Free Questions › CPA › Business Analysis and Reporting
Free CPA Business Analysis and Reporting Practice Questions & Answers
491 exam-style Business Analysis and Reporting questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 1
The contribution margin per unit equals:
Select an option first.
Correct answer: B — SELLING PRICE minus VARIABLE cost per unit
Explanation: CM per unit = Selling price − VARIABLE cost per unit. It is the amount each unit contributes toward covering FIXED costs and then generating profit. Fixed costs are NOT deducted in arriving at contribution margin — that is the entire distinction from gross profit.
Question 2
The break-even point in UNITS equals:
Select an option first.
Correct answer: D — Fixed costs / Contribution margin per unit
Explanation: Break-even units = FIXED COSTS / CONTRIBUTION MARGIN PER UNIT. Each unit sold contributes its CM toward the fixed cost block; break-even is reached when the fixed costs are fully covered. Break-even in DOLLARS uses the CM RATIO as the denominator instead.
Question 3
The contribution margin RATIO equals:
Select an option first.
Correct answer: C — CM / SALES
Explanation: CM ratio = Contribution margin / SALES. It expresses the proportion of each sales dollar available to cover fixed costs and profit. Break-even in DOLLARS = Fixed costs / CM ratio.
Question 4
The margin of safety measures:
Select an option first.
Correct answer: B — How far SALES CAN FALL before reaching the break-even point
Explanation: MARGIN OF SAFETY = Actual (or budgeted) sales − Break-even sales. It measures the cushion before losses begin. A LOW margin of safety combined with HIGH operating leverage is genuinely dangerous: small revenue declines produce large profit declines from an already thin buffer.
Question 5
Degree of operating leverage (DOL) equals:
Select an option first.
Correct answer: A — Contribution margin / Operating income (EBIT)
Explanation: DOL = Contribution margin / EBIT (equivalently, %ΔEBIT / %ΔSales). It measures how sensitive operating income is to a change in sales. HIGH FIXED COSTS produce high operating leverage — profits swing violently with volume.
Get the full CPA question bank — free
Drop your email and we'll send you fresh CPA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 6
Net present value is computed by discounting cash flows at:
Select an option first.
Correct answer: C — The REQUIRED RETURN (cost of capital)
Explanation: NPV discounts future cash flows at the REQUIRED RETURN (typically the WACC). Accept the project if NPV ≥ 0. NPV's key advantage over IRR is its reinvestment assumption: it implicitly assumes cash flows are reinvested at the COST OF CAPITAL, which is realistic.
Question 7
The internal rate of return is the discount rate at which:
Select an option first.
Correct answer: C — NPV EQUALS ZERO
Explanation: IRR is the discount rate that makes NPV = 0. Accept if IRR ≥ the hurdle rate. Its flaws: it assumes reinvestment AT THE IRR (unrealistic for high-return projects), and it can produce MULTIPLE answers when cash flows change sign more than once.
Question 8
When NPV and IRR conflict on mutually exclusive projects, the auditor should rely on:
Select an option first.
Correct answer: B — NPV — because its reinvestment assumption (at the cost of capital) is realistic
Explanation: When NPV and IRR CONFLICT for MUTUALLY EXCLUSIVE projects, NPV WINS. IRR's reinvestment assumption (reinvesting at the IRR itself) is unrealistic, and IRR ignores differences in project SCALE. NPV measures the actual dollar value added.
Question 9
The payback period ignores:
Select an option first.
Correct answer: C — The TIME VALUE OF MONEY and all cash flows AFTER the payback point
Explanation: PAYBACK ignores BOTH the time value of money AND every cash flow occurring after payback is achieved. A project can pay back quickly and still destroy value. It is a crude liquidity screen, not a decision rule. DISCOUNTED payback fixes the first flaw but not the second.
Question 10
The profitability index is used primarily for:
Select an option first.
Correct answer: C — CAPITAL RATIONING — ranking projects when funds are limited
Explanation: PI = PV of future cash flows / Initial investment. Accept if PI ≥ 1 (equivalent to NPV ≥ 0). Its real use is CAPITAL RATIONING: when capital is limited, ranking by PI maximises total NPV per dollar invested.
Question 11
The weighted average cost of capital uses weights based on:
Select an option first.
Correct answer: C — MARKET values of debt and equity
Explanation: WACC uses MARKET-VALUE weights, not book values. WACC = (E/V) × Re + (D/V) × Rd × (1 − t). Note only DEBT receives the tax shield — interest is deductible, dividends are not.
Question 12
In the WACC formula, the tax adjustment (1 − t) applies to:
Select an option first.
Correct answer: D — The cost of DEBT only
Explanation: Only the cost of DEBT is multiplied by (1 − t), because INTEREST is tax-deductible. Dividends on common AND PREFERRED stock are NOT deductible, so neither receives a tax shield. This is why preferred stock is an expensive financing source.
Question 13
Under CAPM, the cost of equity equals:
Select an option first.
Correct answer: C — Rf + β(Rm − Rf)
Explanation: CAPM: Re = Risk-free rate + β × (Market risk premium). Beta measures SYSTEMATIC risk — the only risk that is priced, because unsystematic risk can be diversified away at no cost.
Question 14
Beta measures:
Select an option first.
Correct answer: A — SYSTEMATIC (market) risk
Explanation: BETA measures SYSTEMATIC risk — sensitivity to market movements. It is the only risk for which investors are compensated, since UNSYSTEMATIC (firm-specific) risk can be eliminated through diversification for free. A beta of 1.0 moves with the market.
Question 15
Economic value added (EVA) equals:
Select an option first.
Correct answer: A — NOPAT minus (WACC × Invested capital)
Explanation: EVA = NOPAT − (WACC × Invested Capital). It charges a rent on ALL capital, including EQUITY. A division can report positive accounting profit yet NEGATIVE EVA — meaning it earned less than the cost of the capital it employs. That gap is the entire point of the measure.
Question 16
Return on investment (ROI) for a division equals:
Select an option first.
Correct answer: C — Operating income / Average operating assets
Explanation: Divisional ROI = Operating income / Average operating assets = Margin × Turnover. Its flaw is UNDERINVESTMENT: a manager earning 20% ROI will reject a 15% project even when the firm's cost of capital is 10%, because it would dilute their measured ROI.
Question 17
Residual income solves ROI's underinvestment problem because it is:
Select an option first.
Correct answer: B — A DOLLAR amount — so any project earning above the required return increases it
Explanation: RESIDUAL INCOME = Operating income − (Required return × Average operating assets). Because it is a DOLLAR figure, a manager accepts ANY project with positive RI — even one that would lower their ROI percentage. That cures the underinvestment distortion.
Question 18
The direct materials PRICE variance is computed using:
Select an option first.
Correct answer: C — Actual quantity PURCHASED
Explanation: DM PRICE variance = (Actual price − Standard price) × Actual quantity PURCHASED. It is isolated at the point of PURCHASE. The DM QUANTITY variance uses actual quantity USED. Different quantities in the same pair of formulas — and the exam gives you both figures.
Question 19
The direct labour EFFICIENCY variance is computed as:
Select an option first.
Correct answer: A — (Actual hours − Standard hours allowed) × STANDARD RATE
Explanation: Labour EFFICIENCY variance = (Actual hours − Standard hours allowed) × STANDARD RATE. It uses the STANDARD rate, isolating the quantity effect. The RATE variance = (Actual rate − Standard rate) × Actual hours, isolating the price effect.
Question 20
A variance is FAVOURABLE when:
Select an option first.
Correct answer: C — ACTUAL cost is LESS than STANDARD cost (or actual revenue exceeds budget)
Explanation: A variance is FAVOURABLE when actual COST is BELOW standard, or actual REVENUE is ABOVE budget. Compute the number, then reason about the DIRECTION from the economics — never from the sign alone, which depends on how you ordered the subtraction.
Question 21
The fixed overhead VOLUME variance arises because:
Select an option first.
Correct answer: D — Actual production volume DIFFERED from the volume used to set the fixed overhead rate — it measures CAPACITY UTILISATION
Explanation: The VOLUME variance is NOT a spending variance — nobody 'spent' it. It arises purely because fixed overhead is applied using a predetermined rate based on an assumed volume. Producing less than planned leaves fixed overhead UNDERAPPLIED. It measures capacity utilisation, nothing more.
Question 22
Economic order quantity (EOQ) minimises:
Select an option first.
Correct answer: B — The TOTAL of ordering costs plus carrying costs
Explanation: EOQ = √(2DS/H). It minimises the SUM of ORDERING costs and CARRYING costs. Its assumptions — constant demand, constant lead time, no stockouts — are all false in practice, which the exam may ask you to identify.
Question 23
The reorder point equals:
Select an option first.
Correct answer: B — (Lead time × Daily usage) + Safety stock
Explanation: ROP = (Lead time × Daily usage) + SAFETY STOCK. The first term is expected usage during the lead time; safety stock is a buffer against VARIABILITY in demand or lead time. With perfectly predictable demand and lead time, safety stock would be zero.
Question 24
Activity-based costing improves on a plant-wide rate when:
Select an option first.
Correct answer: A — Products consume overhead in DIFFERENT PROPORTIONS from the volume-based allocation base
Explanation: ABC matters when products consume overhead in DIFFERENT PROPORTIONS from the volume base (typically direct labour). A plant-wide rate systematically OVER-costs high-volume products and UNDER-costs low-volume, complex ones. Revealing that cross-subsidy is ABC's entire purpose.
Question 25
Under process costing with the WEIGHTED-AVERAGE method, equivalent units equal:
Select an option first.
Correct answer: D — Units completed and transferred out + (Ending WIP × % complete)
Explanation: WEIGHTED-AVERAGE EU = Units completed and transferred out + (Ending WIP × % complete). It makes NO attempt to separate periods — beginning WIP costs are LUMPED IN with current-period costs. FIFO separates them, giving a purer current-period cost per unit.
Question 26
The high-low method estimates cost behaviour using:
Select an option first.
Correct answer: D — Only the HIGHEST and LOWEST ACTIVITY observations
Explanation: HIGH-LOW uses only the two EXTREME ACTIVITY observations (not the extreme costs). Because it relies on just two points, a single OUTLIER destroys it. REGRESSION uses all observations and is far more robust — a point the exam expects you to make.
Question 27
The DuPont decomposition of ROE is:
Select an option first.
Correct answer: A — Margin × Turnover × Leverage
Explanation: ROE = Net profit margin × Asset turnover × Equity multiplier. Its value is DIAGNOSTIC — it shows WHY ROE changed. An ROE rising purely because the LEVERAGE term rose is a warning signal, not an achievement.
Question 28
Free cash flow to the firm (FCFF) equals:
Select an option first.
Correct answer: D — EBIT(1 − t) + Depreciation & amortisation − Capital expenditures − Increase in net working capital
Explanation: FCFF = EBIT(1 − t) + D&A − CapEx − ΔNWC. D&A is added back because it is non-cash; CapEx and working capital investment are subtracted because they are real cash outflows that never appeared on the income statement.
Question 29
The cost of PREFERRED stock equals:
Select an option first.
Correct answer: A — Dp / Pnet, with NO tax adjustment
Explanation: Cost of preferred = Preferred dividend / Net issue price. There is NO (1 − t) adjustment, because preferred dividends are NOT tax-deductible. That is why preferred is expensive: it carries debt-like fixed payments without the tax shield.
Question 30
The Gordon growth (dividend discount) model computes the cost of equity as:
Select an option first.
Correct answer: A — D1/P0 + g
Explanation: Re = (D1 / P0) + g — dividend yield plus growth. It requires g < Re and a stable, predictable dividend. It is useless for a company that pays no dividend, which is why CAPM is the default in practice.
More free CPA topics
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.