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CSC CX Selection study materials
CSC CX Selection study resources

CSC CX Selection: Financial Statements, Corporate Finance, and Valuation

CSC CX Selection · Work through your exam, one topic at a time.

All guide sections

Financial Statements, Corporate Finance, and Valuation

What this domain tests

Reading the three statements, computing the ratio families, and converting accounting numbers into a valuation. Expect ratio computation, DuPont decomposition, and discounted cash flow or multiple-based valuation.

The statements

  • Balance sheet: Assets = Liabilities + Shareholders' Equity, a snapshot at a point in time.
  • Income statement: revenue to net income over a period; includes EPS.
  • Cash flow statement: operating, investing and financing sections. Free cash flow = operating cash flow − capital expenditures.
  • IFRS applies to public companies; ASPE is used by many private enterprises, so comparability across statements requires checking the framework.

Ratio families

  • Liquidity: current ratio = current assets / current liabilities; quick ratio strips inventory and prepaids.
  • Leverage: debt-to-equity; interest coverage = EBIT / interest expense.
  • Efficiency: inventory turnover = COGS / average inventory; days = 365 / turnover.
  • Profitability: gross margin, net margin, ROE = net income / equity.
  • DuPont: ROE = net margin × asset turnover × equity multiplier.

Worked example

Current assets $500,000 (including inventory $200,000 and prepaid expenses $20,000); current liabilities $250,000.

  • Current ratio = 500,000 / 250,000 = 2.00
  • Quick ratio = (500,000 − 200,000 − 20,000) / 250,000 = 280,000 / 250,000 = 1.12 The current ratio looks comfortable, but more than 40% of current assets are inventory and prepaids. The quick ratio shows liquidity is adequate, not strong. That interpretation is what earns the second mark.

Traps

  • Using year-end inventory instead of average inventory in turnover.
  • Forgetting that preferred dividends reduce the numerator in basic EPS.
  • Treating a capital lease or operating lease obligation as irrelevant to debt ratios under current standards.
  • Mixing book equity with market equity in ROE and then comparing to P/B.

Key points

  • Current ratio = current assets / current liabilities; quick ratio removes inventory and prepaids.
  • DuPont: ROE = net margin × asset turnover × equity multiplier.
  • Free cash flow = operating cash flow − capital expenditures.
  • EPS numerator deducts preferred dividends.
  • IFRS versus ASPE affects comparability across issuers.