FAC Financial Statement Analysis 3

Question 1

Which of the following is an example of a non-cash item that must be added back to net income in the indirect method cash flow statement?

Accepted Answer

Depreciation expense

Answer

Depreciation is a non-cash charge deducted on the income statement, so it is added back to net income when reconciling to operating cash flow.

Question 2

A company's times interest earned (interest coverage) ratio declined from 8x to 3x over two years. This trend most likely signals:

Accepted Answer

Deteriorating ability to service interest obligations from operating earnings

Answer

A falling interest coverage ratio means EBIT is shrinking relative to interest expense, indicating greater risk of being unable to meet debt service obligations.

Question 3

Which financial metric is most useful for comparing operating profitability across companies with different capital structures?

Accepted Answer

EBITDA margin

Answer

EBITDA margin strips out interest (capital structure) and taxes, making it useful for comparing operating performance across firms with varying leverage.

Question 4

A high accounts payable turnover ratio compared to industry peers most likely indicates a company:

Accepted Answer

Is paying its suppliers more quickly than peers

Answer

A high payables turnover ratio means the company pays suppliers frequently (quickly), which may reduce its days payable outstanding.

Question 5

Which section of the cash flow statement would reflect the proceeds from selling a building?

Accepted Answer

Investing activities

Answer

Proceeds from selling long-term assets such as buildings are classified as investing cash inflows.

(FAC) Finance and Accounting Certification Practice Test

(FAC) Finance and Accounting Certification Practice Test

FAC Financial Statement Analysis 3