2026 First Midterm Study Guide

Chapters 3–4

Financial statements, cash flow, statement relationships, and financial ratios. Built specifically for the September 22 test.

Concept section15 True / FalseFrom Chapters 3–4 · distribution may vary

Calculation section12 calculation targetsFrom Chapters 3–4 · distribution may vary

Important exam note

Practice examples — not the actual exam questions

Read before studying

All True/False and calculation questions in this study guide are SAMPLE PRACTICE QUESTIONS. The questions on the September 22, 2026 exam will be different. However, the exam will test similar concepts, relationships, formulas, calculation methods, and reasoning from Chapters 3 and 4. Do not memorize the numbers or wording of these sample questions. Focus on understanding why each answer is correct and how to solve the same type of problem when the facts or numbers change.

What to know

Exam map

Chapters 3–4 only

Exam totals: Chapters 3–4 contain 12 calculation targets and 15 True/False questions in total. Questions may come from either chapter; do not assume an equal chapter-by-chapter split.

Chapter 3 · Financial Statements

Income statement order and net income
Balance-sheet identities and missing-item algebra
Retained earnings and net working capital
CFO / CFI / CFF and source-versus-use logic
CapEx from net fixed assets and depreciation

Chapter 4 · Financial Ratios

Liquidity: current and quick ratios
Leverage: debt ratio and debt-to-equity
Profitability: margins, ROA, ROE
Efficiency: turnover, DIO, DSO
Market: EPS and P/E

Minimum formula sheet

Relationships to memorize

Exam-ready

Income statement

Sales − COGS = Gross Profit Gross Profit − OpEx − Dep = EBIT EBIT − Interest = EBT EBT − Taxes = Net Income

RE_end = RE_begin + NI − Dividends

Balance sheet

TA = TL + TE TA = CA + NFA CA = Cash + A/R + Inventory NWC = CA − CL

TE = Common Stock + Retained Earnings

Cash flow

ΔCash = CFO + CFI + CFF CFO = NI + Dep − ΔAR − ΔInventory + ΔAP

CapEx = ΔNFA + Depreciation (if no asset sales)

Working-capital signs: Asset ↑ = use; asset ↓ = source. Liability ↑ = source; liability ↓ = use.

Core ratios

Current = CA / CL Quick = (CA − Inventory) / CL Debt ratio = TL / TA D/E = Total Debt / Equity

Gross margin = Gross Profit / Sales Operating margin = EBIT / Sales Net margin = NI / Sales ROA = NI / Assets ROE = NI / Equity

Inv Turnover = COGS / Inventory DIO = 365 / Inv Turnover EPS = NI / Shares P/E = Price / EPS

Calculation section

12 Calculation Targets

Chapters 3–4 · distribution may vary

The calculation section contains 12 total targets from Chapters 3–4. The opening cash-flow problem demonstrates four possible targets—CFO/OCF, CFI, CFF, and ending cash—but the chapter distribution on the exam may vary.

Chapter 3 · Financial statements & cash flow

1A–1D

Chapter 3 · 4 calculation targets

Construct the Statement of Cash Flows

Using the indirect method, compute CFO, CFI, CFF, and ending cash.

Decrease in A/R$50

Increase in inventory$10

EBIT$300

Interest expense$20

Decrease in A/P$20

Cash dividends$10

Decrease in common stock$30

Decrease in net fixed assets$50

Depreciation$25

Income tax$30

Beginning cash$200

Step-by-step solution

Question 1 Video Explanation

3:25

The video begins with the full question and a pause prompt, then builds the solution on the blackboard.

Chapter 3

Income statement: Net income

Sales = $6,400; COGS = $3,840; SG&A = $1,120; Depreciation = $280; Interest = $160; tax rate = 25%. Compute net income.

Chapter 3

Balance-sheet identity

Total assets = $8,500 and total liabilities = $5,100. Compute total equity.

Chapter 4 · Financial ratios

Chapter 4

Current ratio

Current assets = $2,100; current liabilities = $1,400. Compute the current ratio.

Chapter 4

Debt ratio

Total liabilities = $5,100; total assets = $8,500. Compute the debt ratio.

Chapter 4

Operating margin

EBIT = $1,160; sales = $6,400. Compute operating margin.

Chapter 4

ROA

Net income = $750; total assets = $8,500. Compute ROA using ending assets.

Chapter 4

Inventory turnover and DIO

COGS = $3,840; inventory = $600. Compute inventory turnover and DIO.

Chapter 4

EPS and P/E

Net income = $900; shares outstanding = 300; stock price = $24. Compute EPS and P/E.

Questions 5–12 · Video review

Eight Remaining Calculation Questions

Detailed walkthrough

This video reviews the eight calculation questions that follow the cash-flow-statement problem. For each question, pause and try the calculation before watching the detailed explanation and Excel solution.

Important: These are sample practice questions, not the actual exam questions. Focus on the formulas, steps, units, and interpretation.

Concept check

15 True / False

Chapters 3–4 · distribution may vary