CMA Part 2 Exam Prep 2026 - A-Financial Statement Analysis

Candidates should be able to prepare and analyze common-size (vertical) financial statements for the balance sheet and income statement, conduct horizontal (comparative) analysis to identify year-over-year trends against a base year, and calculate growth rates for individual line items on both statements.

Candidates should be able to calculate and interpret key liquidity ratios — current, quick (acid-test), cash, cash flow, and net working capital ratios — and explain how changes in current assets, liabilities, or unit sales affect them. They must also understand the liquidity of current liabilities.For leverage, candidates need to define solvency and distinguish it from liquidity, define operating and financial leverage, and calculate their degrees. They should compute and interpret leverage ratios including the equity multiplier, debt-to-equity, long-term debt-to-equity, debt-to-total assets, interest coverage, fixed charge coverage, and cash flow to fixed charges. Finally, they must discuss how capital structure decisions influence a company’s solvency and risk profile.

Know the Liquidity Ratios; the Solvency Ratios and the Profitability Ratios.

Activity ratios measure how efficiently a company manages its assets and working capital. Key ratios include Accounts Receivable Turnover (Credit Sales / Avg. A/R), Inventory Turnover (COGS / Avg. Inventory), and Accounts Payable Turnover (Payables / Avg. A/P). Days metrics convert these: DSO Receivables (365 / A/R Turnover), Days in Inventory ((Avg. Inventory / COGS) × 365), and Days in Payables (365 / A/P Turnover). Operating Cycle = DSO Receivables + Days in Inventory; Cash Conversion Cycle subtracts Days in Payables. Total Asset Turnover (Sales / Avg. Assets) and Fixed Asset Turnover (Sales / Avg. PP&E) assess overall and fixed asset efficiency. Shorter cycles and higher turnovers indicate better performance.

Profitability ratios measure a company’s ability to generate earnings efficiently. Gross Profit Margin = (Net Sales – COGS) / Net Sales shows profitability after direct production costs, highlighting pricing power and cost control. Operating Profit Margin = Operating Income / Net Sales evaluates core business performance after operating expenses. Net Profit Margin = Net Income / Net Sales reflects overall bottom-line results after interest and taxes. EBITDA Margin adds back depreciation, amortization, interest, and taxes, providing a clearer view of operating performance by removing financing and accounting effects. ROA = Net Income / Total Assets measures how effectively assets generate profit. ROE = Net Income / Shareholders’ Equity gauges returns to owners. Higher values across these ratios indicate stronger profitability and better resource utilization.

Market ratios assess investor perceptions and stock valuation. Market-to-Book Ratio compares stock price to book value per share ((Total Equity – Preferred Equity) / Common Shares). P/E Ratio = Market Price / EPS shows how much investors pay for earnings. Price to EBITDA measures value relative to operating earnings. Basic EPS = (Net Income – Preferred Dividends) / Weighted Average Shares; Diluted EPS includes potential shares. Earnings Yield = EPS / Price; Dividend Payout Ratio = Dividends / Net Income; Shareholder Return = Price change + Dividends. Book value uses historical cost and may differ significantly from market value

Profitability ratios assess earnings efficiency. Gross Profit Margin = (Net Sales – COGS)/Net Sales measures core profitability after direct costs. Operating Profit Margin = Operating Income/Net Sales shows performance after operating expenses. Net Profit Margin = Net Income/Net Sales reflects bottom-line profitability. EBITDA Margin adds back non-cash and financing items for operational focus. ROA (Net Income/Total Assets) evaluates asset efficiency, while ROE (Net Income/Equity) measures return to shareholders. Higher margins and returns indicate stronger profitability.

Section A.4 addresses special issues affecting financial analysis. Foreign exchange fluctuations impact reported results due to changing rates influenced by economic and political factors. Foreign operations require identifying the functional currency (the primary currency of cash flows) and deciding between historical or current exchange rates, with translation gains/losses treated per standards. Inflation distorts ratios, requiring price-index adjustments for comparability. Off-balance sheet financing (operating leases, special purpose entities, sale/factoring of receivables, and joint ventures) keeps obligations off the balance sheet to improve ratios like debt-to-equity without increasing reported debt. Accounting changes are adjusted retrospectively for principles and errors, prospectively for estimates. Book value (historical) differs from market value; accounting profit ignores opportunity costs unlike economic profit. Earnings quality depends on business environment, GAAP compliance, and management judgment for accurate performance representation.