FIA Financial Statement Interpretation 2

Question 1

A company's current ratio decreased from 2.5 to 1.2 over one year while its quick ratio remained stable at 1.1. What does this most likely indicate?

Accepted Answer

Significant build-up of inventory

Answer

When the current ratio falls sharply but the quick ratio (which excludes inventory) stays stable, the gap indicates a significant increase in inventory holdings.

Question 2

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

Accepted Answer

Investing activities

Answer

Proceeds from the sale of long-term assets such as property, plant, and equipment are reported under investing activities.

Question 3

A firm reports net income of $500,000 but operating cash flow of only $50,000. Which scenario best explains this discrepancy?

Accepted Answer

The firm has high non-cash revenues and rising receivables

Answer

High non-cash revenues (e.g., recognized but uncollected) and rising receivables cause net income to exceed cash from operations.

Question 4

Under the indirect method of preparing the cash flow statement, an increase in accounts payable is:

Accepted Answer

Added to net income

Answer

An increase in accounts payable means the company delayed cash payments, preserving cash, so it is added back to net income in operating activities.

Question 5

Return on Equity (ROE) can be decomposed using the DuPont formula into which three components?

Accepted Answer

Net profit margin × asset turnover × equity multiplier

Answer

The DuPont decomposition breaks ROE into net profit margin (profitability), asset turnover (efficiency), and the equity multiplier (financial leverage).

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Financial Statement Interpretation 2