CAT Financial Statement Analysis 3

Question 1

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

Accepted Answer

2.0

Answer

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

Question 2

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

Accepted Answer

Investing activities

Answer

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

Question 3

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

Accepted Answer

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

Answer

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

Question 4

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

Accepted Answer

Higher gross profit

Answer

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.

Question 5

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

Accepted Answer

Operating cash-generating ability independent of financing and accounting decisions

Answer

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

(CAT) Certified Accounting Technician Practice Test

(CAT) Certified Accounting Technician Practice Test

CAT Financial Statement Analysis 3