CCP Ratio Analysis & Cash Flow 3

Question 1

The acid-test (quick) ratio differs from the current ratio primarily because it:

Accepted Answer

Excludes inventory and prepaid expenses from current assets

Answer

The quick ratio excludes inventory and prepaid expenses from current assets because these are less liquid and may not be quickly convertible to cash.

Question 2

When analyzing a manufacturer's cash conversion cycle (CCC), which formula is correct?

Accepted Answer

DIO + DSO − DPO

Answer

The cash conversion cycle equals Days Inventory Outstanding plus Days Sales Outstanding minus Days Payable Outstanding, measuring the net days to convert investments into cash.

Question 3

A company's gross profit margin declined from 42% to 31% over two years while revenue grew. A credit analyst should first investigate:

Accepted Answer

Rising cost of goods sold relative to revenue, possibly from input cost pressure or pricing erosion

Answer

A declining gross margin despite revenue growth typically signals rising input costs, commoditization, or competitive pricing pressure on the core business.

Question 4

Under IFRS, interest paid may be classified in the cash flow statement as:

Accepted Answer

Either operating or financing activities

Answer

IFRS allows interest paid to be classified as either operating or financing activities, providing more flexibility than US GAAP which requires operating classification.

Question 5

A company with a return on equity (ROE) of 22% and a return on assets (ROA) of 8% is most likely:

Accepted Answer

Using significant financial leverage to amplify equity returns

Answer

When ROE substantially exceeds ROA, it indicates the company is using debt (financial leverage) to boost returns to equity holders beyond what assets alone generate.

(CCP) Certified Credit Professional Practice Test

(CCP) Certified Credit Professional Practice Test

CCP Ratio Analysis & Cash Flow 3