categorizes cash into operating, investing, and financing
activities, explaining changes in the cash balance.
8. What does the debt-to-equity ratio measure?
✅ Answer: Financial leverage
Rationale: Debt-to-Equity = Total Liabilities / Shareholders’ Equity – it
shows the proportion of debt used relative to equity.
9. If a company’s gross profit is $300,000 and net sales are
$1,000,000, what is the gross profit margin?
✅ Answer: 30%
Rationale: Gross Profit Margin = Gross Profit / Net Sales = 300,000 /
1,000,000 = 30%.
, 10. Which ratio is a measure of profitability that considers all
expenses including interest and taxes?
✅ Answer: Net Profit Margin
Rationale: Net Profit Margin = Net Income / Net Sales – it reflects the
percentage of each sales dollar that remains as profit after all costs.
11. A company’s inventory turnover is 8 times per year. What does
this imply?
✅ Answer: The company sells and replaces its inventory 8 times
annually.
Rationale: Higher turnover indicates efficient inventory management
and strong sales.
12. Which statement is true about the DuPont analysis?
✅ Answer: It breaks ROE into profitability, efficiency, and leverage
components.
Rationale: DuPont decomposes ROE = Net Profit Margin × Asset
Turnover × Equity Multiplier, helping identify drivers of return.
13. What is the primary purpose of financial ratio analysis?
✅ Answer: To evaluate a company’s performance and financial health.
Rationale: Ratios allow comparison over time and against industry
benchmarks to assess strengths/weaknesses.
14. Which item is NOT found on the balance sheet?
✅ Answer: Sales revenue
Rationale: Sales revenue appears on the income statement; the balance
sheet shows assets, liabilities, and equity.
15. A firm has earnings per share (EPS) of $4 and a market price
per share of $60. What is the P/E ratio?
✅ Answer: 15×
(Latest Update ) Introduction
to Business Finance | Questions &
Answers | 100% Correct | Grade A - WGU
1. Which financial statement reports a company’s revenues and
expenses over a period of time?
✅ Answer: Income Statement
Rationale: The income statement measures profitability over a specific
period (e.g., quarter, year) by matching revenues against expenses.
2. What does the balance sheet equation represent?
✅ Answer: Assets = Liabilities + Equity
Rationale: This is the fundamental accounting equation; it shows that
everything the company owns (assets) is financed either by debt
(liabilities) or owner’s funds (equity).
3. Which ratio measures a company’s ability to pay short-term
obligations with its most liquid assets?
✅ Answer: Quick Ratio (Acid-Test)
Rationale: Quick Ratio = (Cash + Marketable Securities + Receivables)
/ Current Liabilities – it excludes inventory to focus on truly liquid
assets.
4. A company has current assets of $500,000 and current liabilities
of $250,000. What is its current ratio?
✅ Answer: 2.0
,Rationale: Current Ratio = Current Assets / Current Liabilities =
500,,000 = 2.0. This indicates strong short-term liquidity.
5. Which ratio indicates how efficiently a company uses its assets to
generate sales?
✅ Answer: Total Asset Turnover
Rationale: Total Asset Turnover = Net Sales / Average Total Assets – it
measures sales generated per dollar of assets.
6. A firm has net income of $100,000 and average total assets of
$500,000. What is its Return on Assets (ROA)?
✅ Answer: 20%
Rationale: ROA = Net Income / Average Total Assets = 100,000 /
500,000 = 0.20 (20%).
7. Which financial statement shows the sources and uses of cash
during a period?
✅ Answer: Statement of Cash Flows
Rationale: It categorizes cash into operating, investing, and financing
activities, explaining changes in the cash balance.
8. What does the debt-to-equity ratio measure?
✅ Answer: Financial leverage
Rationale: Debt-to-Equity = Total Liabilities / Shareholders’ Equity – it
shows the proportion of debt used relative to equity.
9. If a company’s gross profit is $300,000 and net sales are
$1,000,000, what is the gross profit margin?
✅ Answer: 30%
Rationale: Gross Profit Margin = Gross Profit / Net Sales = 300,000 /
1,000,000 = 30%.
, 10. Which ratio is a measure of profitability that considers all
expenses including interest and taxes?
✅ Answer: Net Profit Margin
Rationale: Net Profit Margin = Net Income / Net Sales – it reflects the
percentage of each sales dollar that remains as profit after all costs.
11. A company’s inventory turnover is 8 times per year. What does
this imply?
✅ Answer: The company sells and replaces its inventory 8 times
annually.
Rationale: Higher turnover indicates efficient inventory management
and strong sales.
12. Which statement is true about the DuPont analysis?
✅ Answer: It breaks ROE into profitability, efficiency, and leverage
components.
Rationale: DuPont decomposes ROE = Net Profit Margin × Asset
Turnover × Equity Multiplier, helping identify drivers of return.
13. What is the primary purpose of financial ratio analysis?
✅ Answer: To evaluate a company’s performance and financial health.
Rationale: Ratios allow comparison over time and against industry
benchmarks to assess strengths/weaknesses.
14. Which item is NOT found on the balance sheet?
✅ Answer: Sales revenue
Rationale: Sales revenue appears on the income statement; the balance
sheet shows assets, liabilities, and equity.
15. A firm has earnings per share (EPS) of $4 and a market price
per share of $60. What is the P/E ratio?
✅ Answer: 15×
