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
Which ratio measures how effectively a company uses its assets to generate sales?
Answer: Asset turnover ratio
Asset turnover ratio = Net Sales / Average Total Assets, reflecting how efficiently management deploys assets to produce revenue.
Operating leverage refers to the extent to which a company uses:
Answer: Fixed costs relative to variable costs in its cost structure
Operating leverage measures the proportion of fixed operating costs; a higher fixed cost base amplifies the effect of sales changes on operating income.
On a balance sheet, which of the following is an example of a contra-asset account?
Answer: Accumulated depreciation
Accumulated depreciation offsets the gross value of fixed assets and is presented as a contra-asset, reducing the book value of property, plant, and equipment.
A company with an interest coverage ratio of 1.2 most likely:
Answer: Barely covers interest payments from operating earnings
An interest coverage ratio near 1.0 means operating income barely covers interest expense, leaving little margin for safety and signaling potential solvency risk.
When using the indirect method for the cash flow statement, a decrease in accounts payable is treated as:
Answer: A subtraction from net income
A decrease in accounts payable means the company paid suppliers more than it incurred in new payables, representing a cash outflow subtracted from net income in the operating section.
Goodwill appears on a company's balance sheet when:
Answer: One company acquires another for more than the fair value of its net identifiable assets
Goodwill arises only in business combinations when the purchase price exceeds the fair value of the acquired entity's identifiable net assets.
Which profitability ratio is most useful when comparing companies with different capital structures?
Answer: Return on assets (ROA)
ROA measures profitability relative to total assets before considering how those assets are financed, making it more comparable across companies with varying debt levels.