CCM Financial Statement Analysis 5

Question 1

A company reports a significant increase in 'other assets' on the balance sheet with no corresponding disclosure. Why should a credit analyst flag this?

Accepted Answer

Unexplained growth in vague asset categories may indicate capitalized expenses, deferred losses, or window dressing to inflate the balance sheet

Answer

Opaque 'other asset' categories can conceal impaired assets, improperly capitalized costs, or fictitious entries — requiring analyst scrutiny and management explanation.

Question 2

Which of the following describes a 'Z-score' model in the context of financial statement analysis?

Accepted Answer

A quantitative bankruptcy prediction model that combines multiple financial ratios into a single score to assess default risk

Answer

The Altman Z-score uses a weighted combination of financial ratios (working capital, retained earnings, EBIT, equity, and sales — all relative to assets or liabilities) to predict bankruptcy probability.

Question 3

A company's net profit margin is 12%, but its operating profit margin is 22%. What does this gap primarily reflect?

Accepted Answer

Below-the-line items such as interest expense, taxes, and non-operating losses are significantly reducing net income

Answer

The difference between operating margin and net margin reflects interest expense, income taxes, and other non-operating items that occur below the operating income line.

Question 4

When assessing earnings quality, which of the following signals that reported earnings may be of LOW quality?

Accepted Answer

A large and growing gap where net income significantly exceeds operating cash flow year after year

Answer

When net income persistently exceeds operating cash flow, it suggests aggressive accrual accounting — revenues may be recognized early or expenses deferred, inflating reported earnings.

Question 5

A company's balance sheet shows goodwill equal to 60% of total assets following an acquisition. What is the primary credit risk this creates?

Accepted Answer

A large goodwill impairment could drastically reduce equity and tangible net worth, weakening the borrower's financial position

Answer

Goodwill is subject to impairment testing and can be written down significantly if the acquired business underperforms, which would sharply reduce reported equity and net worth.

(CCM) Certified Credit Manager Practice Test

(CCM) Certified Credit Manager Practice Test

CCM Financial Statement Analysis 5