Financial Statement Analysis Flashcards
7 cards from real CCM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Statement Analysis flashcards as text
Which of the following best describes 'off-balance-sheet financing' and why it concerns credit analysts?
Answer: Obligations such as operating leases or special purpose entities that create real financial obligations not shown as debt on the balance sheet
Off-balance-sheet financing hides true leverage, so stated debt ratios understate actual financial obligations and risk, requiring analysts to adjust financial statements.
A company switches its inventory accounting method from FIFO to LIFO during a period of rising prices. What is the immediate impact on reported gross profit?
Answer: Gross profit decreases because LIFO matches the most recent (higher) costs to revenue
Under LIFO in a rising price environment, the most recently purchased (higher cost) inventory is expensed first, increasing COGS and reducing reported gross profit.
Which financial metric is most useful for comparing the capital structure risk of companies with different tax rates and interest expense levels?
Answer: EBIT-based interest coverage ratio
The interest coverage ratio using EBIT isolates operating earnings before tax and interest effects, enabling fair leverage comparisons across companies with different tax and financing structures.
A company's accounts payable days outstanding increased from 30 to 75 days over 18 months. How should a credit analyst interpret this?
Answer: The company may be stretching payables due to cash flow pressure, which could strain supplier relationships
Rapidly increasing payable days often signals cash flow stress, as the company delays payments to suppliers — a warning sign of liquidity deterioration.
Return on equity (ROE) can be decomposed using the DuPont formula. Which three components make up the standard DuPont analysis?
Answer: Net profit margin, asset turnover, and equity multiplier (financial leverage)
The DuPont framework breaks ROE into net profit margin (profitability) × asset turnover (efficiency) × equity multiplier (leverage), revealing the drivers of shareholder returns.
A company's free cash flow (FCF) is consistently negative despite positive EBITDA. Which of the following is the most likely explanation?
Answer: High capital expenditure requirements or large working capital increases are consuming all operating cash
Free cash flow equals operating cash flow minus capital expenditures; heavy capex demands or working capital growth can drain all cash generated even when EBITDA is strong.
When analyzing a consolidated financial statement, what should a credit analyst be aware of regarding minority interest?
Answer: Minority interest represents the ownership portion of subsidiaries not owned by the parent, and consolidated debt includes 100% of subsidiary debt even if not fully owned
Consolidated statements include 100% of subsidiary assets and liabilities even when ownership is less than 100%, so the parent bears full debt exposure while earnings attributable to minority owners are subtracted.