Financial Statement Analysis- Certification
Exam Question and Answers [100% Correct]
2025 Latest Release!
What is the purpose of financial statement analysis?
The purpose of financial statement analysis is to evaluate a company's financial health,
performance, and profitability to make in...
Financial Statement Analysis- Certification
Exam Question and Answers [100% Correct]
2025 Latest Release!
What is the purpose of financial statement analysis?
The purpose of financial statement analysis is to evaluate a company's financial health,
performance, and profitability to make informed decisions about its financial position and future
prospects.
How does the liquidity ratio affect financial analysis?
Liquidity ratios, such as the current ratio and quick ratio, measure a company's ability to meet its
short-term liabilities with its short-term assets. A higher liquidity ratio indicates a stronger ability to meet
immediate financial obligations.
What is the difference between the income statement and the balance sheet?
The income statement shows a company’s revenues and expenses over a specific period,
resulting in net income or loss, while the balance sheet shows a company’s assets, liabilities, and
shareholders' equity as of a specific date.
What is the importance of the cash flow statement in financial analysis?
The cash flow statement provides insight into a company's cash inflows and outflows, helping to
assess its ability to generate cash, meet obligations, and manage investments, which is crucial for
evaluating its overall financial health.
What is working capital, and why is it important?
Working capital is the difference between a company’s current assets and current liabilities. It is
important because it indicates the company's ability to cover its short-term obligations and invest in its
day-to-day operations.
What does the profitability ratio indicate in financial analysis?
1
, Profitability ratios measure a company's ability to generate earnings compared to its expenses
and other costs. Key ratios include the net profit margin and return on equity, providing insights into
efficiency and financial health.
What is the purpose of the return on equity (ROE) ratio?
The return on equity ratio measures a company’s ability to generate profit from its shareholders’
equity. A higher ROE indicates effective management and efficient use of equity capital.
How does financial leverage impact financial analysis?
Financial leverage involves using borrowed capital to fund investments. It can increase potential
returns but also amplifies risk, as higher debt levels increase financial obligations and the cost of interest
payments.
What is the significance of the debt-to-equity ratio in financial analysis?
The debt-to-equity ratio measures a company's financial leverage by comparing its total liabilities
to shareholders' equity. A high ratio suggests more debt financing and higher financial risk, while a low
ratio indicates less risk.
How is the quick ratio different from the current ratio?
The quick ratio excludes inventory from current assets, focusing only on the most liquid assets
(cash, receivables, and marketable securities). It provides a more conservative view of a company's
ability to meet short-term obligations.
What is the role of horizontal analysis in financial statement analysis?
Horizontal analysis involves comparing financial data over a series of periods, highlighting trends
and growth patterns, allowing analysts to assess performance changes over time.
How is vertical analysis used in financial statement analysis?
Vertical analysis expresses each item in a financial statement as a percentage of a base amount,
such as sales or total assets, enabling easier comparison between companies of different sizes or within
the same industry.
What is the significance of the gross profit margin in financial analysis?
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