Certified Valuation Analyst CVA Financial Statement Analysis 5

Question 1

Which leverage ratio compares total liabilities to total shareholders' equity?

Accepted Answer

Debt-to-equity ratio

Answer

The debt-to-equity ratio divides total liabilities by equity to measure financial leverage.

Question 2

In normalizing earnings, gains from the sale of a fixed asset should be treated how?

Accepted Answer

Removed as a non-operating, non-recurring gain

Answer

Asset-sale gains are non-recurring and non-operating, so they are removed from normalized earnings.

Question 3

What does a current ratio below 1.0 most directly suggest?

Accepted Answer

Current liabilities exceed current assets, signaling liquidity risk

Answer

A current ratio under 1.0 means short-term obligations exceed short-term assets, indicating possible liquidity strain.

Question 4

Why might an analyst add back non-cash stock-based compensation when estimating cash earnings?

Accepted Answer

It reduces accounting earnings but uses no cash in the period

Answer

Stock-based compensation is a non-cash expense, so it is added back to approximate cash earnings.

Question 5

Which financial statement reconciles beginning and ending retained earnings?

Accepted Answer

Statement of changes in equity

Answer

The statement of changes in equity shows movements in retained earnings including net income and dividends.

Certified Valuation Analyst Practice Test