Financial Planning & Analysis Flashcards

Which ratio measures how efficiently a company uses its assets to generate revenue?

Answer: Asset turnover ratio

Asset turnover ratio = Net Sales / Average Total Assets, measuring how effectively assets generate revenue.

A company uses FIFO inventory accounting. During a period of rising prices, what effect does this have on net income compared to LIFO?

Answer: Higher net income

FIFO assigns older, lower-cost inventory to COGS first, resulting in lower COGS and higher net income when prices are rising.

What is the purpose of a sensitivity analysis in financial planning?

Answer: To test how outcomes change when key assumptions vary

Sensitivity analysis examines how changes in one or more input variables affect a financial outcome, revealing which assumptions matter most.

An operator calculates EBITDA at $120,000 and interest expense at $20,000, depreciation at $15,000, and taxes at $10,000. What is net income?

Answer: $75,000

Net income = EBITDA − Depreciation − Interest − Taxes = $120,000 − $15,000 − $20,000 − $10,000 = $75,000.

Which of the following best describes the concept of working capital?

Answer: Current assets minus current liabilities

Working capital = Current Assets − Current Liabilities, representing the funds available for day-to-day operations.

A business wants to reduce its cash conversion cycle. Which action would be most effective?

Answer: Extending the time to pay suppliers

Extending days payable outstanding (paying suppliers later) lengthens the float and reduces the cash conversion cycle.

What does a high debt-service coverage ratio (DSCR) indicate?

Answer: The company has strong cash flow relative to its debt payments

A high DSCR (typically above 1.25) means the business generates sufficient cash flow to comfortably cover loan payments.