CAT Financial Statement Analysis 2

Question 1

A company's current ratio is 2.5 and its quick ratio is 0.8. What does this significant difference indicate?

Accepted Answer

The company carries a large amount of inventory

Answer

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.

Question 2

Which financial statement presents revenues and expenses over a specific accounting period?

Accepted Answer

Income statement

Answer

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.

Question 3

When analyzing a common-size income statement, each line item is expressed as a percentage of:

Accepted Answer

Net revenue

Answer

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.

Question 4

A firm reports net income of $80,000 and average total assets of $640,000. What is its Return on Assets (ROA)?

Accepted Answer

12.5%

Answer

ROA = Net Income / Average Total Assets = $80,000 / $640,000 = 12.5%, measuring how efficiently assets generate profit.

Question 5

Which of the following is classified as a non-cash item that reduces net income but not operating cash flow?

Accepted Answer

Depreciation

Answer

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.

(CAT) Certified Accounting Technician Practice Test

(CAT) Certified Accounting Technician Practice Test

CAT Financial Statement Analysis 2