Free DSST Principles of Finance Practice Questions

Sample Practice Questions

Try these 10 sample questions from the DSST Principles of Finance practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1Which financial statement reports a company's assets, liabilities, and shareholders' equity at a particular date?

   1. A.Balance sheetCorrect answer: A
   2. B.Income statement
   3. C.Cash flow statement
   4. D.Statement of shareholders' equity

   Explanation: The SEC explains: "A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity." The balance sheet presents these balances at a point in time; the other statements report performance, cash movement, or changes in equity over a period.

   Reference: Beginners' Guide to Financial Statements — Balance Sheets

2. 2A payment of $1,210 is due two years from now. With a 10% annual discount rate and annual compounding, what is its present value?

   1. A.$1,100
   2. B.$1,000Correct answer: B
   3. C.$1,210
   4. D.$1,464.10

   Explanation: The source states: "Solving for the present value (discounted value) of a lump sum is the exact opposite of solving for a future value." Discount two years: $1,210 ÷ 1.10² = $1,000. One discount period, no discounting, or compounding forward produces the other choices.

   Reference: Principles of Finance, 7.3 Methods for Solving Time Value of Money Problems — Example 2: Present Value of Lump Sums

3. 3A supplier permits a business to receive inventory now and pay the invoice later. What short-term financing arrangement is this?

   1. A.A revolving bank credit line
   2. B.A trade credit accountCorrect answer: B
   3. C.A short-term bank loan
   4. D.A commercial paper issue

   Explanation: The source states: "purchases of inventory and services can be made on trade credit accounts—allowing the purchaser time to pay." The deferred supplier invoice creates trade credit; the other choices describe financing from a bank or investors.

   Reference: Principles of Finance, 19.2 What Is Trade Credit? — What Is Trade Credit?

4. 4A $1,000 face-value bond has a 6% annual coupon paid semiannually. How much is each coupon payment?

   1. A.$15
   2. B.$30Correct answer: B
   3. C.$60
   4. D.$120

   Explanation: The source states: "if a bond pays interest on a semiannual or quarterly basis, the coupon rate will have to be divided by 2 or 4, respectively" The semiannual rate is 6%/2 = 3%; $1,000 × 3% = $30.

   Reference: Principles of Finance, 10.1 Characteristics of Bonds — Characteristics of Bonds, Coupon payment

5. 5Which purchase is an example of a capital expenditure for a manufacturing company?

   1. A.Paper used this month in the office
   2. B.A machine expected to produce goods for seven yearsCorrect answer: B
   3. C.Routine monthly utility service
   4. D.Inventory intended for resale this month

   Explanation: The source states: "the benefits from capital expenditures extend beyond one year." A long-lived production machine provides benefits over several years; routine supplies, utilities and resale inventory are short-term operating items.

   Reference: Introduction to Business, 16.2 How Organizations Use Funds — Long-Term Expenditures

6. 6To estimate a firm's current before-tax debt cost from traded bonds, which rate incorporates their current price and all promised payments through maturity?

   1. A.The bonds' original coupon rate
   2. B.The current yield to maturityCorrect answer: B
   3. C.The current coupon yield alone
   4. D.The historical borrowing rate when issued

   Explanation: The source states: "The YTM of 6.312% represents what investors are currently requiring to purchase the debt issued by the company." Yield to maturity includes the current price and promised cash flows; coupon and historical rates do not generally do so.

   Reference: Principles of Finance, 17.2 The Costs of Debt and Equity Capital — Yield to Maturity and the Cost of Debt

7. 7An asset has a 40% probability of returning 20% and a 60% probability of returning −5%. What is its expected return?

   1. A.3%
   2. B.5%Correct answer: B
   3. C.7.5%
   4. D.15%

   Explanation: The source states: "expected value is a weighted mean where the probabilities form the weights." 0.40 × 20% + 0.60 × (−5%) = 5%. An unweighted average or ignoring the loss gives a different value.

   Reference: Principles of Finance, 13.5 Probability Distributions — Calculate and Interpret Expected Values

8. 8A company receives ¥1,200,000 when the exchange rate is ¥120 per U.S. dollar. Ignoring transaction costs, how many dollars does it receive?

   1. A.$1,000
   2. B.$10,000Correct answer: B
   3. C.$100,000
   4. D.$144,000,000

   Explanation: The source example states: "If the company expects to have sales of JPY 50,000,000, it is expecting sales to be worth USD 500,000." At 120 yen per dollar, ¥1,200,000/120 = $10,000; multiplying rather than dividing or misplacing the decimal produces the other values.

   Reference: Principles of Finance, 20.3 Exchange Rates and Risk — Projecting Sales in US Dollars

9. 9A company reports net revenue of $900,000 and cost of sales of $540,000. What is its gross profit?

   1. A.$1,440,000
   2. B.$360,000Correct answer: B
   3. C.$540,000
   4. D.$900,000

   Explanation: The SEC explains that one "subtracts the costs of sales from the net revenues to arrive at a subtotal" called gross profit. Gross profit is $900,000 minus $540,000, or $360,000. Adding the figures, reporting cost of sales alone, or reporting net revenue alone does not perform this subtraction.

   Reference: Beginners' Guide to Financial Statements — Income Statements

10. 10For a fixed positive payment received in five years, what happens to its present value if the annual discount rate increases from 5% to 8%?

    1. A.It increases because interest accumulates faster.
    2. B.It remains unchanged because the payment is fixed.
    3. C.It decreases because the payment is discounted more heavily.Correct answer: C
    4. D.It becomes negative because the rate is positive.

    Explanation: The source states: "Solving for the present value (discounted value) of a lump sum is the exact opposite of solving for a future value." With time and the future payment held fixed, a higher positive rate increases the compounding divisor, so present value falls.

    Reference: Principles of Finance, 7.3 Methods for Solving Time Value of Money Problems — Example 2: Present Value of Lump Sums