Certified Valuation Analyst CVA Financial Statement Analysis 3 — Questions and Answers
Question 1: Which DuPont component isolates how efficiently a firm uses assets to generate revenue?
- Asset turnover (Correct answer)
- Net profit margin
- Equity multiplier
- Interest coverage
Correct answer: Asset turnover
Asset turnover (sales / total assets) measures revenue generated per dollar of assets.
Question 2: A quick ratio that is much lower than the current ratio indicates the company relies heavily on what asset?
- Inventory (Correct answer)
- Cash
- Accounts receivable
- Marketable securities
Correct answer: Inventory
The quick ratio excludes inventory, so a large gap shows inventory dominates current assets.
Question 3: When computing free cash flow to the firm, why is interest expense added back (net of tax)?
- FCFF measures cash available to all capital providers before financing (Correct answer)
- Interest is non-cash
- Interest reduces taxes only
- Interest is part of capex
Correct answer: FCFF measures cash available to all capital providers before financing
FCFF reflects cash before financing decisions, so after-tax interest is added back to remove its effect.
Question 4: Which trend in days sales outstanding (DSO) suggests deteriorating collections?
- A rising DSO over several periods (Correct answer)
- A falling DSO
- A constant DSO
- A negative DSO
Correct answer: A rising DSO over several periods
An increasing DSO means receivables are collected more slowly, signaling weaker collections.
Question 5: In valuation-oriented analysis, what does EBITDA primarily attempt to approximate?
- Operating cash flow before financing and capital structure (Correct answer)
- Net income after taxes
- Total shareholder equity
- Retained earnings
Correct answer: Operating cash flow before financing and capital structure
EBITDA proxies pre-financing operating cash generation by removing interest, taxes, and non-cash charges.
Question 6: A company capitalizes costs that competitors expense. What is the likely effect on current-period earnings?
- Reported earnings are overstated relative to peers (Correct answer)
- Earnings are understated
- No effect on comparability
- Cash flow is reduced
Correct answer: Reported earnings are overstated relative to peers
Capitalizing instead of expensing defers costs, inflating current earnings versus peers who expense.
Question 7: Which working capital measure shows the net days cash is tied up in operations?
- Cash conversion cycle (Correct answer)
- Current ratio
- Debt-to-equity
- Return on assets
Correct answer: Cash conversion cycle
The cash conversion cycle (DSO + DIO − DPO) measures days cash is tied up in operations.
Certified Valuation Analyst CVA Financial Statement Analysis 3
Which DuPont component isolates how efficiently a firm uses assets to generate revenue?