🎯Ratio Analysis and Financial Statement Analysis Quiz: 27 MCQs

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Keisha Lacy 16 March 2024

CPA: FAR Ratio Analysis And Financial Statement Analysis Quiz 1;Quiz 1
Problem 14. What is a “plow-back ratio”? I did not see it explained in the lecture.

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1. Deleted User 21 March 2024
  
  Hello Keisha,
  
  The term “plow-back ratio” refers to a financial metric used to measure the proportion of a company’s earnings that are reinvested back into the business for future growth, rather than being distributed to shareholders as dividends.
  
  The plow-back ratio is calculated by dividing the amount of earnings retained by the company (i.e., not paid out as dividends) by the total earnings. Mathematically, it can be expressed as:
  
  Plow-back ratio = (Net Income – Dividends) / Net Income
  
  A high plow-back ratio indicates that the company is retaining a large portion of its earnings to reinvest in its operations, which can lead to higher growth opportunities in the future. On the other hand, a low plow-back ratio suggests that the company is distributing a larger portion of its earnings to shareholders in the form of dividends, which may be indicative of a more mature or stable company that doesn’t require as much reinvestment for growth.
  
  Farhat Lectures Support Team
  
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  1. Keisha Lacy 21 March 2024
    
    Thank you very much.
    
    Keisha
    
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Devin Wigley 29 July 2024

There’s a lot of questions and formulas in Ratio Analysis And Financial Statement Analysis Quiz 1 that were not in the lectures like question 12,13, and 14 for example. What are the best ways to answer the questions correctly?

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Arax M 7 September 2024

The answer to the #2 question of Quiz 1 is wrong. Besides inventory, we also subtract prepaid expenses from current assets to be left with cash, cash equivalent marketable securities and A/R for the numerator of the quick ratio.

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1. Maroun, CPA 10 September 2024
  
  Hello Arax,
  
  I updated the question.
  Thank you for bringing this to our attention!
  
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Ryo 28 February 2025

No.2 for the ratio analysis is wrong. I used the review course for supplementing this, but quick ratio was calculated by;
cash + accounts receivables + market securities / current liabilities
You ignore prepaid expenses and inventory.

Please correct this error as soon as possible. Thank you!

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1. Maroun, CPA 1 March 2025
  
  Hello Ryo,
  
  The two formulas will lead to the same result. The key point is that inventory and prepaid assets should not be accounted for in the quick ratio. That’s why they are subtracted form current assets.
  
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Ryo 21 March 2025

Q21;
Hi, is it possible if you could break down the calculations here?
I can’t quite understand how to solve this question..

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Kathleen Kim 14 July 2025

I agree with all the explanations. However, for the denominator in the ROE calc, shouldn’t we be using the average equity?
Based on that, the ave. equity would be 299,952, calculated as
(Beg equity 288,655 (End. equity 311,250 – Net Income 22,595) + End equity 311,250)/2
ROE = 22,595 / 299,952 = 7.53%

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1. Maroun, CPA 16 July 2025
  
  Hi Kathleen,
  
  Your reasoning is logical, and you’re correct in noting that for some financial ratios, especially when provided with both beginning and ending balances, we typically use average equity. However, in this specific question, only one equity figure was directly available, calculated from the given debt and equity multiplier information.
  
  The question did not explicitly provide beginning and ending equity balances, nor did it instruct us to use average equity. Typically, unless specified otherwise or explicitly provided with two periods’ equity balances, we use the ending equity amount as given.
  
  If the question intended for average equity to be used, it would clearly mention or provide sufficient data for both the beginning and ending balances.
  
  It is worth mentioning that net income is not the only item that could affect equity. Issuance or purchase of stock, distribution of dividends, etc… also affect equity but they were not provided.
  
  I hope this clarifies your confusion!
  
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Surangi Moonesinghe 27 July 2025

Q 28 – Why dividend is not a current liability?

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1. Maroun, CPA 31 July 2025
  
  Hello Surangi,
  
  Dividends become a current liability when declared, because the company owes this amount to shareholders and typically pays it within one year. Thus, immediately upon declaring dividends, the journal entry is:
  
  Dr. Retained Earnings (reduces equity)
  Cr. Dividends Payable (creates a current liability)
  
  However, this liability is temporary and exists only until the dividends are paid.
  
  When dividends are subsequently paid (typically shortly after declaration):
  Dr. Dividends Payable (current liability eliminated)
  Cr. Cash (current asset decreased)
  
  Thus, at the end of the period, after the dividends have been paid, the current liability (“Dividends Payable”) is eliminated completely.
  
  In the scenario provided by the question, the dividends were both declared and paid during 20X5. By the end of 20X5, dividends payable no longer exists because the company has already settled this liability with cash.
  
  Therefore, at year-end, the dividend transaction:
  – Reduces current assets (cash)
  – Has no net effect on current liabilities (as the liability was created and then eliminated within the same year).
  
  As a result, the quick ratio (current assets excluding inventory ÷ current liabilities) will decrease because only the numerator (cash) decreases, while the denominator (current liabilities) remains unchanged at year-end.
  
  I hope this explanation clarifies why dividends are not shown as a current liability at year-end in this scenario!
  
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Kajal Goff 4 February 2026

Are all these rations that are not mentioned in Becker going to be test in FAR? Rations such as Plow back, Capital intensity and cash average ratio and others ….

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1. Maroun, CPA 9 February 2026
  
  Hello Kajal,
  
  Ratios like plowback, capital intensity, “cash average ratio,” etc., are less likely to be directly tested as standalone memorization items in FAR. If they appear, it’s usually because the formula is given in a task-based simulation where you can derive what you need.
  
  So don’t worry, prioritize Becker’s list and focus on understanding the fundamentals.
  
  Hope this helps!
  
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Aditi Agrawal 11 September 2026

Hello
why you add taxes and interest expense, it should be deducted.
The income before income taxes and interest expense is equal to $950,000 + $500,000 + $400,000 = $1,850,000??
The times interest earned ratio is computed as follows:

Income before income taxes and interest expense/
Interest expense

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1. Maroun, CPA 14 September 2026
  
  Hello Aditi,
  
  The taxes and interest are added because the calculation starts with net income, which is reported after deducting both interest expense and income tax expense.
  
  To determine income before interest and taxes (EBIT), we must add those amounts back:
  
  Net income $950,000
  + Income taxes $500,000
  + Interest expense $400,000
  = EBIT $1,850,000
  
  EBIT must be higher than net income.
  
  Hope this makes sense!
  
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🎯Ratio Analysis and Financial Statement Analysis Quiz: 27 MCQs

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