CCP CCP Financial Statement Analysis & Credit Decisions

Question 1

When analyzing a potential customer's financial statements, which document most directly reveals the company's ability to generate cash to pay obligations?

Accepted Answer

Statement of cash flows

Answer

The statement of cash flows shows actual cash generated from operations, investing, and financing activities — making it the most direct measure of a company's ability to pay debts.

Question 2

A buyer's financial statements show net income of $500K but operating cash flow of -$200K. What is the most likely explanation?

Accepted Answer

Working capital is growing faster than earnings, consuming cash despite profitability

Answer

When operating cash flow lags net income, it often signals that receivables, inventory, or other working capital components are expanding, absorbing cash generated from profitable sales.

Question 3

Which financial ratio directly measures a company's short-term liquidity without including inventory in the calculation?

Accepted Answer

Quick ratio (acid-test ratio)

Answer

The quick ratio (cash + marketable securities + receivables ÷ current liabilities) excludes inventory because it may not be quickly convertible to cash, giving a more conservative liquidity view.

Question 4

A credit professional notes that a buyer's goodwill increased significantly year-over-year without a disclosed acquisition. This MOST likely indicates:

Accepted Answer

A possible accounting irregularity that warrants further investigation

Answer

Under US GAAP, goodwill only arises from business acquisitions and cannot be internally generated; an unexplained increase is a red flag requiring clarification.

Question 5

Which of the following is a 'red flag' when reviewing a privately held buyer's financial statements?

Accepted Answer

Compiled financials with no assurance from the accountant

Answer

Compiled financial statements carry no assurance — the accountant merely assembles management-provided data without verification, making them the weakest form of third-party financial documentation.

(CCP) Certified Credit Professional Practice Test

(CCP) Certified Credit Professional Practice Test

CCP CCP Financial Statement Analysis & Credit Decisions