CCP Financial Statement Analysis & Credit Decisions Flashcards
6 cards from real CCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CCP Financial Statement Analysis & Credit Decisions flashcards as text
A credit professional is reviewing a manufacturer's financials and notices inventory has grown 40% while sales grew only 5%. What risk does this signal?
Answer: Potential obsolescence, overproduction, or declining demand that may impair asset quality
Inventory growing far faster than sales suggests the company may be building unsalable stock, facing demand weakness, or carrying obsolete goods — all of which reduce the quality of current assets.
What is the primary purpose of spreading a buyer's financial statements over multiple years in a credit review?
Answer: To identify trends in profitability, leverage, and liquidity that a single year cannot reveal
Multi-year spreading reveals whether key metrics are improving or deteriorating over time, which is far more predictive of future creditworthiness than any single year snapshot.
Which condition described in the footnotes of a buyer's audited financials should most concern a trade creditor?
Answer: A going concern qualification from the auditor
A going concern qualification means the auditor has substantial doubt about the company's ability to continue operating — the strongest possible warning signal for any creditor.
EBITDA is often used as a proxy for operating cash flow. When is this proxy LEAST reliable?
Answer: When a company has rapidly growing working capital needs that consume operating cash
EBITDA ignores working capital changes; in a high-growth company with expanding receivables and inventory, actual operating cash flow can be far below EBITDA despite strong earnings.
A credit professional is asked to approve terms for a customer whose financial statements show negative tangible net worth. This means:
Answer: Intangible assets and goodwill exceed equity, leaving no hard asset cushion for creditors
Negative tangible net worth means that when intangibles are removed from equity, creditors have no hard asset base to fall back on in a liquidation scenario.
Which financial analysis technique compares each line item on the income statement as a percentage of net sales to identify structural changes in a buyer's business?
Answer: Common-size (vertical) analysis
Common-size vertical analysis expresses each income statement line as a percentage of net sales, making it easy to spot margin erosion, rising cost structures, or changes in business mix.