Business Finance Quiz
Questions: 16 · 10 minutes
1. A company earns $90,000 before interest and taxes and incurs $30,000 in interest expense. What is its interest coverage ratio?
3.0
2.0
0.33
4.0
2. A company's cost of goods sold remains stable, but its inventory turnover ratio increases. What most directly explains the change?
Its average accounts receivable increased
Its average inventory decreased
Its long-term borrowing increased
Its gross margin percentage increased
3. Which cost is most likely to vary directly with the number of units sold?
The annual audit fee
Monthly factory rent
A sales commission paid for each unit sold
A manager's fixed annual salary
4. A company records $12,000 of depreciation expense for equipment this year. What is the direct effect of recording that expense?
Profit and cash both immediately fall by $12,000
Cash falls by $12,000, but accounting profit is unchanged
Accounting profit falls by $12,000, but recording depreciation creates no current-period cash outflow
Revenue rises by $12,000 while asset value stays unchanged
5. A product sells for $50, has a variable cost of $30 per unit, and supports $40,000 in fixed costs. How many units must be sold to break even?
2,000 units
1,333 units
800 units
5,000 units
6. An invoice states “2/10, net 30.” What does that mean?
The supplier allows two monthly payments, beginning after 30 days
The customer must pay 10% now and the remaining amount in 30 days
The customer pays 2% interest every 10 days until day 30
The customer may take a 2% discount by paying within 10 days; otherwise the full amount is due within 30 days
7. Under standard net present value analysis, what does a positive NPV indicate?
The investment will recover its initial cost within one year
The investment has no uncertainty because its cash flows were discounted
The investment's accounting profit is guaranteed to be positive every year
Discounted expected inflows exceed discounted expected outflows, so the project adds value under the assumptions used
8. A profitable company is struggling to pay suppliers because many customers have not yet paid their invoices. Which explanation best fits the situation?
Gross profit must be negative even though net profit is positive
Depreciation has removed cash from the bank account
Revenue has been recognized, but the related cash is still tied up in receivables
The company has too much equity on its balance sheet
9. How is net working capital normally calculated?
Current assets minus current liabilities
Total assets minus total equity
Revenue minus cost of goods sold
Cash minus long-term debt
10. Which equation forms the foundation of a balance sheet?
Assets = Liabilities + Equity
Revenue = Assets − Expenses
Cash = Profit + Liabilities
Equity = Revenue − Current Assets
11. Which statement accurately compares equity financing with borrowing?
Equity always costs less than debt and cannot affect control
Equity avoids mandatory interest payments but can dilute existing owners' stakes
Equity guarantees dividends, while lenders receive payments only when profits allow
Equity must be repaid on a fixed schedule, while debt has no repayment obligation
12. Two firms have similar sales, but one relies much more heavily on fixed operating costs. If sales change, what is generally true of the firm with higher operating leverage?
Its revenue cannot fall below its fixed costs
Its interest expense automatically changes in direct proportion to sales
Its operating profit will generally respond more sharply to changes in sales
Its inventory must increase whenever sales decline
13. A business has $90,000 in current assets and $60,000 in current liabilities. What is its current ratio?
0.67
2.50
30,000
1.50
14. A company records $120,000 in sales and $70,000 in cost of goods sold. What is its gross profit?
$190,000
$70,000
$120,000
$50,000
15. A business budgeted $5,000 for monthly utilities but actually spent $6,000. How should the variance be described?
A $6,000 favorable variance
A $1,000 unfavorable variance
A $5,000 unfavorable variance
A $1,000 favorable variance
16. An item costs a retailer $80 and sells for $100. What are its gross margin and markup percentages?
Gross margin 25%; markup 20%
Gross margin 20%; markup 25%
Gross margin 20%; markup 20%
Gross margin 25%; markup 25%