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.

• AA. Incorrect. Market price to book value describes the price-to-book (P/B) ratio, not P/E.
• BB. Correct. P/E ratio = market price per share ÷ earnings per share.
• CC. Incorrect. Earnings per share to dividends per share relates to the dividend payout ratio, not P/E.
• DD. Incorrect. Market price to sales per share describes the price-to-sales ratio, not P/E.

• Source: FINRA Investor Education: Evaluating Stocks, accessed October 2026

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.

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

• Source: SEC: Beginners' Guide to Financial Statements, accessed October 2026

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.

• AA. 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.
• BB. 2:1 does not reflect the exclusion of inventory and prepaid expenses required for the quick ratio calculation.
• CC. 1.5:1 doesn't match the precise result of dividing $550,000 by $400,000.
• DD. 1:1 understates the ratio and doesn't correspond to the correct numerator/denominator here.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

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 owners' equity at a single point in time. The statement of financial position at a specific date describes the balance sheet, not the income statement. Likewise, a listing of assets, liabilities, and owners' equity is the balance sheet's content. The claim that income statements are prepared annually and not for interim periods is factually wrong, because companies routinely prepare quarterly (10-Q) and annual (10-K) income statements.

• AA. This describes the balance sheet, which is a snapshot of financial position at one date. The income statement covers a span of time instead.
• BB. Correct. The income statement reports revenues, expenses, and the resulting net income over a period such as a quarter or year, unlike the balance sheet's point-in-time snapshot.
• CC. Assets, liabilities, and owners' equity are the three components of the balance sheet. The income statement reports revenues and expenses and arrives at net income.
• DD. Income statements are routinely prepared for interim periods such as quarters, and often monthly for internal use. Nothing limits them to annual preparation, and the reporting frequency does not distinguish the income statement from the balance sheet anyway.

• Source: SEC: Beginners' Guide to Financial Statements, accessed October 2026

Correct answer: A. 12:1

The price-to-earnings ratio is calculated as market price per share divided by earnings per share: $60 ÷ $5 = 12, expressed as 12:1 (or '12 times earnings'). Choice B is the inverted calculation (earnings yield, not P/E). Choices C and D do not follow the correct formula.

• AA. P/E = price / EPS = $60 / $5 = 12, which is correct.
• BB. This inverts the calculation (EPS/price) rather than price/EPS, giving the earnings yield, not the P/E ratio.
• CC. This figure would only result from a much larger price or much smaller EPS than given; it doesn't match $60/$5.
• DD. This doesn't correspond to dividing $60 by $5 and misstates the ratio.

• Source: FINRA Investor Education: Evaluating Stocks, accessed October 2026

Correct answer: C. 20.0%

Return on equity = Net Income / Average Stockholders' Equity = $80,000 / $400,000 = 0.20, or 20.0%, measuring how efficiently the company generates profit from shareholders' invested capital.

• AA. This understates ROE; dividing net income by equity ($80,000 ÷ $400,000) actually gives 20%, not 5%.
• BB. This appears to divide the figures the wrong way or misplace a decimal; the correct calculation of $80,000 ÷ $400,000 yields 20%, not 16%.
• CC. Correct. ROE = net income ÷ average stockholders' equity = $80,000 ÷ $400,000 = 20.0%.
• DD. This overstates ROE; it doesn't match dividing $80,000 by $400,000, which correctly produces 20%, not 32%.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: D. A current ratio of 0.5, indicating the company may have difficulty meeting short-term obligations from current assets alone.

The current ratio is calculated as current assets divided by current liabilities: $2 million / $4 million = 0.5. A current ratio below 1.0 means current liabilities exceed current assets, signaling potential short-term liquidity strain; the company may struggle to cover obligations coming due within the next year using only assets expected to convert to cash within that period. This differs from the quick (acid-test) ratio, which further excludes inventory from current assets, but that refinement is not needed to calculate the basic current ratio here.

• AA. Wrong: this inverts the calculation; with assets of $2M and liabilities of $4M, the ratio is not 2.0.
• BB. Wrong: the basic current ratio only requires total current assets and current liabilities; inventory detail is only needed for the quick ratio, a different, more conservative measure.
• CC. Wrong: a ratio of 1.0 would require current assets to equal current liabilities, which is not the case here ($2M vs. $4M).
• DD. Correct: $2 million divided by $4 million equals 0.5, correctly reflecting weaker short-term liquidity since current liabilities exceed current assets.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: A. $1.11

Basic EPS is calculated as (net income − preferred dividends) ÷ weighted average common shares outstanding. Preferred dividends here total 500,000 × $2 = $1,000,000, leaving $1,000,000 of income available to common shareholders. Dividing by 900,000 common shares yields approximately $1.11 per share. Choice B fails to subtract preferred dividends before dividing. Choice C incorrectly divides net income by the preferred share count. Choice D does not correspond to a correctly applied formula.

• AA. Correct. Preferred dividends of $1,000,000 (500,000 x $2) are subtracted from net income of $2,000,000, leaving $1,000,000 available to common, divided by 900,000 shares = $1.11.
• BB. $2.22 results from failing to subtract the preferred dividend before dividing by common shares, effectively double-counting income available to common.
• CC. $4.00 divides net income by preferred shares outstanding, which is not how basic EPS for common stock is calculated.
• DD. $1.33 does not correctly subtract the full preferred dividend obligation from net income before dividing by common shares outstanding.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026