DSST Prep Financial Accounting Exam Questions & Answers 2026 (11–20)

Question 1

Gross profit is calculated as

TheoryPractice · Accepted Answer

Sales revenue minus cost of goods sold. Gross profit represents the difference between sales revenue and the direct cost of producing goods sold (cost of goods sold). It appears on the income statement.

Question 2

The DuPont analysis decomposes return on equity (ROE) into which three components?

TheoryPractice · Accepted Answer

Profit margin, asset turnover, and equity multiplier. The DuPont formula breaks ROE into profit margin (profitability), total asset turnover (efficiency), and equity multiplier (leverage): ROE = Profit Margin x Asset Turnover x Equity Multiplier.

Question 3

If a company's marginal tax rate is 35% and its average tax rate is 28%, which rate should be used for evaluating a new project?

TheoryPractice · Accepted Answer

The marginal tax rate of 35%. The marginal tax rate should be used for decision making because it represents the tax rate applied to the next dollar of income, which is relevant for evaluating incremental projects.

Question 4

Which of the following appears on both the income statement and the statement of cash flows?

TheoryPractice · Accepted Answer

Interest expense. Interest expense appears as an expense on the income statement and is also part of the operating activities section of the statement of cash flows (under the indirect method).

Question 5

The times interest earned ratio measures a company's ability to

TheoryPractice · Accepted Answer

Meet its interest obligations. The times interest earned ratio (EBIT divided by interest expense) measures how many times a company can cover its interest obligations with operating income, indicating solvency.

Question 6

Inventory turnover ratio is calculated as

TheoryPractice · Accepted Answer

Cost of goods sold divided by average inventory. Inventory turnover measures how many times inventory is sold and replaced during a period. It is calculated by dividing cost of goods sold by average inventory.

Question 7

Pro forma financial statements are used primarily for

TheoryPractice · Accepted Answer

Financial planning and forecasting. Pro forma statements are projected financial statements used for planning and forecasting future financial performance based on assumptions about future business conditions.

Question 8

On the statement of cash flows, the purchase of treasury stock would be classified as a

TheoryPractice · Accepted Answer

Financing activity. Treasury stock purchases involve the company buying back its own shares, which is a transaction with owners and therefore classified as a financing activity.

Question 9

The asset turnover ratio measures

TheoryPractice · Accepted Answer

How efficiently assets are used to generate sales. Asset turnover (Sales divided by Total Assets) measures how efficiently a company uses its assets to generate sales revenue. Higher turnover indicates better asset utilization.

Question 10

Which of the following would cause total stockholders' equity to increase?

TheoryPractice · Accepted Answer

Net income for the period. Net income increases retained earnings, which is a component of stockholders' equity. Profitable operations increase the equity of the company.

DSST Prep Financial Accounting Exam Questions & Answers 2026 (11–20)

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