Quiz # 5- Chapter 11

A startup tech company is rapidly growing in revenue but shows negative profits. When advising potential investors, which metric would be most relevant to analyze?

• Current ratio

• Return on equity

• Cash flow from operations

• Gross profit margin

When reviewing a company's balance sheet, you notice goodwill has increased significantly. What's the most likely explanation?

• The company launched successful marketing campaigns

• The company acquired another business above book value

• The company invested in new equipment

• The company increased its market share

A manufacturing company's accountant is preparing financial statements. Which item represents a contingent liability that should be disclosed?

• Unpaid utility bills

• Pending lawsuit with uncertain outcome

• Upcoming employee payroll

• Purchase orders for raw materials

In analyzing two competing retailers, which combination of ratios would best indicate superior inventory management?

• Current ratio and quick ratio

• Debt ratio and equity ratio

• Inventory turnover and gross margin

• Return on assets and profit margin

Your client's small business shows steady profits but frequently runs out of cash. What would you recommend first?

• Increase prices

• Implement stricter credit policies

• Take out a long-term loan

• Reduce inventory purchases

A company switched from FIFO to LIFO inventory valuation during rising prices. What's the immediate impact on financial statements?

• Higher net income and higher taxes

• Lower net income and lower taxes

• Higher assets and higher equity

• No impact on financial statements

When examining financial statements for potential fraud, which situation requires closest scrutiny?

• Decreasing accounts receivable with increasing sales

• Increasing cash flow with decreasing profits

• Consistent profit margins despite industry volatility

• Fluctuating inventory levels with seasonal sales

Your friend runs a food truck and keeps all receipts but doesn't record transactions daily. What's the biggest risk?

• Tax audit problems

• Inaccurate menu pricing

• Poor cash flow management

• All options are correct

A company's financial ratios are significantly better than industry averages. What should an auditor do first?

• Congratulate management on their performance

• Investigate accounting methods used

• Share the information with stakeholders

• Compare with previous years' ratios

In a digital currency transaction, which accounting challenge is most significant?

• Recording the transaction date

• Determining fair market value

• Calculating transaction fees

• Identifying the other party