CMA P2 Financial Statement Analysis: practice questions with answers

Question 1

A common-size balance sheet for Pellmont Co. shows current assets at 40% of total assets, inventory at 15% of total assets and current liabilities at 25% of total assets. Current assets consist only of cash, marketable securities, accounts receivable and inventory. What is Pellmont's quick (acid-test) ratio?

1. A 1.00
2. B 1.60
3. C 0.60
4. D 0.63

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Answer: A. Common-size percentages can be used directly because every item has the same base (total assets).
Quick assets = cash + marketable securities + receivables = current assets − inventory = 40% − 15% = 25%.
Quick ratio = 25% / 25% = 1.00.

Question 2

Garrick Bottling and Kestle Beverages each report net sales of $12,000,000 and gross property, plant and equipment of $8,000,000. Garrick's accumulated depreciation is $6,000,000 and Kestle's is $2,000,000. Both use straight-line depreciation and similar asset lives. Which conclusion about their fixed asset turnover (net sales / net PP&E) is most appropriate?

1. A Garrick's turnover of 6.0 vs Kestle's 2.0 mainly reflects older, more depreciated plant, and Garrick may soon need heavy capital spending.
2. B Garrick uses its plant three times as efficiently as Kestle (6.0 vs 2.0), so its return on assets should stay higher in the long run.
3. C Kestle's turnover of 2.0 vs Garrick's 6.0 shows it has invested in far more capacity than its sales of $12,000,000 can justify.
4. D Both companies have a fixed asset turnover of 1.5, because fixed asset turnover is always measured on gross PP&E.

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Answer: A. Net PP&E: Garrick $8,000,000 − $6,000,000 = $2,000,000; Kestle $8,000,000 − $2,000,000 = $6,000,000.
Fixed asset turnover: Garrick $12,000,000 / $2,000,000 = 6.0; Kestle $12,000,000 / $6,000,000 = 2.0.
On gross PP&E both are $12,000,000 / $8,000,000 = 1.5.

Garrick's assets are about 75% depreciated, so its high turnover reflects old plant, not better use of capacity. Analysts should compare asset ages (accumulated depreciation / gross PP&E) before reading activity ratios, and expect Garrick to face large replacement spending.

Question 3

Penrose Bank holds a portfolio of over-the-counter interest-rate swaps. It values them with a discounted cash flow model whose inputs are observable market yield curves and quoted interest rates; no significant unobservable inputs are used. In which level of the US GAAP fair value hierarchy (ASC 820) should these measurements be classified?

1. A Level 1
2. B Level 3
3. C They are outside the hierarchy because a model is used
4. D Level 2

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Answer: D. ASC 820 classifies fair value measurements by the lowest level input that is significant to the measurement:
- Level 1: unadjusted quoted prices in active markets for identical items.
- Level 2: other observable inputs, such as yield curves, quoted prices for similar items, or quoted prices in inactive markets.
- Level 3: significant unobservable inputs (the entity's own assumptions).

A swap valued from observable yield curves is Level 2. Analysts treat Level 3 measurements as lower quality because they rely more on management judgment.

Question 4

Petrel Marine's trend analysis uses 2021 as the base year (2021 = 100). The index for total operating revenue is 130 for 2023 and 156 for 2025. The analyst wants to restate the series with 2023 as the base year (2023 = 100). What is the restated index for 2025?

1. A 126.0
2. B 120.0
3. C 83.3
4. D 202.8

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Answer: B. An index number is the year's amount divided by the base-year amount, × 100. To move the base to 2023, divide each index by the 2023 index:
2025 restated index = 156 / 130 × 100 = 120.0.

Revenue grew 20% from 2023 to 2025. The growth between any two later years is the same whichever base year is used; only the scale of the series changes.

Question 5

Ashgrove Retail's common stock trades at a price-earnings ratio of 16, and the company pays out 40% of its earnings as common dividends. Ashgrove has no preferred stock. What is the dividend yield on Ashgrove's common stock?

1. A 2.50%
2. B 3.75%
3. C 6.40%
4. D 6.25%

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Answer: A. Dividend yield = DPS / price = (DPS / EPS) × (EPS / price) = payout ratio × earnings yield.
Earnings yield = 1 / 16 = 6.25%.
Dividend yield = 40% × 6.25% = 2.50%.

Question 6

Sutter Lane Apparel's SG&A expense for 2025 was $6,300,000 on net sales of $38,000,000. It included a $600,000 restructuring charge for closing a distribution center and a $150,000 one-time litigation settlement. Net sales in 2024 were $32,000,000. To assess underlying cost control, an analyst measures 2025 recurring SG&A as a percentage of 2025 net sales. What is this ratio?

1. A 14.6%
2. B 16.6%
3. C 17.3%
4. D 15.0%

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Answer: A. Recurring SG&A = $6,300,000 − $600,000 − $150,000 = $5,550,000.
Recurring SG&A ratio = $5,550,000 / $38,000,000 = 14.6% of sales (reported: 16.6%).

Removing nonrecurring items before computing expense ratios separates ongoing cost behaviour from one-time events, which makes the trend across years more meaningful.