CFM CFM Financial Reporting & Analysis 2 — Questions and Answers
Question 1: Which ratio measures the percentage of earnings paid out as dividends to shareholders?
- Dividend Yield
- Payout Ratio (Correct answer)
- Earnings Per Share
- Price-to-Earnings Ratio
Correct answer: Payout Ratio
The payout ratio (dividends paid ÷ net income) shows what percentage of profits are distributed to shareholders as dividends.
Question 2: What does a Days Sales Outstanding (DSO) ratio indicate?
- How many days inventory sits before being sold
- The average number of days to collect payment after a sale (Correct answer)
- How long it takes to pay suppliers
- The number of days of operating expenses covered by cash
Correct answer: The average number of days to collect payment after a sale
DSO measures the average number of days a company takes to collect payment from customers after a credit sale, indicating accounts receivable efficiency.
Question 3: Under the indirect method of the cash flow statement, net income is adjusted for which of the following?
- Cash dividends paid to shareholders
- Non-cash items and changes in working capital (Correct answer)
- Capital expenditures
- Proceeds from long-term debt
Correct answer: Non-cash items and changes in working capital
The indirect method starts with net income and adjusts for non-cash items (e.g., depreciation) and changes in working capital accounts to arrive at operating cash flow.
Question 4: Which of the following would be classified as a financing activity on the cash flow statement?
- Purchase of equipment
- Collection of accounts receivable
- Issuance of common stock (Correct answer)
- Payment to suppliers
Correct answer: Issuance of common stock
Issuance of common stock is a financing activity because it involves raising capital from shareholders, which changes the company's equity structure.
Question 5: A company has total assets of $500,000 and total liabilities of $200,000. What is the debt-to-equity ratio?
- 0.40
- 0.67 (Correct answer)
- 1.50
- 2.50
Correct answer: 0.67
Total equity = $500,000 - $200,000 = $300,000; Debt-to-Equity = $200,000 / $300,000 = 0.67.
Question 6: Which financial analysis technique compares each line item on the income statement as a percentage of net sales?
- Horizontal analysis
- Vertical analysis (Correct answer)
- Trend analysis
- Ratio analysis
Correct answer: Vertical analysis
Vertical analysis expresses each line item as a percentage of a base figure (typically net sales for the income statement), enabling easy comparison across periods or companies.
CFM CFM Financial Reporting & Analysis 2
Which ratio measures the percentage of earnings paid out as dividends to shareholders?