Area 1: Financial Reporting (30-40%)
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Gross Profit / Net Sales
Net Income / Average Total Assets
Net Income / Average Stockholders' Equity
Current Assets / Current Liabilities
(Cash + Short-Term Investments + Net Receivables) / Current Liabilities
Net Credit Sales / Average Accounts Receivable
Days sales outstanding = 365 / AR Turnover
Cost of Goods Sold / Average Inventory
Days in inventory = 365 / Inventory Turnover
Cost of Goods Sold / Average Accounts Payable
Days payable outstanding = 365 / AP Turnover
Total Liabilities / Total Stockholders' Equity
Earnings Before Interest and Taxes (EBIT) / Interest Expense
Net Income + Interest Expense + Income Tax Expense + Depreciation + Amortization
Non-GAAP metric used as a proxy for operating cash flow before capital structure and tax effects
Market Price per Share / Earnings per Share
Net Sales / Average Total Assets
Measures how efficiently assets generate revenue. Component of DuPont analysis
Actual Results − Budgeted Amount
Favorable if revenue variance is positive or expense variance is negative. Unfavorable if the opposite
| Category | Ratio | Formula | What It Measures |
|---|---|---|---|
| Profitability | Gross profit margin | Gross Profit / Net Sales | Pricing power and production efficiency |
| Profitability | Return on assets | Net Income / Avg Total Assets | How efficiently assets generate profit |
| Profitability | Return on equity | Net Income / Avg Equity | Return to shareholders |
| Liquidity | Current ratio | CA / CL | Short-term debt coverage |
| Liquidity | Quick ratio | (Cash + ST Invest + AR) / CL | Immediate debt coverage (no inventory) |
| Liquidity | AR turnover | Net Credit Sales / Avg AR | Collection speed |
| Liquidity | Inventory turnover | COGS / Avg Inventory | Inventory sell-through speed |
| Solvency | Debt-to-equity | Total Liabilities / Equity | Leverage and financial risk |
| Solvency | Times interest earned | EBIT / Interest Expense | Ability to service debt |
| Performance | Asset turnover | Net Sales / Avg Total Assets | Revenue efficiency per dollar of assets |
| Performance | P/E ratio | Price per Share / EPS | Market valuation relative to earnings |
| Framework | Basis of Accounting | Common Users | Key Feature |
|---|---|---|---|
| Cash basis | Revenue/expense when cash received/paid | Small businesses, sole proprietors | Simplest; no receivables or payables |
| Modified cash basis | Cash basis + selected accruals (depreciation, debt) | Small businesses wanting some accrual items | Must be logical and consistent modifications |
| Tax basis | IRC rules for income/deductions | Tax-focused entities, S corps, partnerships | Follows tax return; DTA/DTL not needed |
| Regulatory basis | Rules prescribed by regulatory agency | Insurance companies, utilities, banks | May differ significantly from GAAP |
| Contractual basis | Terms specified in a contract or agreement | Loan covenants, joint ventures | Tailored to specific agreement requirements |
The five categories of financial ratios. Profitability measures earnings power. Liquidity measures short-term cash adequacy. Solvency measures long-term debt coverage. Performance measures market valuation and operating output. Efficiency measures asset utilization (turnover ratios).