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Practice CPA®CPA BAR Practice ExamQuestion 36

Easy1 markMultiple Choice

Area 2: Financial Statement AnalysisFinancial AnalysisCredit AnalysisSolvency

CPA · Question 36 · Area 2: Financial Statement Analysis

A company is evaluating the 'Creditworthiness' of a potential customer. Which ratio would be MOST relevant?

Answer options:

A.

Price-Earnings Ratio

B.

Times Interest Earned (Interest Coverage)

C.

Gross Margin

D.

Asset Turnover

How to approach this question

Think like a bank. What do you care about? Can they pay me back? That's Interest Coverage.

Full Answer

B.Times Interest Earned (Interest Coverage)✓ Correct

B

Credit analysis focuses on Solvency and Liquidity. Times Interest Earned measures the safety margin for paying interest obligations.

Common mistakes

Focusing on profitability (Margin) instead of solvency.

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