Financial Statement Analysis Flashcards
7 cards from real CAT 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 current ratio is 2.5 and its quick ratio is 0.8. What does this significant difference indicate?
Answer: The company carries a large amount of inventory
A large gap between current ratio and quick ratio indicates that inventory makes up a significant portion of current assets, since quick ratio excludes inventory.
Which financial statement presents revenues and expenses over a specific accounting period?
Answer: Income statement
The income statement (also called profit and loss statement) summarizes revenues, expenses, and net income over a defined period such as a quarter or fiscal year.
When analyzing a common-size income statement, each line item is expressed as a percentage of:
Answer: Net revenue
In a common-size income statement, all items are expressed as a percentage of net revenue (or net sales), enabling comparison across companies of different sizes.
A firm reports net income of $80,000 and average total assets of $640,000. What is its Return on Assets (ROA)?
Answer: 12.5%
ROA = Net Income / Average Total Assets = $80,000 / $640,000 = 12.5%, measuring how efficiently assets generate profit.
Which of the following is classified as a non-cash item that reduces net income but not operating cash flow?
Answer: Depreciation
Depreciation is a non-cash charge that reduces net income on the income statement but is added back in the operating section of the cash flow statement.
If a company's days sales outstanding (DSO) increases significantly from one year to the next, this most likely indicates:
Answer: The company is collecting receivables more slowly
A rising DSO means more days are needed to collect receivables, suggesting customers are taking longer to pay or credit policy has loosened.
Horizontal analysis compares financial statement data by:
Answer: Comparing figures across multiple time periods to identify trends
Horizontal analysis (trend analysis) compares financial data across two or more periods to identify growth rates, patterns, and changes over time.