SECTION A – Financial Statement Analysis (Weightage 25%)
S.No Questions Answers
1. What are the five Liquidity ratios, which measure the sufficiency of the firm’s
classifications of ratios? cash resources to meet its short-term cash obligations.
Leverage, capital structure, solvency and earnings coverage
ratios, which evaluate the firm’s ability to satisfy its debt and
obligations for other fixed financing charges such as operating
leases by looking at the mix of its financing sources and its
historical earnings.
Activity ratios, which provide information on a firm's ability
to manage efficiently its current assets (accounts receivable
and inventory) and current liabilities (accounts payable).
Profitability analysis, which measures the firm’s profit in
relation to its total revenue or the amount of net income from
each dollar of sales and its return on invested assets.
Market ratios and earnings per share analysis,
or shareholder ratios, which describe the firm’s financial
condition in terms of amounts per share of stock.
2. How is operating income Sales or service revenues
calculated? − Cost of goods sold (COGS)
= Gross profit
− Selling, general, and administrative expenses
= Operating income
3. How is EBIT calculated? Operating income
+ Interest and dividend income
+/− Non-operating gains/(losses)
+/− G/L from operations of discontinued Component X including
G/L on disposal of $XXXX (before tax)
= Earnings Before Interest and Taxes (EBIT)
4. What is EBITDA? EBITDA stands for earnings before interest, taxes, depreciation and
amortization. EBIT (earnings before interest and taxes) includes
deductions for depreciation and amortization expensed. Therefore,
EBITDA is EBIT plus depreciation and amortization expense, to “add
back” the depreciation and amortization. EBITDA is used to analyze a
company's earnings before interest and taxes as well as before the
non-cash charges of depreciation and amortization.
5. How is EBT calculated? Earnings Before Interest and Taxes (EBIT)
− Interest expense
= Earnings Before Taxes (EBT)
6. What is a vertical common- A simple vertical common-size financial statement covers one year’s
size financial statement? operating results and expresses each component as a percentage of a
total.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 6 of 66
, For example, fixed assets will not be stated as a dollar amount but
rather will be stated as a percentage of total assets. Each expense
item will be stated as a percentage of total revenue.
7. What is horizontal Horizontal trend analysis is used to evaluate trends for a single
trend series analysis? business over a period of several years.
The first year is the base year, and amounts for subsequent years are
presented not as dollar amounts but as percentages of the base year
amount, with the base year assigned a value of 100%, or 100.
8. How is working capital Current Assets
calculated? − Current Liabilities
= Working Capital
9. How is the current ratio Current Assets
calculated? Current Liabilities
10. How is the quick ratio Cash + Net Receivables + Marketable Securities
calculated? Current Liabilities
11. How is the cash ratio Cash & Cash Equivalents + Marketable Securities
calculated? Current Liabilities
12. How is the cash flow ratio Operating Cash Flow
calculated? Period-End Current Liabilities
13. How is the net working Net Working Capital
capital ratio calculated? Total Assets
14. What is financial leverage? The use of debt to increase earnings.
15. How is the financial leverage Total Assets
ratio calculated? Total Equity
16. How is the degree of % [of future] Change in Net Income
financial leverage % [of future] Change in EBIT
calculated? (Earnings Before Interest and Taxes)
17. What is operating leverage? Operating leverage measures the use of fixed operating costs to
generate greater operating profit.
How is the degree of % [of future] Change in EBIT
18. operating leverage % [of future] Change in Sales
calculated?
19. What does degree of Degree of total leverage expresses the degree to which a company
total leverage measure? uses fixed costs in its operations as well as the degree to which the
company uses fixed rate financing in its capital structure.
20. How is the degree of total % [of future] Change in Net Income
leverage calculated? % [of future] Change in Sales
From the Desk of Muhammad Zain – Founder of Zain Academy Page 7 of 66
S.No Questions Answers
1. What are the five Liquidity ratios, which measure the sufficiency of the firm’s
classifications of ratios? cash resources to meet its short-term cash obligations.
Leverage, capital structure, solvency and earnings coverage
ratios, which evaluate the firm’s ability to satisfy its debt and
obligations for other fixed financing charges such as operating
leases by looking at the mix of its financing sources and its
historical earnings.
Activity ratios, which provide information on a firm's ability
to manage efficiently its current assets (accounts receivable
and inventory) and current liabilities (accounts payable).
Profitability analysis, which measures the firm’s profit in
relation to its total revenue or the amount of net income from
each dollar of sales and its return on invested assets.
Market ratios and earnings per share analysis,
or shareholder ratios, which describe the firm’s financial
condition in terms of amounts per share of stock.
2. How is operating income Sales or service revenues
calculated? − Cost of goods sold (COGS)
= Gross profit
− Selling, general, and administrative expenses
= Operating income
3. How is EBIT calculated? Operating income
+ Interest and dividend income
+/− Non-operating gains/(losses)
+/− G/L from operations of discontinued Component X including
G/L on disposal of $XXXX (before tax)
= Earnings Before Interest and Taxes (EBIT)
4. What is EBITDA? EBITDA stands for earnings before interest, taxes, depreciation and
amortization. EBIT (earnings before interest and taxes) includes
deductions for depreciation and amortization expensed. Therefore,
EBITDA is EBIT plus depreciation and amortization expense, to “add
back” the depreciation and amortization. EBITDA is used to analyze a
company's earnings before interest and taxes as well as before the
non-cash charges of depreciation and amortization.
5. How is EBT calculated? Earnings Before Interest and Taxes (EBIT)
− Interest expense
= Earnings Before Taxes (EBT)
6. What is a vertical common- A simple vertical common-size financial statement covers one year’s
size financial statement? operating results and expresses each component as a percentage of a
total.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 6 of 66
, For example, fixed assets will not be stated as a dollar amount but
rather will be stated as a percentage of total assets. Each expense
item will be stated as a percentage of total revenue.
7. What is horizontal Horizontal trend analysis is used to evaluate trends for a single
trend series analysis? business over a period of several years.
The first year is the base year, and amounts for subsequent years are
presented not as dollar amounts but as percentages of the base year
amount, with the base year assigned a value of 100%, or 100.
8. How is working capital Current Assets
calculated? − Current Liabilities
= Working Capital
9. How is the current ratio Current Assets
calculated? Current Liabilities
10. How is the quick ratio Cash + Net Receivables + Marketable Securities
calculated? Current Liabilities
11. How is the cash ratio Cash & Cash Equivalents + Marketable Securities
calculated? Current Liabilities
12. How is the cash flow ratio Operating Cash Flow
calculated? Period-End Current Liabilities
13. How is the net working Net Working Capital
capital ratio calculated? Total Assets
14. What is financial leverage? The use of debt to increase earnings.
15. How is the financial leverage Total Assets
ratio calculated? Total Equity
16. How is the degree of % [of future] Change in Net Income
financial leverage % [of future] Change in EBIT
calculated? (Earnings Before Interest and Taxes)
17. What is operating leverage? Operating leverage measures the use of fixed operating costs to
generate greater operating profit.
How is the degree of % [of future] Change in EBIT
18. operating leverage % [of future] Change in Sales
calculated?
19. What does degree of Degree of total leverage expresses the degree to which a company
total leverage measure? uses fixed costs in its operations as well as the degree to which the
company uses fixed rate financing in its capital structure.
20. How is the degree of total % [of future] Change in Net Income
leverage calculated? % [of future] Change in Sales
From the Desk of Muhammad Zain – Founder of Zain Academy Page 7 of 66
