CPFM Financial Statement Analysis 3 — Questions and Answers
Question 1: Vertical analysis expresses each line item as a percentage of which base?
- Prior year amount
- Total revenue or total assets (Correct answer)
- Net income
- Industry average
Correct answer: Total revenue or total assets
Vertical analysis states items as a percentage of a base such as total revenue or total assets.
Question 2: Inventory turnover is calculated as cost of goods sold divided by:
- Total sales
- Average inventory (Correct answer)
- Total assets
- Net income
Correct answer: Average inventory
Inventory turnover equals cost of goods sold divided by average inventory.
Question 3: A high days-sales-outstanding (DSO) figure generally indicates:
- Fast collection of receivables
- Slow collection of receivables (Correct answer)
- Strong cash reserves
- Low inventory levels
Correct answer: Slow collection of receivables
A high DSO means the company takes longer to collect its receivables.
Question 4: Which ratio measures a company's ability to pay interest on outstanding debt?
- Times interest earned (Correct answer)
- Current ratio
- Asset turnover
- Gross margin
Correct answer: Times interest earned
Times interest earned (interest coverage) measures the ability to cover interest expense from earnings.
Question 5: Working capital is defined as:
- Current assets minus current liabilities (Correct answer)
- Total assets minus total liabilities
- Cash plus receivables
- Revenue minus expenses
Correct answer: Current assets minus current liabilities
Working capital equals current assets minus current liabilities.
Question 6: The DuPont analysis breaks ROE into profit margin, asset turnover, and:
- Current ratio
- Equity multiplier (Correct answer)
- Quick ratio
- Gross margin
Correct answer: Equity multiplier
DuPont decomposes ROE into profit margin, asset turnover, and the equity multiplier (leverage).
Question 7: Which statement explains changes in a company's cash position during a period?
- Income statement
- Balance sheet
- Statement of cash flows (Correct answer)
- Statement of equity
Correct answer: Statement of cash flows
The statement of cash flows reports cash inflows and outflows across operating, investing, and financing activities.
CPFM Financial Statement Analysis 3
Vertical analysis expresses each line item as a percentage of which base?