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DSST Principles of Finance study materials
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DSST Principles of Finance practice questions

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Question 1Financial statements & planning

A firm reports current assets of $180,000 and current liabilities of $120,000. What is its current ratio?

  1. 0.50
  2. 0.67
  3. 2.00
  4. 1.50 Correct answer.

Explanation

The current ratio divides current assets by current liabilities, so $180,000 divided by $120,000 equals 1.50. A ratio above 1.0 indicates the firm holds more short-term assets than short-term obligations.

Question 2Financial statements & planning

Which financial statement reports a firm's revenues, expenses, and net income over a period of time?

  1. Income statement Correct answer.
  2. Statement of retained earnings
  3. Balance sheet
  4. Statement of cash flows

Explanation

The income statement summarizes revenues and expenses for an accounting period and derives net income. The balance sheet is a point-in-time snapshot, while the cash flow statement tracks cash movements across operating, investing, and financing activities.

Question 3Financial statements & planning

A company has total assets of $500,000 and total liabilities of $300,000. What is total stockholders' equity?

  1. $300,000
  2. $500,000
  3. $800,000
  4. $200,000 Correct answer.

Explanation

The accounting identity states that assets equal liabilities plus equity, so equity equals $500,000 minus $300,000, or $200,000. Equity represents the residual claim of owners after liabilities are satisfied.

Question 4Financial statements & planning

Which activity appears in the operating section of the statement of cash flows?

  1. Issuing new common stock
  2. Purchasing equipment
  3. Repaying long-term debt
  4. Collecting cash from customers Correct answer.

Explanation

Operating activities involve the cash effects of transactions entering net income, such as collecting from customers and paying suppliers. Issuing stock and repaying debt are financing activities, while buying equipment is an investing activity.

Question 5Financial statements & planning

A firm has net income of $60,000, sales of $400,000, and total assets of $300,000. What is its return on assets?

  1. 5%
  2. 10%
  3. 15%
  4. 20% Correct answer.

Explanation

Return on assets equals net income divided by total assets, so $60,000 divided by $300,000 equals 20%. It measures how efficiently assets generate profit.

Question 6Financial statements & planning

Which item is classified as a current liability on a classified balance sheet?

  1. Land held for future use
  2. Accumulated depreciation
  3. Accounts payable to suppliers Correct answer.
  4. Bonds payable due in ten years

Explanation

Current liabilities are obligations expected to be settled within one year or the operating cycle, and accounts payable to suppliers fits that definition. Long-term bonds, land, and accumulated depreciation are not current obligations.

Question 7Financial statements & planning

A firm projects sales of $250,000, with cost of goods sold at 60% of sales. What is the projected gross profit?

  1. $60,000
  2. $250,000
  3. $100,000 Correct answer.
  4. $150,000

Explanation

Gross profit equals sales minus cost of goods sold. Cost of goods sold is 60% of $250,000, or $150,000, leaving gross profit of $100,000, which is 40% of sales.

Question 8Financial statements & planning

In financial planning, which term describes the process of projecting future financial statements based on assumed sales growth and operating relationships?

  1. Reconciliation
  2. Pro forma forecasting Correct answer.
  3. Amortization
  4. Auditing

Explanation

Pro forma forecasting builds projected income statements and balance sheets from assumptions such as sales growth and constant ratios. It supports planning and external financing decisions rather than historical reporting.

Question 9Financial statements & planning

A firm has inventory of $90,000, cost of goods sold of $540,000, and 365 days in the year. What is its days' sales in inventory?

  1. 6.0 days
  2. 16.4 days
  3. 90.0 days
  4. 60.8 days Correct answer.

Explanation

Days' sales in inventory equals (inventory divided by cost of goods sold) multiplied by 365. That gives ($90,000 / $540,000) x 365, which equals about 60.8 days on hand.

Question 10Financial statements & planning

A company's beginning retained earnings are $120,000, net income is $45,000, and dividends paid are $15,000. What are the ending retained earnings?

  1. $135,000
  2. $150,000 Correct answer.
  3. $90,000
  4. $180,000

Explanation

Ending retained earnings equal beginning retained earnings plus net income minus dividends: $120,000 plus $45,000 minus $15,000 equals $150,000. Dividends reduce the retained balance while net income increases it.

Question 11Financial statements & planning

A firm's debt-to-equity ratio is 1.5 and total liabilities are $450,000. What is total stockholders' equity?

  1. $750,000
  2. $450,000
  3. $300,000 Correct answer.
  4. $675,000

Explanation

Debt-to-equity equals total liabilities divided by total equity, so equity equals $450,000 divided by 1.5, or $300,000. The ratio shows how much creditor financing is used per dollar of owner financing.

Question 12Financial statements & planning

Under the percentage-of-sales approach, which item is typically assumed to vary directly with sales?

  1. Long-term debt
  2. Common stock at par
  3. Paid-in capital in excess of par
  4. Accounts receivable Correct answer.

Explanation

Spontaneous accounts such as accounts receivable, inventory, and accounts payable tend to move proportionally with sales in a percentage-of-sales forecast. Financing accounts like long-term debt and paid-in capital are set by management decisions rather than sales volume.

Question 13Financial statements & planning

A firm reports a net profit margin of 8% and a total asset turnover of 2.0. Using the DuPont framework, what is its return on assets?

  1. 4%
  2. 16% Correct answer.
  3. 10%
  4. 25%

Explanation

In the DuPont decomposition, return on assets equals net profit margin multiplied by total asset turnover. Here 8% times 2.0 equals 16%, showing profit earned per dollar of sales combined with sales generated per dollar of assets.

Question 14Financial statements & planning

Which change would increase a firm's sustainable growth rate, all else held constant?

  1. Increasing the debt-to-equity ratio Correct answer.
  2. Lengthening the receivables collection period
  3. Reducing the net profit margin
  4. Raising the dividend payout ratio

Explanation

The sustainable growth rate rises with higher leverage because more debt supports asset growth without diluting retained earnings. A higher payout ratio, a lower margin, or slower collections all reduce the internally generated funds available for growth.

Question 15Financial statements & planning

A company reports sales of $800,000, all on credit, and average accounts receivable of $100,000. What is its receivables turnover?

  1. 0.125 times
  2. 80.0 times
  3. 8.0 times Correct answer.
  4. 12.5 times

Explanation

Receivables turnover equals credit sales divided by average accounts receivable, so $800,000 divided by $100,000 equals 8.0 times. It indicates how many times the receivables balance is collected during the period.

Question 16Financial statements & planning

During a period of rising prices, which inventory cost flow method generally produces the highest reported net income?

  1. Weighted average
  2. First-in, first-out Correct answer.
  3. Specific identification
  4. Last-in, first-out

Explanation

Under FIFO, older and cheaper inventory costs are assigned to cost of goods sold during inflation, leaving higher-cost units in ending inventory. Lower cost of goods sold raises gross profit and net income relative to LIFO.

Question 17Financial statements & planning

A firm has cash of $40,000, marketable securities of $30,000, receivables of $50,000, inventory of $80,000, and current liabilities of $100,000. What is the quick ratio?

  1. 1.20 Correct answer.
  2. 2.00
  3. 1.50
  4. 0.70

Explanation

The quick ratio excludes inventory, adding cash, marketable securities, and receivables for $120,000, then dividing by current liabilities of $100,000 to get 1.20. It tests liquidity using only the most liquid current assets.

Question 18Financial statements & planning

A firm's projected assets exceed its projected liabilities and equity before any external financing. How is this shortfall typically described in financial planning?

  1. An operating cash inflow
  2. A negative working capital position
  3. A discretionary financing need Correct answer.
  4. A surplus of internally generated funds

Explanation

When forecast asset growth outpaces spontaneous liabilities and retained earnings, the gap must be funded externally and is called the discretionary financing need. Management then chooses among debt, equity, or reduced growth to close it.

Question 19Financial statements & planning

Which ratio best measures how many times a firm can cover its interest charges from operating earnings?

  1. Price-to-earnings ratio
  2. Times interest earned Correct answer.
  3. Dividend payout ratio
  4. Inventory turnover

Explanation

Times interest earned divides earnings before interest and taxes by interest expense, showing the cushion available to service debt. It is a coverage ratio focused on the ability to meet fixed interest obligations.

Question 20Financial statements & planning

A company reports net income of $90,000 and 30,000 shares of common stock outstanding. What is earnings per share?

  1. $0.33
  2. $30.00
  3. $3.00 Correct answer.
  4. $9.00

Explanation

Earnings per share equals net income divided by shares outstanding, so $90,000 divided by 30,000 equals $3.00. It expresses profit attributable to each share of common stock.

Question 21Financial statements & planning

A firm's return on equity is 18% and its dividend payout ratio is 40%. What is its sustainable growth rate?

  1. 7.2%
  2. 18.0%
  3. 43.2%
  4. 10.8% Correct answer.

Explanation

Sustainable growth equals return on equity multiplied by the retention ratio (1 minus the payout ratio). With a 60% retention ratio, 18% times 0.60 equals 10.8%.

Question 22Financial statements & planning

A firm has sales of $1,000,000, a net profit margin of 5%, a total asset turnover of 1.5, and an equity multiplier of 2.0. What is its return on equity under the extended DuPont model?

  1. 10%
  2. 7.5%
  3. 30%
  4. 15% Correct answer.

Explanation

Extended DuPont return on equity equals margin times turnover times equity multiplier: 5% times 1.5 times 2.0 equals 15%. This decomposes performance into profitability, efficiency, and leverage.

Question 23Financial statements & planning

A firm's operating cash flow is $200,000, capital expenditures are $120,000, and it pays $50,000 in dividends. What is its free cash flow to equity?

  1. $80,000
  2. $30,000 Correct answer.
  3. $150,000
  4. $50,000

Explanation

Free cash flow to equity equals operating cash flow minus capital expenditures minus dividends, giving $200,000 minus $120,000 minus $50,000, or $30,000. It represents cash available to equity holders after reinvestment and distributions.

Question 24Financial statements & planning

A firm wants to hold its debt-to-equity ratio constant at 1.0 while growing assets by $200,000. Assuming no new equity issuance, how much new debt must it raise?

  1. $100,000 Correct answer.
  2. $200,000
  3. $0
  4. $50,000

Explanation

With a debt-to-equity ratio of 1.0, debt and equity must fund the asset growth in equal proportions. Half of the $200,000 growth, or $100,000, comes from debt, with the remainder from retained earnings.

Question 25Financial statements & planning

A firm reports net income of $150,000, depreciation of $30,000, an increase in accounts receivable of $20,000, and a decrease in accounts payable of $10,000. Using the indirect method, what is operating cash flow?

  1. $190,000
  2. $150,000 Correct answer.
  3. $210,000
  4. $170,000

Explanation

Start with net income of $150,000, add back noncash depreciation of $30,000, then subtract the $20,000 receivables increase and the $10,000 payables decrease. The result is $150,000, since the adjustments net to zero.

Question 26Financial statements & planning

A firm's net income is $60,000, its tax rate is 25%, and its interest expense is $20,000. What is its times interest earned (interest coverage) ratio?

  1. 2.0
  2. 3.0
  3. 5.0
  4. 4.0 Correct answer.

Explanation

Interest coverage equals EBIT divided by interest expense. Working backward from net income: pre-tax income is $60,000 / 0.75 = $80,000, and adding back interest gives EBIT of $100,000. Dividing $100,000 by $20,000 yields a coverage ratio of 4.0.

Question 27Financial statements & planning

In preparing a pro forma balance sheet under the percentage-of-sales method, a firm assumes spontaneous liabilities grow with sales while long-term debt and common stock are held constant. Which account serves as the balancing plug when projected assets exceed the sum of projected liabilities and equity?

  1. Accounts payable
  2. External financing needed Correct answer.
  3. Retained earnings
  4. Accrued wages

Explanation

When projected asset growth outpaces the internally generated financing from spontaneous liabilities and additions to retained earnings, the residual is the external financing needed, which is the plug that balances the pro forma balance sheet. Accounts payable and accruals are treated as spontaneous items that vary with sales, not as residual balancing figures.

Question 28Financial statements & planning

A firm has sales of $500,000, cost of goods sold of $300,000, operating expenses of $80,000, and depreciation of $40,000. It also pays $25,000 in interest and faces a 30% tax rate. What is its net income?

  1. $45,500
  2. $56,000
  3. $38,500 Correct answer.
  4. $80,000

Explanation

EBIT is sales minus cost of goods sold minus operating expenses minus depreciation: $500,000 - $300,000 - $80,000 - $40,000 = $80,000. Subtracting interest of $25,000 gives pre-tax income of $55,000, and applying the 30% tax rate leaves net income of $38,500.

Question 29Financial statements & planning

A firm has a dividend payout ratio of 25%, a net profit margin of 6%, an asset turnover of 1.8, and an equity multiplier of 1.5. Using the sustainable growth rate formula, approximately what growth rate can the firm sustain without external equity financing?

  1. 16.2%
  2. 6.5%
  3. 12.2% Correct answer.
  4. 8.1%

Explanation

ROE under the DuPont decomposition is 6% x 1.8 x 1.5 = 16.2%, and the retention ratio is 1 minus the 25% payout, or 0.75. Sustainable growth equals ROE times the retention ratio: 16.2% x 0.75 = 12.15%, which rounds to 12.2%.

Question 30Time value of money

An investor deposits $5,000 today in an account that pays 6% annual interest compounded annually. What is the balance after one year?

  1. $5,500
  2. $5,060
  3. $5,006
  4. $5,300 Correct answer.

Explanation

Future value for one period equals the present value multiplied by (1 + r), so $5,000 × 1.06 = $5,300. Compounding annually for a single year adds exactly one year of interest to the principal.

Question 31Time value of money

Which statement best describes the core idea of the time value of money?

  1. Money has the same value at every point in time when inflation is zero
  2. The value of money depends only on the currency in which it is denominated
  3. A dollar received today is worth more than the same dollar received in the future Correct answer.
  4. A dollar received in the future is worth more because it earns interest before receipt

Explanation

The time value of money holds that funds available now can be invested and earn a return, so a present dollar exceeds a future dollar of equal face amount. This is why future cash flows are discounted to compare them with present amounts.

Question 32Time value of money

A firm expects to receive $10,000 exactly three years from now. Using a discount rate of 10% compounded annually, what is the present value closest to?

  1. $7,000
  2. $9,091
  3. $13,310
  4. $7,513 Correct answer.

Explanation

Present value equals future value divided by (1 + r)^n, so $10,000 ÷ 1.331 ≈ $7,513. This discounts the single future cash flow back three years at 10%.

Question 33Time value of money

What does an annuity in finance specifically refer to?

  1. A series of equal cash payments made at regular intervals Correct answer.
  2. A payment stream whose amount changes each period with inflation
  3. Any single lump-sum payment received at a future date
  4. A one-time premium paid to purchase an insurance contract

Explanation

An annuity is a level payment stream occurring at equal intervals for a defined number of periods, such as monthly rent or bond coupons. The defining features are equal amounts and regular timing.

Question 34Time value of money

How does increasing the discount rate affect the present value of a single cash flow to be received in the future?

  1. It increases the present value
  2. It decreases the present value Correct answer.
  3. It leaves the present value unchanged
  4. It changes the present value only if the period exceeds ten years

Explanation

The present value is the future amount divided by (1 + r)^n, so a higher r produces a larger denominator and a smaller present value. Higher discount rates penalize distant cash flows more heavily.

Question 35Time value of money

An account pays 8% annual interest compounded annually. Which expression correctly gives the future value of $2,000 held for four years?

  1. $2,000 ÷ (1.08)^4
  2. $2,000 × (0.08)^4
  3. $2,000 × (1 + 0.08 × 4)
  4. $2,000 × (1.08)^4 Correct answer.

Explanation

Compound future value is PV × (1 + r)^n, which here is $2,000 × 1.08 raised to the fourth power. The exponent captures compounding across all four years.

Question 36Time value of money

A perpetuity pays $500 at the end of every year forever, and the required return is 5% annually. What is its present value?

  1. $25,000
  2. $500
  3. $10,000 Correct answer.
  4. $2,500

Explanation

The present value of a level perpetuity is the payment divided by the discount rate, so $500 ÷ 0.05 = $10,000. Because the payments never end, no maturity term appears in the formula.

Question 37Time value of money

Interest is quoted as 12% per year compounded monthly. What is the monthly periodic rate used in time value calculations?

  1. 6% per month
  2. 1.0% per month Correct answer.
  3. 12% per month
  4. 0.12% per month

Explanation

For nominal annual rates with monthly compounding, divide the annual rate by twelve to obtain the periodic rate: 12% ÷ 12 = 1% per month. That periodic rate is then applied once per month.

Question 38Time value of money

A project requires an outlay today and returns cash in each of the next five years. Which method correctly computes its net present value?

  1. Compound the initial outlay forward five years and subtract it from the total cash received
  2. Average the annual cash flows and divide by the required rate
  3. Discount each year's cash flow at the required rate, sum the results, then subtract the initial outlay Correct answer.
  4. Sum the undiscounted cash flows and subtract the initial outlay

Explanation

Net present value discounts every expected cash flow to time zero at the required rate, adds them, and then deducts the initial investment made at time zero. Only discounted amounts are comparable across different dates.

Question 39Time value of money

An investor wants $50,000 in eight years and can earn 7% compounded annually. Which calculation yields the amount that must be deposited today?

  1. $50,000 × (1.07)^8
  2. $50,000 ÷ (1.07)^8 Correct answer.
  3. $50,000 × (1.07 × 8)
  4. $50,000 ÷ (0.07 × 8)

Explanation

Solving FV = PV × (1 + r)^n for the present amount gives PV = FV ÷ (1 + r)^n. The target future sum is discounted back eight years at 7%.

Question 40Time value of money

A four-year ordinary annuity pays $3,000 at the end of each year, and the discount rate is 9%. Which approach correctly values it?

  1. Multiply $3,000 by four and then divide by 1.09
  2. Add the four payments and treat the total as a single cash flow at year two
  3. Discount each of the four $3,000 payments separately and add the four present values Correct answer.
  4. Discount each payment for four years regardless of when it occurs

Explanation

An annuity's present value is the sum of the present values of each individual payment, each discounted for its own number of periods. The annuity factor formula is simply a shortcut for that sum.

Question 41Time value of money

Which change will increase the future value of a fixed deposit held for a fixed number of years?

  1. Reducing the number of years the deposit is held
  2. Compounding interest more frequently at the same nominal annual rate Correct answer.
  3. Compounding interest less frequently at the same nominal annual rate
  4. Lowering the nominal annual interest rate

Explanation

More frequent compounding at a given nominal rate raises the effective annual rate, so the terminal balance grows. Each additional compounding period applies interest to a slightly larger base.

Question 42Time value of money

A loan of $20,000 is repaid in equal annual installments over five years at 10% interest. What does each installment primarily consist of in the early years?

  1. Equal interest and principal portions in every year
  2. Principal only, with all interest paid at maturity
  3. A larger principal portion and a smaller interest portion
  4. A larger interest portion and a smaller principal portion Correct answer.

Explanation

In an amortizing loan the interest charge is computed on the outstanding balance, which is largest at the start. Because the total payment is level, early payments contain more interest and less principal, and the mix shifts over time.

Question 43Time value of money

What distinguishes an annuity due from an ordinary annuity with the same payment, rate, and term?

  1. The annuity due has no final payment
  2. Payments occur at the beginning of each period, so the annuity due is worth less
  3. Payments occur at the beginning of each period, so the annuity due is worth more Correct answer.
  4. The annuity due uses simple rather than compound interest

Explanation

An annuity due shifts every payment one period earlier, so each cash flow is discounted for one fewer period. That makes its present value equal to the ordinary annuity value multiplied by (1 + r).

Question 44Time value of money

A stream pays $200 at the end of year one, $300 at the end of year two, and $400 at the end of year three. With a 5% discount rate, how is its present value found?

  1. Discount each unequal payment by its own year and sum the three results Correct answer.
  2. Sum the payments and divide by three, then discount for two years
  3. Discount only the largest payment, since it dominates the total
  4. Multiply the average payment by the three-year annuity factor at 5%

Explanation

Unequal cash flows form no standard annuity, so each payment must be discounted individually for its own period and the results added. The annuity shortcut applies only to level payment streams.

Question 45Time value of money

If the nominal annual rate is 10% compounded semiannually, which value is the effective annual rate?

  1. 10.25% Correct answer.
  2. 5.00%
  3. 10.00%
  4. 20.00%

Explanation

The effective annual rate is (1 + 0.10/2)^2 − 1 = 1.05^2 − 1 = 0.1025, or 10.25%. It exceeds the nominal rate because interest is compounded twice within the year.

Question 46Time value of money

An investor can earn 6% annually. What is the present value of $1,000 received at the end of each year forever, with the first payment one year from now?

  1. $16,667 Correct answer.
  2. $1,060
  3. $6,000
  4. $17,667

Explanation

A level perpetuity with the first payment one period ahead is valued as payment divided by rate: $1,000 ÷ 0.06 ≈ $16,667. The result reflects an infinite stream of level payments discounted at 6%.

Question 47Time value of money

Two investments promise the same total nominal cash amount, but one pays it in year two and the other in year five. At a positive discount rate, which has the higher present value?

  1. The one paying in year five, because it accrues more interest
  2. The answer depends only on the currency of payment
  3. They are equal, because the nominal cash amounts match
  4. The one paying in year two, because it is discounted for fewer periods Correct answer.

Explanation

With a positive discount rate, the discount factor shrinks as the number of periods grows, so earlier cash flows carry larger present values. Receiving the same nominal amount sooner is therefore worth more today.

Question 48Time value of money

A saver deposits $1,000 at the end of each year for three years at 5% annual interest. Which statement about the first deposit is correct?

  1. It earns no interest because it is made at year-end
  2. It earns interest for two years, while the third deposit earns none Correct answer.
  3. It earns interest for only one year, because deposits stop after three years
  4. It earns interest for three years, like every other deposit

Explanation

In an ordinary annuity the first deposit sits in the account from the end of year one to the end of year three, a span of two years. The final deposit is made at the valuation date and therefore earns nothing.

Question 49Time value of money

A quoted rate of 18% per year is compounded monthly. Which rate should be used to discount a payment that arrives in one month?

  1. 1.5% per month Correct answer.
  2. 9% per month
  3. 0.18% per month
  4. 18% per month

Explanation

The periodic monthly rate is the nominal annual rate divided by twelve: 18% ÷ 12 = 1.5%. The number of periods must then be expressed in months to stay consistent.

Question 50Time value of money

A project costs $12,000 today and returns $5,000 at the end of each of the next three years. At a 10% discount rate, what is the net present value closest to?

  1. −$433
  2. $2,434
  3. $433 Correct answer.
  4. $3,000

Explanation

The three-year annuity factor at 10% is about 2.4869, so the inflows are worth roughly $12,434 today. Subtracting the $12,000 outlay leaves a net present value of about $433.