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
The DuPont analysis breaks Return on Equity (ROE) into which three components?
Answer: Net profit margin, asset turnover, and equity multiplier
DuPont analysis decomposes ROE into net profit margin × asset turnover × equity multiplier, revealing whether profitability, efficiency, or leverage drives returns.
A company's book value per share is $20 and its market price per share is $60. Its price-to-book (P/B) ratio is:
Answer: 3.0
P/B ratio = Market Price per Share / Book Value per Share = $60 / $20 = 3.0, meaning investors pay three times the net asset value recorded on the balance sheet.
Which of the following scenarios would cause an increase in a company's cash from operating activities without increasing net income?
Answer: Collecting receivables faster, reducing accounts receivable
A decrease in accounts receivable represents cash collected from customers in excess of new credit sales, boosting operating cash flow without affecting net income.
What is the primary limitation of ratio analysis when comparing two companies?
Answer: Differences in accounting policies and fiscal year-ends can make comparisons misleading
Different accounting choices (e.g., depreciation method, inventory valuation) and differing fiscal periods can distort ratio comparisons between companies even within the same industry.
An analyst notices that a company's revenue grew 20% while its cash from operations declined. Which situation best explains this divergence?
Answer: Large increases in accounts receivable suggest revenue was recognized but not yet collected
Revenue growth paired with rising accounts receivable indicates that sales are being recorded on credit but cash has not been collected, reducing operating cash flow relative to reported income.
Which of the following best describes the difference between solvency and liquidity?
Answer: Solvency refers to a firm's ability to meet long-term obligations; liquidity refers to the ability to meet short-term obligations
Liquidity concerns whether a firm can meet obligations due within the near term, while solvency assesses long-run financial health and the ability to repay all debts over time.
Under vertical analysis of a balance sheet, each item is expressed as a percentage of:
Answer: Total assets
In a common-size balance sheet (vertical analysis), every line item is expressed as a percentage of total assets, allowing structural comparisons across periods or companies.