Banking Exam Financial Statement Analysis 2

Question 1

A company's days sales outstanding (DSO) increased from 30 to 55 days year-over-year. What does this most likely indicate?

Accepted Answer

Customers are taking longer to pay invoices

Answer

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?

Accepted Answer

Balance sheet

Answer

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:

Accepted Answer

Total revenue

Answer

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:

Accepted Answer

Significantly weakened ability to service debt from operating earnings

Answer

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?

Accepted Answer

LIFO

Answer

LIFO assigns the most recent (higher) costs to cost of goods sold first, reducing gross profit and net income when prices are rising.

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