Financial Statement Analysis Flashcards

A borrower has current assets of $500,000, inventory of $150,000, and current liabilities of $250,000. What is its quick ratio?

Answer: 1.4

Quick ratio = (500,000 - 150,000) / 250,000 = 1.4.

Which ratio best measures a borrower's ability to cover both interest and scheduled principal payments from operating cash flow?

Answer: Debt service coverage ratio

DSCR compares cash flow available for debt service to total interest plus principal due.

A company has accounts receivable of $120,000 and annual credit sales of $1,460,000. What is its days sales outstanding (365-day year)?

Answer: 30 days

DSO = 120,000 / 1,460,000 x 365 = 30 days.

Days inventory on hand rises from 45 to 80 while sales stay flat. What is the most likely credit concern?

Answer: Slow-moving or obsolete inventory

Inventory building without sales growth often signals obsolescence or weak demand, risking write-downs.

When calculating tangible net worth, which item is deducted from stockholders' equity?

Answer: Goodwill and other intangible assets

Tangible net worth removes intangibles such as goodwill because they offer little liquidation value to creditors.

A company reports EBIT of $600,000 and interest expense of $150,000. What is its times interest earned ratio?

Answer: 4.0x

TIE = 600,000 / 150,000 = 4.0 times.

A rising debt-to-tangible-net-worth ratio most directly indicates what to a lender?

Answer: Greater leverage and a thinner equity cushion for creditors

More debt relative to tangible equity means creditors bear more risk if asset values fall.