FA Financial Reporting and Analysis 2 — Questions and Answers
Question 1: What does EBITDA stand for?
- Earnings Before Income Tax, Depreciation, and Amortization
- Earnings Before Interest, Taxes, Depreciation, and Amortization (Correct answer)
- Equity Before Interest, Taxes, Depreciation, and Amortization
- Earnings Before Investment, Taxes, Debt, and Amortization
Correct answer: Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA measures a company's core operating profitability by excluding interest, taxes, depreciation, and amortization.
Question 2: Which financial ratio indicates what percentage of each dollar of sales remains after all expenses are paid?
- Gross Profit Margin
- Operating Margin
- Net Profit Margin (Correct answer)
- Return on Equity
Correct answer: Net Profit Margin
Net profit margin (net income ÷ net sales) shows how much of each revenue dollar converts to profit after all expenses including taxes.
Question 3: In horizontal analysis, what is being compared?
- Different companies in the same industry
- The same company's financial data across multiple periods (Correct answer)
- Line items as percentages of a base figure
- Debt levels against equity
Correct answer: The same company's financial data across multiple periods
Horizontal analysis compares a company's financial data over two or more periods to identify trends and growth rates.
Question 4: Which section of the cash flow statement includes payments for property, plant, and equipment?
- Operating Activities
- Investing Activities (Correct answer)
- Financing Activities
- Supplemental Disclosures
Correct answer: Investing Activities
Capital expenditures for PP&E are reported in the investing activities section of the cash flow statement.
Question 5: A debt-to-equity ratio greater than 1 indicates that a company:
- Has more equity than debt financing
- Has more debt than equity financing (Correct answer)
- Is operating at a loss
- Has no long-term liabilities
Correct answer: Has more debt than equity financing
A D/E ratio above 1 means total liabilities exceed shareholders' equity, indicating the company relies more on debt than equity for financing.
Question 6: Which accounting principle requires that revenues be recognized when earned, regardless of when cash is received?
- Matching Principle
- Going Concern Principle
- Accrual Basis Principle (Correct answer)
- Conservatism Principle
Correct answer: Accrual Basis Principle
The accrual basis principle requires revenue recognition when it is earned and expenses when incurred, not when cash changes hands.
FA Financial Reporting and Analysis 2
What does EBITDA stand for?