CCM Financial Statement Analysis 3

Question 1

A manufacturer's gross profit margin declined from 42% to 31% over three years while revenue grew. What is the most probable cause?

Accepted Answer

Cost of goods sold rose faster than revenue, possibly due to input cost inflation or pricing pressure

Answer

A declining gross margin with growing revenue typically signals that COGS is rising faster than prices, often from raw material cost increases or competitive pricing pressure.

Question 2

When comparing two companies in the same industry, Company A has a fixed asset turnover of 8.2 and Company B has 3.1. What does this suggest?

Accepted Answer

Company A generates significantly more revenue per dollar of fixed assets

Answer

A higher fixed asset turnover means Company A generates more revenue for each dollar invested in fixed assets, indicating greater operational efficiency.

Question 3

A credit manager is reviewing a borrower's financial statements and finds that capital expenditures exceed depreciation every year for five consecutive years. What does this pattern most likely indicate?

Accepted Answer

The company is consistently investing in growth by expanding its fixed asset base

Answer

When capex consistently exceeds depreciation, the company is net-investing in fixed assets, suggesting expansion or modernization of its productive capacity.

Question 4

Which of the following is the correct formula for calculating the debt service coverage ratio (DSCR)?

Accepted Answer

EBITDA ÷ (principal payments + interest payments)

Answer

DSCR is calculated as EBITDA (or net operating income) divided by total debt service (principal + interest), showing whether earnings can cover debt obligations.

Question 5

A company's income statement shows a net loss, but the cash flow statement shows positive operating cash flow. Which scenario best explains this?

Accepted Answer

Large non-cash charges such as depreciation and amortization exceed the net loss

Answer

High non-cash charges (depreciation, amortization, impairments) can result in a book net loss while actual cash from operations remains positive.

(CCM) Certified Credit Manager Practice Test

(CCM) Certified Credit Manager Practice Test

CCM Financial Statement Analysis 3