User alice, who is not root and not in group root, runs cat /data/report.txt. What happens?

To open a file by its path, you need execute (search) permission on every directory along that path. /data is 700, so only its owner can pass through it. Alice can't, so she gets "Permission denied" before the file's own permissions are even checked.

"It prints the file, because the file is world-readable" is wrong: the file's world-readable bit never comes into play. "Permission denied, because the file isn't executable" is also wrong: reading a file needs read permission, not execute.