CCM Financial Statement Analysis 2

Question 1

A company's quick ratio is 0.8 while its current ratio is 2.1. What does this significant gap most likely indicate?

Accepted Answer

The company holds a large amount of inventory relative to current liabilities

Answer

A large gap between the current ratio and quick ratio indicates inventory makes up a substantial portion of current assets, since inventory is excluded from the quick ratio.

Question 2

Which financial statement best shows a company's ability to generate cash from its core operations?

Accepted Answer

Statement of cash flows — operating activities section

Answer

The operating activities section of the cash flow statement isolates cash generated or consumed by the company's primary business operations.

Question 3

A credit analyst notices a company's days sales outstanding (DSO) increased from 35 to 58 days over two years. What is the most likely concern?

Accepted Answer

Customers are taking longer to pay, signaling potential collection problems

Answer

Rising DSO indicates customers are taking longer to pay, which could signal collection difficulties, deteriorating customer quality, or loosened credit standards.

Question 4

Under the indirect method of preparing the cash flow statement, depreciation is added back to net income because:

Accepted Answer

It is a non-cash expense that reduced net income but did not use cash

Answer

Depreciation is a non-cash charge that reduces net income on the income statement but involves no actual cash outflow, so it is added back under the indirect method.

Question 5

A company reports EBITDA of $5M but operating cash flow of only $1.2M. Which factor most likely explains this large discrepancy?

Accepted Answer

Significant increases in working capital are consuming cash

Answer

Large increases in working capital (e.g., rising receivables or inventory) can absorb cash and create a wide gap between EBITDA and actual operating cash flow.

(CCM) Certified Credit Manager Practice Test

(CCM) Certified Credit Manager Practice Test

CCM Financial Statement Analysis 2