Financial Statement Analysis for CPA BAR: Ratios and Interpretation
By SimplyCPA · 11 October 2026
On this page (6)
- Liquidity: Current ratio, quick ratio and cash ratio — can the business pay short-term obligations?
- Activity: Receivable, inventory and payable turnover (and their days) — how efficiently working capital is used.
- Solvency: Debt-to-equity and times interest earned — can it survive long term and service its debt?
- Profitability: Margins, return on assets and return on equity; DuPont splits ROE into margin × turnover × leverage.
- Interpretation beats calculation: BAR asks why a ratio moved and what a transaction does to it — always reason from the numerator and denominator.
Where this is tested
Financial statement analysis is a core part of Area I (Business Analysis) of the Business Analysis and Reporting (BAR) Discipline, and basic ratios also appear in FAR. Expect both calculation questions and "what happens to the ratio if…" questions.
The main ratios
| Category | Ratio | Formula |
|---|---|---|
| Liquidity | Current ratio | Current assets ÷ current liabilities |
| Quick (acid-test) ratio | (Cash + marketable securities + receivables) ÷ current liabilities | |
| Cash ratio | (Cash + marketable securities) ÷ current liabilities | |
| Activity | Receivables turnover | Net credit sales ÷ average receivables (days = 365 ÷ turnover) |
| Inventory turnover | Cost of goods sold ÷ average inventory (days = 365 ÷ turnover) | |
| Payables turnover | Purchases (or COGS) ÷ average payables | |
| Solvency | Debt-to-equity | Total liabilities ÷ total equity |
| Times interest earned | Earnings before interest and taxes ÷ interest expense | |
| Profitability | Gross margin | Gross profit ÷ net sales |
| Net profit margin | Net income ÷ net sales | |
| Return on assets (ROA) | Net income ÷ average total assets | |
| Return on equity (ROE) | Net income ÷ average equity |
Cash conversion cycle = days sales outstanding + days inventory outstanding − days payables outstanding.
Worked example
Current assets $500,000 (cash $80,000, receivables $170,000, inventory $250,000); current liabilities $250,000; total liabilities $600,000; equity $900,000; net sales $2,000,000; COGS $1,300,000; net income $150,000; average inventory $260,000; average receivables $160,000.
- Current ratio = 500 ÷ 250 = 2.0
- Quick ratio = (80 + 170) ÷ 250 = 1.0
- Inventory turnover = 1,300 ÷ 260 = 5.0 (73 days)
- Receivables turnover = 2,000 ÷ 160 = 12.5 (about 29 days)
- Debt-to-equity = 600 ÷ 900 = 0.67
- Net margin = 150 ÷ 2,000 = 7.5%; ROE (year-end equity) = 150 ÷ 900 = 16.7%
DuPont analysis
ROE = Net profit margin × Asset turnover × Equity multiplier
= (Net income ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Equity).
Two companies with the same ROE can get there very differently — one through high margins, another through heavy leverage. DuPont shows which.
"What happens if…" questions
The trick: when a ratio is above 1, an equal increase (or decrease) in the numerator and denominator moves it towards 1. Paying $50,000 of payables with cash takes a 2.0 current ratio (500/250) to 2.25 (450/200). If the ratio were below 1, the same payment would lower it.
- Buying inventory on credit: current ratio falls (if above 1), quick ratio falls.
- Writing off a receivable against the allowance: no effect on net receivables or on any ratio.
- Issuing long-term debt for cash: current ratio rises; debt-to-equity rises.
Pair this with common-size and trend analysis and our BAR financial statement analysis notes.