Gmsisuccess
MCQs: Liquidity, Solvency, Leverage, Financial Analysis & Policies
(US CMA Part 2 | ACCA FM Level – Moderate to Difficult)
1. A company has a current ratio of 2.5 but consistently defaults on long-term loan installments. This indicates: A. Strong liquidity and solvency
B. Weak liquidity and weak solvency
C. Strong liquidity but weak solvency
D. Weak liquidity but strong solvency
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2. Which situation BEST describes a liquidity crunch? A. Negative retained earnings
B. High debt-equity ratio
C. Profitable firm unable to meet short-term obligations
D. Declining market share
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3. High operating leverage implies: A. High variable costs
B. High financial risk
C. High fixed operating costs
D. Low contribution margin
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4. Financial leverage magnifies: A. Sales volatility
B. Operating risk
C. Earnings per share variability
D. Contribution margin
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5. A firm with high operating leverage and high financial leverage is MOST exposed to: A. Market risk
B. Liquidity risk
C. Total business risk
D. Currency risk
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6. Trading on equity is successful when: A. Cost of debt > ROCE
B. ROCE > Cost of debt
C. Debt is interest-free
D. Equity capital is zero
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7. Debt Trap
7. A company is said to be in a debt trap when: A. Debt increases profitability
B. New debt is used to repay old debt interest
C. Equity exceeds debt
D. Interest coverage ratio improves
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8. A highly geared company means: A. More equity than debt
B. More debt than equity
C. No preference shares
D. High liquidity
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9. High Financial Leverage
9. High financial leverage is MOST risky during: A. Inflation
B. Stable sales
C. Economic downturn
D. Low interest rates
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10. Financial flexibility refers to a firm’s ability to: A. Increase dividend payout
B. Change accounting policies
C. Raise funds at reasonable cost when needed
D. Eliminate all debt
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11. Risk Owner
11. In enterprise risk management, the risk owner is: A. External auditor
B. Internal auditor
C. Person responsible for managing the risk
D. Board chairman
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12. Operational excellence primarily improves: A. Capital structure
B. Cost efficiency and process reliability
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13. High quality of revenue means revenue is: A. Rapidly growing
B. Based on cash sales and core operations
C. Derived from one-time events
D. Earned through accounting estimates
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14. Horizontal analysis compares: A. Line items as a percentage of sales
B. Financial data across time periods
C. Actual vs budget
D. Industry averages
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15. Vertical Analysis / Common-Size Statement
15. In a common-size income statement: A. All items are shown as a percentage of total assets
B. All items are shown as a percentage of equity
C. All items are shown as a percentage of sales
D. Only expenses are standardized
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16. Interpretation of Financial Statements
16. A rising gross profit margin but falling net profit margin suggests: A. Improved cost control
B. Higher operating or financing expenses
C. Better pricing power
D. Lower tax rates
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17. Profitability vs Liquidity Trade-off
17. Holding excessive cash balances will generally: A. Increase profitability
B. Reduce liquidity
C. Reduce profitability
D. Increase financial leverage
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18. Current Performance
18. The ratio MOST relevant to assess current performance: A. Debt-equity ratio
B. Current ratio
C. EPS
D. Asset turnover
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19. EPS
19. EPS measures: A. Cash available to shareholders
B. Market value of equity
C. Profit attributable to each equity share
D. Dividend paid per share
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20. Diluted EPS
20. Diluted EPS assumes: A. No conversion of securities
B. Only equity shares outstanding
C. Conversion of all dilutive potential shares
D. Only options are exercised
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21. Dilutive Securities
21. Which is MOST likely to dilute EPS? A. Convertible debentures
B. Preference shares (non-convertible)
C. Treasury shares
D. Redeemable bonds
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22. Dividend Policy
22. According to Modigliani–Miller (without taxes): A. Dividend policy affects firm value
B. Dividend policy is irrelevant
C. Higher dividends increase value
D. Retention always increases value
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23. Residual Dividend Policy
23. Under residual dividend policy, dividends are paid: A. At fixed percentage of profit
B. After financing all acceptable investments
C. Only in loss years
D. Before capital budgeting
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24. Operating Policy
24. Operating policies primarily affect: A. Capital structure
B. Cost behavior and margins
C. Dividend payout
D. Debt covenants
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25. Financial Policy
25. Financial policies mainly determine: A. Product pricing
B. Production efficiency
C. Capital structure and dividend decisions
D. Inventory valuation
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26. Inventory Turnover (Low)
26. A low inventory turnover may be due to: A. Strong demand
B. Over-stocking or obsolete inventory
C. High COGS
D. Low selling prices
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27. Solvency Ratio
27. Which ratio BEST measures long-term solvency? A. Current ratio
B. Quick ratio
C. Debt-equity ratio
D. Inventory turnover
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28. Interest Coverage
28. Declining interest coverage ratio indicates: A. Improved liquidity
B. Higher financial risk
C. Lower leverage
D. Better profitability
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29. Capital Structure
29. An optimal capital structure is one that: A. Eliminates risk
B. Maximizes cost of capital
C. Minimizes WACC and maximizes firm value
D. Uses only equity
Answer:
30. Gross Profit vs Net Income
30. Gross profit excludes: A. Operating expenses
B. Cost of goods sold
C. Selling expenses
D. Administrative expenses
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31. Liquidity Improvement
31. Which action improves liquidity but may hurt profitability? A. Extending credit to customers
B. Holding higher cash balances
C. Increasing leverage
D. Accelerating depreciation
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32. Financial Statement Red Flag
32. Which is a red flag for earnings quality? A. Stable operating cash flows
B. Rising revenue with falling cash flow
C. Consistent margins
D. Conservative accounting
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33. Profitability Ratio
33. ROCE improves when: A. Capital employed increases faster than EBIT
B. EBIT increases with stable capital employed
C. Debt replaces equity without EBIT change
D. Inventory increases
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34. Leverage & EPS
34. Financial leverage increases EPS when: A. EBIT < interest
B. EBIT > interest
C. Sales decrease
D. Tax rate increases
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35. Common-Size Balance Sheet
35. In a common-size balance sheet: A. Assets are shown as % of total assets
B. Liabilities are shown as % of sales
C. Equity is ignored
D. Only current assets are standardized
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