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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.

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  1. A company has total debt of $500,000 and total equity of $250,000. What is its debt-to-equity ratio?

    Answer: 2.0

    Debt-to-equity ratio = Total Debt / Total Equity = $500,000 / $250,000 = 2.0, indicating $2 of debt for every $1 of equity.

  2. Which section of the statement of cash flows reflects the purchase of equipment?

    Answer: Investing activities

    Purchasing equipment is a capital expenditure recorded under investing activities, as it involves acquiring long-term assets.

  3. What does a price-to-earnings (P/E) ratio measure?

    Answer: The market price investors are willing to pay per dollar of earnings

    The P/E ratio = Market Price per Share / Earnings per Share, indicating how much investors pay for each dollar of the company's earnings.

  4. When FIFO inventory method is used during a period of rising prices, compared to LIFO, the income statement will show:

    Answer: Higher gross profit

    Under FIFO during rising prices, older (cheaper) costs are matched against revenue, leaving higher gross profit compared to LIFO which uses newer, costlier units first.

  5. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is used primarily to assess:

    Answer: Operating cash-generating ability independent of financing and accounting decisions

    EBITDA strips out interest, taxes, and non-cash charges to provide a measure of core operating performance and approximate operating cash flow.

  6. A company's acid-test (quick) ratio is calculated using:

    Answer: Cash + Marketable Securities + Net Receivables divided by Current Liabilities

    The quick ratio uses only the most liquid current assets (cash, short-term investments, and net receivables) divided by current liabilities, excluding inventory and prepaid expenses.

  7. What does a declining gross profit margin over multiple periods most likely signal?

    Answer: Increasing cost of production relative to sales prices

    A falling gross profit margin indicates that cost of goods sold is rising faster than revenue, reflecting pricing pressure, higher input costs, or both.