Wall Street Prep Redbook Accounting Financial Statement Analysis (2024 / 2025) Actual Questions and Verified Answers, 100% Guarantee Pass
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Wall Street Prep Redbook Accounting Financial Statement Analysis (2024 / 2025) Actual Questions and Verified Answers, 100% Guarantee Pass What are some of the most common margins used tomeasure profitability?-
: Gross Margin:The percentage of revenue remaining after subtracting just COGS,the
dire...
Wall Street Prep Redbook Accounting Financial Statement Analysis.pdf file:///C:/Users/HP/Desktop/New%20folder%20(2)/Wall%20Street%2
Wall Street Prep Redbook Accounting:
Financial Statement Analysis
1. What are some of the most common margins used to measure profitability?-
: Gross Margin: The percentage of revenue remaining after subtracting just COGS,the
direct costs associated with the company's revenue generation (e.g., direct materials,
direct labor).
Net Profit Margin: The percentage of accrual profitability remaining after all expenses
have been subtracted. Unlike operating margin, this measure is impacted by capital
structure and taxes
2. What do the phrases "above the line" and "below the line" mean?: "Above the
Line":If a profitability metric is "above the line," it reflects a company's operational
performance before non-operational items such as interest and taxes
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In contrast, profitability metrics "below the line" have adjusted operating income for
non-operating income and expenses, which are items classified as discretionary and
unrelated to the core operations of a business
3. Is EBITDA a good proxy for operating cash flow?: While EBITDA does addback
D&A, typically the largest non-cash expense, it doesn't capture the full cashimpact
of capital expenditures ("capex") or working capital changes during the period.
***Despite the criticism regarding its drawbacks, EBITDA remains the most widely
used proxy for operating cash flow in practice***
4. What are some examples of non-recurring items?: Non-recurring items
include legal settlements (gain or loss), restructuring expenses, inventory
write-downs, or asset impairments. Often called "scrubbing" the financials, the act of
adjusting for these non-recurring items is meant to normalize the cash flows and
depict a company's true operating performance.
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5. When adjusting for non-recurring expenses, are litigation expenses always
added back?: Not necessarily, as whether an expense is non-recurring depends on
the industry. In many cases, it's a discretionary decision on whether an expenseis a
part of the normal operations of a company. For example, expenses related to
litigation might not be added back for a research and development (R&D) oriented
pharmaceutical company, given the prevalence of lawsuits in the industry
6. What is the difference between organic and inorganic revenue growth ?-
: Organic Growth: A company experiencing organic growth is expanding to new
markets, enhancing its sales & marketing strategies, improving its product/service
mix, or introducing new products. The focus is on continuously making operational
improvements and bringing in revenue (e.g., set prices more appropriately post-mar-
ket research, target right end markets).
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