Banking Exam Financial Statement Analysis 2 — Questions and Answers
Question 1: A company's days sales outstanding (DSO) increased from 30 to 55 days year-over-year. What does this most likely indicate?
- Improved collections efficiency
- Customers are taking longer to pay invoices (Correct answer)
- The company extended its payment terms to suppliers
- Revenue recognition was accelerated
Correct answer: Customers are taking longer to pay invoices
A rising DSO means accounts receivable are taking longer to convert to cash, signaling potential collection problems or looser credit policies.
Question 2: Which financial statement best reflects a company's ability to meet its long-term obligations?
- Income statement
- Statement of retained earnings
- Balance sheet (Correct answer)
- Statement of cash flows
Correct answer: Balance sheet
The balance sheet shows total assets versus total liabilities, revealing whether long-term assets adequately cover long-term debt obligations.
Question 3: When performing a common-size income statement analysis, each line item is expressed as a percentage of:
- Total assets
- Net income
- Total revenue (Correct answer)
- Gross profit
Correct answer: Total revenue
Common-size income statements divide every line item by total revenue, enabling comparison across companies of different sizes.
Question 4: A bank analyst notices that a borrower's interest coverage ratio fell from 4.5x to 1.2x. This change primarily signals:
- Improved profitability relative to debt
- Reduced risk of default
- Significantly weakened ability to service debt from operating earnings (Correct answer)
- A decrease in total debt outstanding
Correct answer: Significantly weakened ability to service debt from operating earnings
An interest coverage ratio of 1.2x means EBIT barely covers interest expense, indicating high default risk compared to the prior 4.5x reading.
Question 5: Under GAAP, which inventory costing method typically results in the lowest net income during a period of rising prices?
- FIFO
- Weighted average
- LIFO (Correct answer)
- Specific identification
Correct answer: LIFO
LIFO assigns the most recent (higher) costs to cost of goods sold first, reducing gross profit and net income when prices are rising.
Question 6: A company reports operating cash flow of $500K but net income of $900K. The most likely explanation is:
- Large non-cash depreciation charges
- Significant increases in accounts receivable or inventory (Correct answer)
- A major cash dividend payment
- A large gain on asset sale included in operating income
Correct answer: Significant increases in accounts receivable or inventory
When operating cash flow is much lower than net income, it typically means working capital items like receivables or inventory consumed cash that was recognized as revenue.
Question 7: Which ratio measures how efficiently a company uses its assets to generate sales?
- Return on equity
- Asset turnover ratio (Correct answer)
- Debt-to-equity ratio
- Current ratio
Correct answer: Asset turnover ratio
Asset turnover (Net Sales ÷ Average Total Assets) indicates how many dollars of revenue are generated per dollar of assets employed.
Banking Exam Financial Statement Analysis 2
A company's days sales outstanding (DSO) increased from 30 to 55 days year-over-year.
What does this most likely indicate?