Finance for Non-Finance Managers Financial Statement Analysis 3

Question 1

What does EBITDA stand for and why is it used in financial analysis?

Accepted Answer

Earnings Before Interest, Taxes, Depreciation, and Amortization — approximates operating cash flow

Answer

EBITDA strips out financing and accounting decisions to show core operating profitability, useful for comparing companies across industries.

Question 2

A company has net income of $200,000 and revenue of $2,000,000. What is its net profit margin?

Accepted Answer

10%

Answer

Net profit margin = Net Income / Revenue = $200,000 / $2,000,000 = 10%.

Question 3

Which financial statement links the income statement and balance sheet?

Accepted Answer

The statement of retained earnings

Answer

The statement of retained earnings shows how net income (from the income statement) flows into retained earnings on the balance sheet.

Question 4

What does a high price-to-earnings (P/E) ratio generally suggest?

Accepted Answer

Investors expect strong future earnings growth

Answer

A high P/E ratio indicates investors are willing to pay a premium, typically because they anticipate significant earnings growth.

Question 5

Under accrual accounting, when is revenue recognized?

Accepted Answer

When the product or service is delivered

Answer

Accrual accounting recognizes revenue when goods or services are delivered, regardless of when payment is received.

Finance for Non-Finance Managers Practice Test