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Financial Statement Analysis Flashcards

7 cards from real Banking Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A company's days sales outstanding (DSO) increased from 30 to 55 days year-over-year. What does this most likely indicate?

    Answer: Customers are taking longer to pay invoices

    A rising DSO means accounts receivable are taking longer to convert to cash, signaling potential collection problems or looser credit policies.

  2. Which financial statement best reflects a company's ability to meet its long-term obligations?

    Answer: Balance sheet

    The balance sheet shows total assets versus total liabilities, revealing whether long-term assets adequately cover long-term debt obligations.

  3. When performing a common-size income statement analysis, each line item is expressed as a percentage of:

    Answer: Total revenue

    Common-size income statements divide every line item by total revenue, enabling comparison across companies of different sizes.

  4. A bank analyst notices that a borrower's interest coverage ratio fell from 4.5x to 1.2x. This change primarily signals:

    Answer: Significantly weakened ability to service debt from operating earnings

    An interest coverage ratio of 1.2x means EBIT barely covers interest expense, indicating high default risk compared to the prior 4.5x reading.

  5. Under GAAP, which inventory costing method typically results in the lowest net income during a period of rising prices?

    Answer: LIFO

    LIFO assigns the most recent (higher) costs to cost of goods sold first, reducing gross profit and net income when prices are rising.

  6. A company reports operating cash flow of $500K but net income of $900K. The most likely explanation is:

    Answer: Significant increases in accounts receivable or inventory

    When operating cash flow is much lower than net income, it typically means working capital items like receivables or inventory consumed cash that was recognized as revenue.

  7. Which ratio measures how efficiently a company uses its assets to generate sales?

    Answer: Asset turnover ratio

    Asset turnover (Net Sales ÷ Average Total Assets) indicates how many dollars of revenue are generated per dollar of assets employed.