IAR Financial Analysis & Reporting 2

Question 1

Which financial ratio measures how efficiently a company uses its assets to generate sales?

Accepted Answer

Asset turnover ratio

Answer

Asset turnover ratio (Sales / Average Total Assets) measures how efficiently a company generates revenue from its asset base.

Question 2

Under GAAP, which inventory costing method typically results in the highest net income during periods of rising prices?

Accepted Answer

FIFO

Answer

FIFO assigns the oldest (lower) costs to COGS first, leaving newer higher-cost items in inventory, resulting in lower COGS and higher net income during inflation.

Question 3

A company reports operating cash flow of $500,000 and capital expenditures of $200,000. What is its free cash flow?

Accepted Answer

$300,000

Answer

Free cash flow = Operating cash flow − Capital expenditures = $500,000 − $200,000 = $300,000.

Question 4

Which section of the cash flow statement reflects cash received from customers and paid to suppliers?

Accepted Answer

Operating activities

Answer

Operating activities capture the core business cash flows including receipts from customers and payments to suppliers and employees.

Question 5

An analyst notices a company's accounts receivable days outstanding has risen from 35 to 65 days year-over-year. This most likely indicates:

Accepted Answer

Customers are taking longer to pay, increasing collection risk

Answer

Rising DSO (Days Sales Outstanding) suggests customers are slower to pay, which can signal credit quality deterioration or aggressive revenue recognition.

IAR Practice Test

IAR Practice Test

IAR Financial Analysis & Reporting 2