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's quick ratio is 0.8 while its current ratio is 2.1. What does this significant gap most likely indicate?
Answer: The company holds a large amount of inventory relative to current liabilities
A large gap between the current ratio and quick ratio indicates inventory makes up a substantial portion of current assets, since inventory is excluded from the quick ratio.
Which financial statement best shows a company's ability to generate cash from its core operations?
Answer: Statement of cash flows — operating activities section
The operating activities section of the cash flow statement isolates cash generated or consumed by the company's primary business operations.
A credit analyst notices a company's days sales outstanding (DSO) increased from 35 to 58 days over two years. What is the most likely concern?
Answer: Customers are taking longer to pay, signaling potential collection problems
Rising DSO indicates customers are taking longer to pay, which could signal collection difficulties, deteriorating customer quality, or loosened credit standards.
Under the indirect method of preparing the cash flow statement, depreciation is added back to net income because:
Answer: It is a non-cash expense that reduced net income but did not use cash
Depreciation is a non-cash charge that reduces net income on the income statement but involves no actual cash outflow, so it is added back under the indirect method.
A company reports EBITDA of $5M but operating cash flow of only $1.2M. Which factor most likely explains this large discrepancy?
Answer: Significant increases in working capital are consuming cash
Large increases in working capital (e.g., rising receivables or inventory) can absorb cash and create a wide gap between EBITDA and actual operating cash flow.
What does a negative tangible net worth indicate about a company?
Answer: Intangible assets and goodwill exceed total equity, suggesting high leverage or past acquisitions financed by debt
Negative tangible net worth means that when intangibles are removed from equity, liabilities exceed tangible assets, a warning sign for creditors assessing collateral coverage.
Which ratio directly measures how efficiently a company converts its assets into revenue?
Answer: Asset turnover ratio
The asset turnover ratio (net sales ÷ total assets) measures how efficiently management uses its asset base to generate revenue.