APP Financial Analysis & Reporting 2 — Questions and Answers
Question 1: Which financial metric measures a company's ability to meet short-term obligations using only its most liquid assets?
- Current ratio
- Quick ratio (Correct answer)
- Debt-to-equity ratio
- Inventory turnover
Correct answer: Quick ratio
The quick ratio excludes inventory from current assets, providing a stricter measure of immediate liquidity than the current ratio.
Question 2: A purchasing practitioner reviews a supplier's financial statements and finds that Days Sales Outstanding (DSO) has increased significantly. This typically indicates:
- Improved cash collection efficiency
- Slower customer payment or weaker credit policies (Correct answer)
- Higher sales volume
- Reduced operating costs
Correct answer: Slower customer payment or weaker credit policies
Rising DSO means it takes longer to collect receivables, signaling potential cash flow problems or loosened credit terms.
Question 3: When evaluating total cost of ownership (TCO), which cost category is typically the hardest to quantify?
- Purchase price
- Shipping and freight
- Supplier failure and switching costs (Correct answer)
- Import duties
Correct answer: Supplier failure and switching costs
Costs tied to supplier failure, rework, and switching are often hidden and require estimation, making them the most difficult TCO component to quantify.
Question 4: EBITDA is most commonly used in procurement financial analysis to:
- Calculate net profit after taxes
- Assess a supplier's operational cash generation before financing and accounting choices (Correct answer)
- Measure return on equity
- Determine inventory carrying costs
Correct answer: Assess a supplier's operational cash generation before financing and accounting choices
EBITDA strips out interest, taxes, depreciation, and amortization to give a cleaner view of operational profitability across suppliers.
Question 5: A supplier presents a price increase citing rising raw material costs. Which financial document would best help you verify this claim?
- Balance sheet
- Income statement cost of goods sold detail (Correct answer)
- Statement of retained earnings
- Notes payable schedule
Correct answer: Income statement cost of goods sold detail
The income statement's COGS section shows material cost trends over time, allowing direct verification of the supplier's cost increase claim.
Question 6: In capital budgeting for procurement decisions, the payback period method's primary weakness is that it:
- Is too complex to calculate
- Ignores the time value of money and cash flows beyond the payback period (Correct answer)
- Overestimates project risk
- Requires a discount rate
Correct answer: Ignores the time value of money and cash flows beyond the payback period
Payback period simply counts years to recoup investment without discounting future cash flows or considering profitability after breakeven.
Question 7: A purchasing team uses spend analysis to segment suppliers using Pareto analysis. Typically, what percentage of suppliers account for approximately 80% of spend?
- 80%
- 50%
- 20% (Correct answer)
- 35%
Correct answer: 20%
Pareto's 80/20 rule holds that roughly 20% of suppliers typically drive about 80% of total procurement spend.
APP Financial Analysis & Reporting 2
Which financial metric measures a company's ability to meet short-term obligations using only its most liquid assets?