Banking Exam Financial Statement Analysis 4

Question 1

When evaluating a company's earnings quality, which of the following is considered a red flag?

Accepted Answer

Net income is primarily driven by non-recurring gains

Answer

Net income driven mainly by one-time gains rather than core operations suggests poor earnings quality and may not be sustainable going forward.

Question 2

A company's return on equity (ROE) increases while return on assets (ROA) remains flat. Using DuPont analysis, this is most consistent with:

Accepted Answer

Increased financial leverage

Answer

ROE = ROA × Equity Multiplier; if ROA is unchanged but ROE rises, the equity multiplier (financial leverage) must have increased.

Question 3

Which accounting method recognizes revenue only when cash is received from the customer?

Accepted Answer

Cash basis

Answer

Cash basis accounting records revenue when cash is actually received, rather than when goods or services are delivered.

Question 4

An analyst finds that a company's book value per share is $25 but its market price is $60. This implies a price-to-book (P/B) ratio of:

Accepted Answer

2.4

Answer

P/B ratio = Market Price ÷ Book Value per Share = $60 ÷ $25 = 2.4, meaning the market values the company at 2.4 times its net assets.

Question 5

In bank lending, which financial statement is most critical for assessing a business borrower's repayment capacity?

Accepted Answer

Cash flow statement

Answer

The cash flow statement shows actual cash generated from operations, which is the primary source for debt repayment rather than accounting profits.

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