Question

Q.1. Certain barriers exist as to the adoption of international accounting standards for financial reporting by certain U.S. companies. These barriers include:

	A.	governance issues.
	B.	global comparability.
	C.	maintenance of the standards.
	D.	funding of the effort.

Q.2. Lending agreements often have a provision that requires the DSCR to be maintained below a certain figure.

True

False

Q.3. If total operating revenues are $20,000 and the operating margin is 10%, what is the amount of operating income?

	A.	$100
	B.	$1,000
	C.	$2,000
	D.	$200

Q.4. Solvency ratios reflect the ability of the organization to pay its annual debt obligations, including:

	A.	annual interest and principal obligations on its long-term debt.
	B.	annual interest and principal obligations on both its long-term and short-term debt.
	C.	annual principal obligations only on its long-term debt.
	D.	None of these is correct.

Q.5. The acronym EBIT is a broad measure in common use and is widely used by credit analysts.

True

False

Answer 1

Q 1: D Finding of the effort.

The adoption of international accounting standards for financial reporting by certain U.S. companies depends on voluntary financial contributions from industry, the international audit firms, and the financial community. This created at least the perception of a risk that the financial backers might gain undue influence over the standard-setting process.

Q2: True.

Explanation: Debt-service coverage ratio(DSCR) is a measurement of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.

DSCR can be used in analyzing firms, projects, or individual borrowers.

The ratio reflects the ability to service debt given a particular level of income.

​DSCR =  

Net Operating Income = Revenue−COE

COE = Certain operating expenses

Total Debt Service = Current debt obligations​.

Q 3: C $ 2,000

The formula for Operating Income = Total Operating Revenue – Direct Costs – Indirect Costs. OR

Operating Income = Total Operating Revenue * Operating Margin %

Operating Income = $ 20,000 * 10%

Operating Income = $ 2,000

Q 4: B annual interest and principal obligations on both its long-term and short-term debt.

The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-and long-term liabilities. The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations.

It measures the cash flow capacity in relation to all liabilities, rather than only short-term debt.

Solvency Ratio =

Q 5. True

Earnings before interest and taxes is an indicator of a company's profitability. One can calculate it as revenue minus expenses, excluding tax and interest.

EBIT is a term used by creditors for their credit risk analysis of a proposed loan. Credit processors, financial analysts, and the loan approval committee have to be clear as to which income to evaluate. It is important that in the performance of their functions, they have a uniform basis in determining the actual earning capacity of the business.

Once the credit risk is determined, the credit analyst will have a basis for whether or not to recommend additional collateral loans.