Banking Exam Financial Statement Analysis 5

Question 1

A company's inventory turnover ratio decreased from 8x to 4x. Which of the following is the most concerning interpretation?

Accepted Answer

The company may have obsolete or slow-moving inventory

Answer

A falling inventory turnover ratio means goods are sitting longer before being sold, which raises the risk of inventory becoming obsolete and needing write-downs.

Question 2

Under IFRS, research costs are:

Accepted Answer

Expensed as incurred

Answer

IFRS requires research costs to be expensed as incurred; only development costs meeting specific criteria may be capitalized.

Question 3

Which of the following would cause a company's operating leverage to be highest?

Accepted Answer

High fixed costs and low variable costs

Answer

High fixed costs create high operating leverage because a small change in revenue produces a large change in operating income.

Question 4

A bank credit analyst is adjusting a borrower's EBITDA for non-recurring items. Which adjustment is most appropriate?

Accepted Answer

Removing one-time litigation settlement gains from adjusted EBITDA

Answer

Non-recurring gains like litigation settlements should be removed from EBITDA because they will not recur and overstate the borrower's sustainable cash-generating ability.

Question 5

A leveraged buyout (LBO) target's financial statements show high EBITDA but very low free cash flow. The most likely cause is:

Accepted Answer

High capital expenditure requirements

Answer

High capex requirements consume cash generated from operations, resulting in low free cash flow despite strong EBITDA.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Financial Statement Analysis 5