FAC Financial Statement Analysis 2

Question 1

A company's current ratio is 2.5 and its quick ratio is 0.8. What does this disparity most likely indicate?

Accepted Answer

The company has high inventory levels relative to current liabilities

Answer

A large gap between the current ratio and quick ratio indicates significant inventory in current assets, since inventory is excluded from the quick ratio.

Question 2

Which financial statement best reveals a company's ability to generate cash from its core operations?

Accepted Answer

Statement of cash flows — operating section

Answer

The operating section of the cash flow statement shows cash generated or used by core business activities, independent of accrual adjustments.

Question 3

When a company uses LIFO instead of FIFO during a period of rising prices, what is the effect on its reported net income?

Accepted Answer

Net income is lower under LIFO

Answer

Under LIFO during rising prices, cost of goods sold is higher (most recent, costlier units sold first), reducing gross profit and net income.

Question 4

The DuPont analysis decomposes return on equity (ROE) into which three components?

Accepted Answer

Net profit margin, asset turnover, and equity multiplier

Answer

DuPont analysis breaks ROE into net profit margin × asset turnover × equity multiplier (financial leverage).

Question 5

A negative operating cash flow combined with positive net income most likely suggests:

Accepted Answer

Significant non-cash revenues or working capital build-up consuming cash

Answer

Positive net income with negative operating cash flow often signals non-cash revenue recognition or a growing investment in working capital that drains cash.

(FAC) Finance and Accounting Certification Practice Test

(FAC) Finance and Accounting Certification Practice Test

FAC Financial Statement Analysis 2