Series 65 Financial Statement Analysis Practice Questions

Correct answer: B. Market price per share to earnings per share

The price-to-earnings (P/E) ratio is calculated as the current market price per share divided by earnings per share (EPS). It expresses how much investors are willing to pay for each dollar of a company's earnings and is one of the most widely used valuation metrics.

• A. Incorrect — market price to book value describes the price-to-book (P/B) ratio, not P/E.
• B. Correct — P/E ratio = market price per share ÷ earnings per share.
• C. Incorrect — earnings per share to dividends per share relates to the dividend payout ratio, not P/E.
• D. Incorrect — market price to sales per share describes the price-to-sales ratio, not P/E.

Correct answer: B. $900,000

The fundamental accounting equation is Assets = Liabilities + Equity, so Equity = Assets - Liabilities = $2,500,000 - $1,600,000 = $900,000.

• A. This adds assets and liabilities together rather than subtracting, producing an incorrect figure.
• B. Assets = Liabilities + Equity, so Equity = $2,500,000 − $1,600,000 = $900,000.
• C. This is simply the total liabilities figure, not the equity figure being asked for.
• D. This is the total assets figure, not stockholders' equity.

• Source: SEC: Beginners' Guide to Financial Statements

Correct answer: A. 1.38:1

The quick (acid-test) ratio excludes inventory and other non-liquid current assets, such as prepaid expenses, from the numerator: ($800,000 − $200,000 − $50,000) ÷ $400,000 = $550,000 ÷ $400,000 = 1.375, or roughly 1.38:1. Choice B is simply the current ratio (which improperly includes inventory and prepaid expenses). Choice C results from excluding only inventory but forgetting prepaid expenses. Choice D does not correspond to any correct or partially correct calculation.

• A. Quick ratio = (current assets − inventory − prepaid expenses) / current liabilities = ($800,000 − $200,000 − $50,000) / $400,000 = $550,000 / $400,000 = 1.375, or about 1.38:1, which is correct.
• B. 2:1 does not reflect the exclusion of inventory and prepaid expenses required for the quick ratio calculation.
• C. 1.5:1 doesn't match the precise result of dividing $550,000 by $400,000.
• D. 1:1 understates the ratio and doesn't correspond to the correct numerator/denominator here.

Correct answer: B. reports the results of operations over a period of time

The income statement (also called the profit and loss statement) summarizes revenues, expenses, and net income over a defined period, such as a quarter or year. The balance sheet, by contrast, is a snapshot of assets, liabilities, and equity at a single point in time. Choice A describes the balance sheet. Choice C also describes the balance sheet's content, not the income statement's. Choice D is factually wrong — companies routinely prepare quarterly (10-Q) and annual (10-K) income statements.

• A. That describes the balance sheet (a point-in-time snapshot), which is the opposite of what distinguishes the income statement.
• B. Correct. The income statement reports revenues, expenses, and resulting net income over a period (e.g., a quarter or year), in contrast to the balance sheet's point-in-time snapshot.
• C. Assets and liabilities are balance sheet line items; the income statement instead reports revenues and expenses.
• D. Income statements are commonly prepared quarterly and annually (and even monthly internally); there's no rule limiting them to annual-only reporting.

• Source: SEC: Beginners' Guide to Financial Statements