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
A company reports a significant increase in 'other assets' on the balance sheet with no corresponding disclosure. Why should a credit analyst flag this?
Answer: Unexplained growth in vague asset categories may indicate capitalized expenses, deferred losses, or window dressing to inflate the balance sheet
Opaque 'other asset' categories can conceal impaired assets, improperly capitalized costs, or fictitious entries — requiring analyst scrutiny and management explanation.
Which of the following describes a 'Z-score' model in the context of financial statement analysis?
Answer: A quantitative bankruptcy prediction model that combines multiple financial ratios into a single score to assess default risk
The Altman Z-score uses a weighted combination of financial ratios (working capital, retained earnings, EBIT, equity, and sales — all relative to assets or liabilities) to predict bankruptcy probability.
A company's net profit margin is 12%, but its operating profit margin is 22%. What does this gap primarily reflect?
Answer: Below-the-line items such as interest expense, taxes, and non-operating losses are significantly reducing net income
The difference between operating margin and net margin reflects interest expense, income taxes, and other non-operating items that occur below the operating income line.
When assessing earnings quality, which of the following signals that reported earnings may be of LOW quality?
Answer: A large and growing gap where net income significantly exceeds operating cash flow year after year
When net income persistently exceeds operating cash flow, it suggests aggressive accrual accounting — revenues may be recognized early or expenses deferred, inflating reported earnings.
A company's balance sheet shows goodwill equal to 60% of total assets following an acquisition. What is the primary credit risk this creates?
Answer: A large goodwill impairment could drastically reduce equity and tangible net worth, weakening the borrower's financial position
Goodwill is subject to impairment testing and can be written down significantly if the acquired business underperforms, which would sharply reduce reported equity and net worth.
Which of the following best explains why a company might show declining revenue but improving net income?
Answer: Cost-cutting measures, elimination of unprofitable product lines, or lower interest expense have improved margins despite lower sales
Revenue can fall while net income rises if the company improves cost efficiency, exits low-margin businesses, reduces debt (lowering interest), or benefits from favorable tax changes.
When spreading financial statements for credit analysis, what is the purpose of making 'normalizing adjustments' to reported financials?
Answer: To remove one-time, non-recurring items so that the adjusted financials reflect the company's ongoing earning power and true financial condition
Normalizing adjustments strip out non-recurring items (e.g., asset sale gains, restructuring charges) to reveal sustainable earnings and cash flow, giving a clearer picture of creditworthiness.