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.
Read the first 7 Financial Statement Analysis flashcards as text
A company's quick ratio is 0.6 while its current ratio is 2.1. The large discrepancy is most likely due to:
Answer: A significant amount of inventory relative to current assets
The quick ratio excludes inventory, so a big gap between quick and current ratios indicates inventory makes up a large portion of current assets.
When a lender performs vertical analysis on a borrower's balance sheet, what is typically used as the base (100%)?
Answer: Total assets
In balance sheet vertical analysis, total assets serve as the base, so each asset, liability, and equity item is shown as a percentage of total assets.
Which of the following best describes goodwill on a balance sheet?
Answer: The excess purchase price paid over the fair value of identifiable net assets in an acquisition
Goodwill represents the premium paid in an acquisition above the fair value of identifiable net assets, reflecting brand, customer relationships, and synergies.
An analyst reviewing trend analysis observes a company's gross margin shrinking from 42% to 31% over three years. This most likely indicates:
Answer: Rising cost of goods sold relative to revenue
A falling gross margin means the cost of producing or purchasing goods is rising faster than sales prices, compressing profitability at the production level.
Which section of the cash flow statement would reflect a company's purchase of a new manufacturing facility?
Answer: Investing activities
Purchases of long-term assets such as property, plant, and equipment are classified as investing activities on the cash flow statement.
A borrower's financial statements show a debt service coverage ratio (DSCR) of 0.85. How should a bank analyst interpret this?
Answer: The borrower's cash flow is insufficient to cover principal and interest payments
A DSCR below 1.0 means the borrower's net operating income does not fully cover debt service obligations, indicating a cash flow shortfall.
Which financial ratio would a bank most likely use to assess a company's short-term liquidity position?
Answer: Current ratio
The current ratio (Current Assets ÷ Current Liabilities) measures whether a company has enough short-term assets to cover short-term obligations.