Financial Reporting & Analysis Flashcards
7 cards from real FA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Reporting & Analysis flashcards as text
What does the current ratio measure?
Answer: A company's ability to meet short-term obligations using current assets
The current ratio (current assets ÷ current liabilities) measures a company's short-term liquidity and ability to pay near-term obligations.
If a company's accounts receivable turnover is 8, what is the approximate average collection period (days sales outstanding)?
Answer: 45.6 days
Days Sales Outstanding = 365 ÷ Accounts Receivable Turnover = 365 ÷ 8 ≈ 45.6 days.
Which profitability ratio measures how effectively a company uses its total assets to generate net income?
Answer: Return on Assets (ROA)
Return on Assets (ROA) = Net Income ÷ Total Assets, directly measuring asset efficiency in generating profit.
The quick ratio differs from the current ratio primarily by excluding which asset?
Answer: Inventory
The quick ratio excludes inventory because it is the least liquid current asset and may not be quickly converted to cash.
Under DuPont analysis, Return on Equity (ROE) is decomposed into which three components?
Answer: Profit margin × Asset turnover × Equity multiplier
The DuPont formula breaks ROE into Net Profit Margin × Asset Turnover × Equity Multiplier, revealing the drivers of shareholder returns.
Which of the following best describes the debt-to-equity ratio?
Answer: Total liabilities divided by total equity
The debt-to-equity ratio compares total liabilities to shareholders' equity, indicating how much the company is financed by creditors versus owners.
A price-to-earnings (P/E) ratio of 20 most accurately means that:
Answer: Investors are paying $20 for every $1 of annual earnings
A P/E of 20 means the market price is 20 times the earnings per share, so investors pay $20 for each $1 of current earnings.