I85PREP
⌘ K
FPAC study materials
FPAC study resources

FPAC practice questions

One question at a time. Build your FPAC understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Financial Analysis

In financial statement analysis, which ratio measures a company's ability to meet short-term obligations using only its most liquid current assets?

  1. Debt-to-equity ratio
  2. Gross margin ratio
  3. Current ratio
  4. Quick ratio Correct answer.

Explanation

The quick (acid-test) ratio excludes inventory and prepaid items from current assets, isolating cash, marketable securities, and receivables against current liabilities. It therefore tests liquidity under a stricter standard than the current ratio. Debt-to-equity and gross margin address leverage and profitability, not near-term liquidity.

Question 2Financial Analysis

A firm reports net income of $240,000, sales of $3,000,000, and total assets of $1,500,000. What is its return on assets?

  1. 12.5%
  2. 6.25%
  3. 8.0%
  4. 16.0% Correct answer.

Explanation

Return on assets equals net income divided by average (or here, given) total assets: $240,000 / $1,500,000 = 0.16, or 16%. The ratio shows how efficiently assets generate profit. Mixing in sales produces a margin figure rather than an asset return.

Question 3Financial Analysis

Which financial statement reports cash flows classified into operating, investing, and financing activities?

  1. Statement of financial position
  2. Income statement
  3. Statement of retained earnings
  4. Statement of cash flows Correct answer.

Explanation

The statement of cash flows organizes receipts and payments into operating, investing, and financing categories to explain the change in cash over a period. The statement of financial position is a point-in-time snapshot of assets and claims. The income statement reports accrual-based performance rather than cash movement.

Question 4Financial Analysis

Under the DuPont framework, return on equity is decomposed into which set of three drivers?

  1. Gross margin, inventory turnover, and debt ratio
  2. Current ratio, quick ratio, and cash ratio
  3. Operating margin, dividend payout, and book value
  4. Net profit margin, asset turnover, and equity multiplier Correct answer.

Explanation

The three-factor DuPont model multiplies net profit margin, total asset turnover, and the equity multiplier (assets divided by equity). This shows how profitability, efficiency, and leverage combine to produce return on equity. The other listed groupings mix unrelated liquidity or payout measures.

Question 5Financial Analysis

A company has current assets of $500,000, inventory of $150,000, and current liabilities of $250,000. What is its quick ratio?

  1. 0.60
  2. 1.60
  3. 1.40 Correct answer.
  4. 2.00

Explanation

The quick ratio is (current assets minus inventory) divided by current liabilities: ($500,000 - $150,000) / $250,000 = 1.40. Inventory is excluded because it may be slow to convert to cash. A ratio above 1.0 indicates liquid assets cover current liabilities.

Question 6Financial Analysis

Which concept requires that a company's financial statements be prepared on the assumption that the business will continue operating for the foreseeable future?

  1. Matching principle
  2. Materiality constraint
  3. Going concern assumption Correct answer.
  4. Revenue recognition principle

Explanation

The going concern assumption underpins preparation of financial statements by presuming the entity will continue in operation long enough to realize assets and settle liabilities. Without it, liquidation-based measurement would apply. Matching, revenue recognition, and materiality address timing and disclosure thresholds rather than entity continuity.

Question 7Financial Analysis

When performing horizontal analysis, an analyst compares a line item across periods primarily to identify what?

  1. The effect of changing prices on equity
  2. The trend and percentage change over time Correct answer.
  3. The proportion of each item within total assets
  4. The industry average for the line item

Explanation

Horizontal analysis tracks a line item across successive periods, usually expressing each period as a percentage of a base year, to reveal growth or decline trends. Vertical (common-size) analysis, by contrast, expresses items as a proportion of a single period total. The other options describe different analytical techniques.

Question 8Financial Analysis

Which of the following best describes the purpose of a common-size income statement?

  1. To restate all items in a constant currency
  2. To convert accrual figures into cash figures
  3. To show every line item as a percentage of net sales Correct answer.
  4. To eliminate intercompany transactions

Explanation

A common-size income statement expresses each line item as a percentage of net sales, enabling comparison of cost structure across companies of different size or across periods. It does not adjust for cash versus accrual or currency. Intercompany elimination is a consolidation procedure, not a common-size technique.

Question 9Financial Analysis

A company reports cost of goods sold of $600,000 and average inventory of $100,000. What is its inventory turnover, and what does it indicate?

  1. 6.0 times, indicating inventory is sold and replaced six times per period Correct answer.
  2. 6.0 times, indicating the firm holds six periods of inventory
  3. 0.17 times, indicating rapid inventory turnover
  4. 0.17 times, indicating slow inventory movement

Explanation

Inventory turnover equals cost of goods sold divided by average inventory: $600,000 / $100,000 = 6.0 times. A higher turnover generally signals efficient inventory management and faster conversion to sales. The reciprocal would express days of inventory rather than turnover.

Question 10Financial Analysis

An analyst observes that a company's debt-to-equity ratio rose from 0.8 to 1.4 while its interest coverage ratio fell from 6.0 to 2.5. Which interpretation is most consistent with these changes?

  1. The company reduced leverage and improved its ability to service debt
  2. The company increased leverage and its capacity to cover interest weakened Correct answer.
  3. The company's profitability must have increased sharply
  4. The company's liquidity improved because coverage rose

Explanation

A rising debt-to-equity ratio indicates greater reliance on debt financing, while a falling interest coverage ratio (EBIT divided by interest) signals reduced capacity to meet interest obligations. Together they suggest higher financial risk. Liquidity and profitability cannot be inferred as improving from these two movements.

Question 11Financial Analysis

Under the indirect method, which adjustment is added back to net income when computing cash flow from operations?

  1. An increase in accounts receivable
  2. Depreciation expense Correct answer.
  3. A gain on the sale of equipment
  4. A decrease in accounts payable

Explanation

Depreciation is a non-cash expense that reduced net income, so it is added back to reconcile net income to operating cash flow. Increases in receivables and decreases in payables consume cash and are subtracted. Gains on asset sales are removed because the related cash flow belongs in investing activities.

Question 12Financial Analysis

A company's net income is $180,000, preferred dividends are $30,000, and weighted average common shares outstanding are 50,000. What is basic earnings per share?

  1. $3.00 Correct answer.
  2. $4.20
  3. $3.60
  4. $2.40

Explanation

Basic EPS equals net income less preferred dividends, divided by weighted average common shares: ($180,000 - $30,000) / 50,000 = $3.00. Preferred dividends are subtracted because they are not available to common shareholders. Using net income alone overstates the per-share result.

Question 13Financial Analysis

In vertical analysis of a balance sheet, each asset line item is typically expressed as a percentage of what base?

  1. Shareholders' equity
  2. Total assets Correct answer.
  3. Net sales
  4. Total liabilities

Explanation

Vertical analysis of a balance sheet expresses each item as a percentage of total assets, so the asset, liability, and equity sections each sum to 100%. This reveals the relative composition of the balance sheet. Net sales is the base used for income statement common-sizing, not the balance sheet.

Question 14Financial Analysis

A company's accounts receivable turnover is 8 times. Approximately how many days does it take, on average, to collect receivables (using a 365-day year)?

  1. 73.0 days
  2. 8.0 days
  3. 45.6 days Correct answer.
  4. 30.4 days

Explanation

Days sales outstanding equals 365 divided by the receivables turnover: 365 / 8 = 45.625, or about 45.6 days. This measures the average collection period and reflects credit and collection efficiency. The turnover figure itself is a frequency, not a day count.

Question 15Financial Analysis

Which of the following transactions would increase a company's return on equity without changing net income, all else equal?

  1. Repurchasing shares using excess cash Correct answer.
  2. Declaring a stock dividend
  3. Recording an accrued expense
  4. Issuing new common shares at par

Explanation

A share repurchase reduces shareholders' equity, so the same net income is divided by a smaller equity base, raising return on equity. Issuing shares increases equity and lowers the ratio. Stock dividends merely reclassify equity components and do not change total equity.

Question 16Financial Analysis

When converting an income statement figure to a common-size percentage, which base is standard?

  1. Operating income
  2. Net sales Correct answer.
  3. Total assets
  4. Gross profit

Explanation

Common-size income statements express each line item as a percentage of net sales, allowing cost and expense structure to be compared across firms and periods. Gross profit, operating income, and total assets are not the standard base. Total assets is used for balance sheet common-sizing.

Question 17Financial Analysis

A firm has EBIT of $450,000 and interest expense of $150,000. What is its interest coverage ratio, and how should it be interpreted?

  1. 1.5, meaning EBIT covers interest one and a half times
  2. 0.33, meaning interest exceeds EBIT
  3. 3.0, meaning the firm holds three times its debt in assets
  4. 3.0, meaning EBIT covers interest three times Correct answer.

Explanation

Interest coverage equals EBIT divided by interest expense: $450,000 / $150,000 = 3.0. This indicates operating earnings cover interest charges three times, a common solvency benchmark. The reciprocal is not a coverage interpretation, and the ratio says nothing about asset backing for debt.

Question 18Financial Analysis

Which analysis technique isolates the impact of a single variable by holding all other assumptions constant?

  1. Trend analysis
  2. Sensitivity analysis Correct answer.
  3. Ratio analysis
  4. Common-size analysis

Explanation

Sensitivity analysis changes one input at a time while holding others fixed to measure how a result responds to that variable. Trend, common-size, and ratio analyses describe historical relationships rather than isolating single-variable effects. This makes sensitivity analysis useful for assessing forecast risk.

Question 19Financial Analysis

A company reports sales of $2,000,000, all on credit, and average accounts receivable of $250,000. What is the receivables turnover?

  1. 12.5 times
  2. 8.0 times Correct answer.
  3. 0.125 times
  4. 4.0 times

Explanation

Receivables turnover equals net credit sales divided by average accounts receivable: $2,000,000 / $250,000 = 8.0 times. This indicates receivables are collected and re-established eight times during the period. The reciprocal would represent a fraction of the period, not a turnover rate.

Question 20Financial Analysis

An analyst notes that a company's gross margin declined while its operating margin remained stable. Which explanation is most plausible?

  1. The company eliminated all selling and administrative costs
  2. Both cost of goods sold and operating expenses rose proportionally with sales
  3. Cost of goods sold rose as a percentage of sales, but operating expenses fell as a percentage of sales Correct answer.
  4. Net income increased because of lower taxes

Explanation

Gross margin reflects sales minus cost of goods sold, while operating margin also deducts operating expenses. If gross margin falls but operating margin holds, higher product costs were likely offset by lower operating expense ratios. Proportional increases in both would not leave operating margin stable.

Question 21Financial Analysis

A firm reports cash flow from operations of $900,000, capital expenditures of $400,000, and dividends paid of $100,000. What is its free cash flow to equity under the common definition?

  1. $400,000 Correct answer.
  2. $900,000
  3. $300,000
  4. $500,000

Explanation

Free cash flow to equity is often computed as cash flow from operations minus capital expenditures minus dividends: $900,000 - $400,000 - $100,000 = $400,000. It represents cash available to equity holders after reinvestment and distributions. Omitting either deduction overstates the figure.

Question 22Financial Analysis

A company's return on equity is 18%, its net profit margin is 6%, and its asset turnover is 1.5. What is its equity multiplier under the DuPont identity?

  1. 3.0
  2. 1.5
  3. 2.0 Correct answer.
  4. 0.5

Explanation

The DuPont identity states ROE = net profit margin x asset turnover x equity multiplier. Rearranging, the multiplier equals 18% / (6% x 1.5) = 18% / 9% = 2.0. This indicates assets are twice equity, consistent with moderate leverage.

Question 23Financial Analysis

Which situation most likely explains a large positive operating cash flow accompanied by negative net income?

  1. Repayment of long-term debt
  2. Large non-cash charges such as depreciation and impairment added back to income Correct answer.
  3. A substantial increase in accounts receivable
  4. Heavy investment in new plant and equipment

Explanation

Non-cash charges reduce reported net income without consuming cash, so adding them back under the indirect method can produce positive operating cash flow despite a net loss. Investing in plant affects investing activities, and rising receivables consume operating cash. Debt repayment falls under financing activities.

Question 24Financial Analysis

An analyst computes a company's sustainable growth rate as ROE multiplied by the retention ratio. If ROE is 15% and the dividend payout ratio is 40%, what is the sustainable growth rate?

  1. 6.0%
  2. 15.0%
  3. 9.0% Correct answer.
  4. 10.0%

Explanation

The retention ratio is 1 minus the payout ratio, or 60%. Sustainable growth equals ROE times retention: 15% x 0.60 = 9.0%. This estimates growth achievable from internally generated funds without altering leverage. Using the payout ratio instead of retention produces an incorrect result.

Question 25Financial Analysis

A firm's inventory turnover fell sharply while its days sales outstanding rose, with sales unchanged. Which conclusion is best supported?

  1. The firm has reduced its reliance on short-term debt
  2. The firm's gross margin must have expanded
  3. The firm has improved its cash conversion cycle
  4. Working capital is being tied up in inventory and receivables, weakening liquidity Correct answer.

Explanation

Slower inventory turnover lengthens inventory days, and higher days sales outstanding lengthens collection time; together they increase the cash conversion cycle and tie up working capital. Liquidity tends to weaken as cash is absorbed. None of the other conclusions follows from these two movements alone.

Question 26Financial Analysis

A company's quick assets total $240,000 and its current liabilities are $200,000. What is the quick ratio, and what does it indicate?

  1. 1.20, indicating the firm can cover current liabilities without relying on inventory Correct answer.
  2. 0.83, indicating the firm holds excess liquid assets
  3. 0.83, indicating the firm cannot cover current liabilities
  4. 1.20, indicating the firm has excessive inventory relative to liabilities

Explanation

The quick ratio equals quick assets divided by current liabilities, or $240,000 / $200,000 = 1.20. Because quick assets exclude inventory and prepaids, a ratio above 1.0 indicates the firm can settle current obligations from its most liquid resources.

Question 27Financial Analysis

Which financial statement links the income statement and the balance sheet by explaining changes in retained earnings over a period?

  1. The statement of financial position
  2. The statement of changes in equity Correct answer.
  3. The statement of cash flows
  4. The notes to the financial statements

Explanation

The statement of changes in equity reconciles opening and closing equity, showing net income, dividends, and other equity movements. It therefore connects profit reported on the income statement with the retained earnings balance on the balance sheet.

Question 28Financial Analysis

An analyst wants to determine whether a company generates enough profit from operations to service its debt before considering taxes. Which measure is most appropriate?

  1. Net income
  2. Net profit margin
  3. Gross profit
  4. EBIT Correct answer.

Explanation

EBIT measures operating profit before interest and taxes, so it captures the earnings available to service debt and taxes. Net income and net profit margin are already reduced by interest, and gross profit excludes operating costs.

Question 29Financial Analysis

A company reports total debt of $500,000 and total equity of $250,000. What is its debt-to-equity ratio?

  1. 0.33
  2. 2.00 Correct answer.
  3. 0.50
  4. 1.50

Explanation

Debt-to-equity equals total debt divided by total equity, or $500,000 / $250,000 = 2.00. The ratio indicates the firm uses twice as much debt as equity financing.

Question 30Financial Analysis

Which ratio best measures how efficiently a company uses its total assets to generate sales?

  1. Return on assets
  2. Total asset turnover Correct answer.
  3. Equity multiplier
  4. Operating margin

Explanation

Total asset turnover equals net sales divided by average total assets and directly expresses sales generated per dollar of assets. Return on assets combines profitability and turnover, while the equity multiplier and operating margin measure leverage and profitability respectively.

Question 31Financial Analysis

Which item is classified as an operating cash flow under the indirect method of preparing the statement of cash flows?

  1. Purchase of property, plant, and equipment
  2. Proceeds from issuing bonds
  3. Payment of cash dividends
  4. Depreciation added back to net income Correct answer.

Explanation

Under the indirect method, non-cash expenses such as depreciation are added back to net income within operating activities. Bond proceeds and capital expenditures are investing or financing flows, and dividends paid are financing outflows.

Question 32Financial Analysis

A company's current ratio is 2.0 and its quick ratio is 0.8. Which conclusion is most consistent with these figures?

  1. The company has no accounts receivable
  2. Inventory represents a large share of current assets Correct answer.
  3. Current liabilities exceed current assets
  4. The company is highly liquid on an immediate basis

Explanation

A wide gap between the current and quick ratios indicates that inventory (and prepaids) make up much of current assets. The quick ratio of 0.8 shows immediate liquidity is weaker than the current ratio suggests.

Question 33Financial Analysis

Which concept holds that expenses should be recognized in the same period as the revenues they helped generate?

  1. Matching principle Correct answer.
  2. Historical cost
  3. Going concern
  4. Conservatism

Explanation

The matching principle requires that expenses be recorded in the period in which the related revenues are recognized. This produces a more meaningful measure of periodic profit than recognizing costs when cash is paid.

Question 34Financial Analysis

A company reports sales of $1,200,000, cost of goods sold of $720,000, and operating expenses of $300,000. What is its operating margin?

  1. 25%
  2. 40%
  3. 15% Correct answer.
  4. 60%

Explanation

Operating profit equals $1,200,000 - $720,000 - $300,000 = $180,000. Dividing by sales of $1,200,000 gives an operating margin of 15%.

Question 35Financial Analysis

A firm's days sales outstanding falls from 60 days to 45 days while credit sales remain constant. Which effect should the analyst expect?

  1. A lower gross margin
  2. A lower average accounts receivable balance Correct answer.
  3. A higher cost of goods sold
  4. A higher average accounts receivable balance

Explanation

Days sales outstanding equals average receivables divided by sales per day, so a shorter collection period with constant sales implies a smaller receivables balance. Faster collection also tends to improve operating cash flow.

Question 36Financial Analysis

An analyst decomposes return on equity into net profit margin, asset turnover, and the equity multiplier. Which framework is being applied?

  1. The sustainable growth model
  2. The Altman Z-score
  3. The DuPont analysis Correct answer.
  4. The dividend discount model

Explanation

DuPont analysis decomposes return on equity into profitability, efficiency, and leverage components. This lets an analyst see whether returns are driven by margins, asset use, or borrowing.

Question 37Financial Analysis

A company has net income of $240,000, total assets of $1,600,000, and total equity of $800,000. Using the DuPont framework, what is its equity multiplier?

  1. 3.33
  2. 1.50
  3. 0.50
  4. 2.00 Correct answer.

Explanation

The equity multiplier equals total assets divided by total equity, or $1,600,000 / $800,000 = 2.00. This indicates that assets are financed with twice as much total capital as equity.

Question 38Financial Analysis

An analyst projects revenue growth of 8% but wants to test the sensitivity of net income to a 5% shortfall in that growth. Which technique is being used?

  1. Scenario analysis Correct answer.
  2. Common-size analysis
  3. Trend analysis
  4. Vertical analysis

Explanation

Scenario analysis evaluates outcomes under alternative assumptions, such as a revenue shortfall relative to the base case. It differs from common-size, trend, and vertical analysis, which describe historical relationships rather than alternative forecasts.

Question 39Financial Analysis

A company's gross margin is 35% and its operating margin is 12%. Which interpretation is most appropriate?

  1. Cost of goods sold exceeds sales
  2. Operating expenses consume a substantial share of gross profit Correct answer.
  3. The company has negative operating leverage
  4. Interest expense accounts for the entire gap between the two margins

Explanation

The gap between gross margin and operating margin reflects operating expenses such as selling, general, and administrative costs. A 23-percentage-point gap means those costs absorb a large portion of gross profit.

Question 40Financial Analysis

A firm reports operating cash flow of $600,000, capital expenditures of $250,000, and dividends of $50,000. What is its free cash flow to equity?

  1. $300,000 Correct answer.
  2. $350,000
  3. $550,000
  4. $400,000

Explanation

Free cash flow to equity equals operating cash flow minus capital expenditures minus dividends, or $600,000 - $250,000 - $50,000 = $300,000. This is the cash available to equity holders after reinvestment and distributions.

Question 41Financial Analysis

A company's inventory turnover declines from 6.0 to 4.0 while sales are flat and gross margin is unchanged. Which explanation is most consistent?

  1. The company has increased its selling prices
  2. The company has shortened its production cycle
  3. The company has reduced its average inventory balance
  4. The company is holding more inventory relative to its cost of goods sold Correct answer.

Explanation

Inventory turnover equals cost of goods sold divided by average inventory. With sales and cost of goods sold flat, a falling turnover implies a larger average inventory balance, which may signal obsolescence or weaker demand.

Question 42Financial Analysis

Which adjustment is required when converting an accrual-based revenue figure to cash collected from customers?

  1. Add an increase in accounts receivable
  2. Subtract a decrease in inventory
  3. Subtract an increase in accounts receivable Correct answer.
  4. Add an increase in accounts payable

Explanation

Cash collected equals revenue adjusted for the change in receivables. When receivables rise, some revenue has not yet been collected, so the increase is subtracted to arrive at cash receipts.

Question 43Financial Analysis

A firm's return on equity is 20%, its payout ratio is 40%, and its net profit margin is 8%. What is its sustainable growth rate?

  1. 12.0% Correct answer.
  2. 4.8%
  3. 8.0%
  4. 20.0%

Explanation

The sustainable growth rate equals ROE multiplied by the retention ratio. With a 40% payout, the retention ratio is 60%, so 20% x 0.60 = 12.0%.

Question 44Financial Analysis

An analyst observes that a company's operating margin is stable but its net margin has fallen sharply. Which factor most likely explains the decline?

  1. An increase in depreciation within operating costs
  2. Rising interest expense or a higher effective tax rate Correct answer.
  3. A deterioration in gross margin
  4. A decline in sales volume

Explanation

Operating margin is measured before interest and taxes, so stability there means the decline arises below the operating line. Higher interest costs or taxes reduce net income without affecting operating margin.

Question 45Financial Analysis

A company reports a current ratio of 1.8, inventory of $300,000, current assets of $900,000, and current liabilities of $500,000. What is its quick ratio?

  1. 1.80
  2. 0.60
  3. 1.20 Correct answer.
  4. 1.50

Explanation

Quick assets equal current assets minus inventory, or $900,000 - $300,000 = $600,000. Dividing by current liabilities of $500,000 gives a quick ratio of 1.20.

Question 46Financial Analysis

A company capitalizes a $2 million development cost that it would previously have expensed. In the year of the change, what is the immediate effect on reported operating profit and operating cash flow?

  1. Operating profit rises and operating cash flow is unchanged Correct answer.
  2. Operating profit falls and operating cash flow rises
  3. Operating profit is unchanged and operating cash flow falls
  4. Operating profit rises and operating cash flow rises by the same amount

Explanation

Capitalizing shifts the cost from the income statement to the balance sheet, raising current operating profit. Total cash paid is the same either way, so operating cash flow is unaffected, although the cash outflow is reclassified as investing.

Question 47Financial Analysis

An analyst notes that a company's cash conversion cycle shortened from 75 days to 55 days while sales were unchanged. Which combination best explains the improvement?

  1. Higher capital expenditures and lower depreciation
  2. Longer inventory holding periods and faster supplier payments
  3. Faster receivables collection or slower supplier payments Correct answer.
  4. Slower receivables collection and higher inventory days

Explanation

The cash conversion cycle equals days inventory plus days sales outstanding minus days payable outstanding. A shorter cycle can result from collecting receivables faster, holding less inventory, or stretching payables.

Question 48Financial Analysis

A firm reports EBIT of $800,000, interest expense of $200,000, and a tax rate of 25%. What is its degree of financial leverage, and how should it be interpreted?

  1. 1.33, meaning a 1% change in EBIT produces a 1.33% change in earnings per share Correct answer.
  2. 0.75, meaning earnings per share are less volatile than EBIT
  3. 1.25, meaning interest covers EBIT 1.25 times
  4. 4.00, meaning a 1% change in EBIT produces a 4% change in earnings per share

Explanation

Degree of financial leverage equals EBIT divided by EBIT minus interest, or $800,000 / $600,000 = 1.33. It indicates that a 1% change in EBIT produces a 1.33% change in earnings per share.

Question 49Financial Analysis

A company's return on assets is 10% and its after-tax cost of debt is 5%. It finances 60% of assets with debt and 40% with equity. Based only on these figures, what does the spread suggest about the use of leverage?

  1. Leverage has no effect on return on equity when ROA exceeds the cost of debt
  2. Leverage is accretive to return on equity because ROA exceeds the after-tax cost of debt Correct answer.
  3. Leverage is dilutive because the debt ratio exceeds 50%
  4. Return on equity equals return on assets regardless of capital structure

Explanation

When return on assets exceeds the after-tax cost of debt, borrowing adds more to earnings than it costs, which raises return on equity above return on assets. The 60% debt share magnifies this positive spread for equity holders.

Question 50Financial Analysis

A company reports net income of $500,000, depreciation of $120,000, an increase in accounts receivable of $80,000, and a decrease in accounts payable of $30,000. What is its operating cash flow under the indirect method?

  1. $730,000
  2. $470,000
  3. $630,000
  4. $510,000 Correct answer.

Explanation

Start with net income of $500,000, add back depreciation of $120,000, subtract the receivables increase of $80,000, and subtract the payables decrease of $30,000. The result is $510,000.