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Free Questions › CPA › Business Analysis and Reporting
Free CPA Business Analysis and Reporting Practice Questions & Answers
500 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 31
Degree of FINANCIAL leverage (DFL) equals:
Select an option first.
Correct answer: D — EBIT / (EBIT − Interest)
Explanation: DFL = EBIT / (EBIT − Interest) = %ΔEPS / %ΔEBIT. It measures sensitivity of EPS to a change in EBIT, and arises from DEBT. DOL arises from FIXED COSTS. Degree of COMBINED leverage = DOL × DFL — they MULTIPLY, they do not add.
Question 32
The degree of combined leverage equals:
Select an option first.
Correct answer: B — DOL × DFL
Explanation: DCL = DOL × DFL. The two leverages COMPOUND: a firm with high fixed costs AND high debt magnifies its own fragility. That multiplicative effect is why airlines and other high-fixed-cost, high-debt businesses fail in recessions.
Question 33
Modified internal rate of return (MIRR) improves on IRR because it:
Select an option first.
Correct answer: D — Assumes reinvestment at the COST OF CAPITAL and produces a SINGLE answer
Explanation: MIRR fixes BOTH of IRR's flaws: it assumes reinvestment at the realistic COST OF CAPITAL (not at the IRR), and it produces a SINGLE solution, avoiding the multiple-rates problem when cash flows change sign more than once.
Question 34
The equivalent units of production under FIFO differ from weighted-average in that FIFO:
Select an option first.
Correct answer: D — SEPARATES prior-period work in beginning WIP from current-period effort
Explanation: FIFO EU = (Beginning WIP × % TO COMPLETE) + Started and completed + (Ending WIP × % complete). It SEPARATES the work remaining on beginning WIP from current-period effort, yielding a pure CURRENT-PERIOD cost per unit — better for performance evaluation.
Question 35
Under ABSORPTION costing, fixed manufacturing overhead is:
Select an option first.
Correct answer: C — A PRODUCT cost — inventoried until the units are sold
Explanation: ABSORPTION (full) costing treats fixed manufacturing overhead as a PRODUCT cost, inventoried until sale. VARIABLE (direct) costing treats it as a PERIOD cost, expensed immediately. Absorption is required for GAAP; variable costing is used internally.
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Question 36
When production EXCEEDS sales, absorption costing income compared with variable costing income is:
Select an option first.
Correct answer: A — HIGHER — fixed overhead is deferred in ending inventory
Explanation: When PRODUCTION > SALES, inventory builds, and absorption costing DEFERS fixed overhead in that ending inventory. So absorption income is HIGHER. When SALES > PRODUCTION, inventory falls, releasing previously deferred fixed overhead, and absorption income is LOWER. Building inventory flatters absorption income — the perverse incentive the exam highlights.
Question 37
A relevant cost for a decision is one that is:
Select an option first.
Correct answer: C — FUTURE and DIFFERS between the alternatives
Explanation: A RELEVANT cost is FUTURE and DIFFERENTIAL — it differs between alternatives. SUNK costs (already incurred) are NEVER relevant. Allocated common costs that continue regardless are also irrelevant. Opportunity costs ARE relevant, even though they never appear in the accounts.
Question 38
In a make-or-buy decision, a cost that continues regardless of the decision is:
Select an option first.
Correct answer: C — IRRELEVANT — it does not differ between alternatives
Explanation: Only AVOIDABLE costs are relevant. Fixed overhead that continues whether the company makes or buys does NOT differ between alternatives and is therefore IRRELEVANT. Including unavoidable allocated overhead is the classic make-or-buy error, and it usually pushes the decision the wrong way.
Question 39
In a special-order decision with IDLE capacity, the relevant cost floor is:
Select an option first.
Correct answer: A — The INCREMENTAL (variable) cost of the order
Explanation: With IDLE capacity, accepting a special order requires only that the price exceed the INCREMENTAL cost — normally the variable cost, plus any incremental fixed costs. Existing fixed costs are irrelevant, because they continue regardless. If capacity is CONSTRAINED, the OPPORTUNITY COST of displaced sales must also be covered.
Question 40
A constrained resource decision should maximise:
Select an option first.
Correct answer: A — CONTRIBUTION MARGIN PER UNIT OF THE CONSTRAINED RESOURCE
Explanation: When a resource is SCARCE (machine hours, labour hours), rank products by CM PER UNIT OF THE CONSTRAINT — not by CM per unit of product. A product with a high CM per unit but a heavy demand on the constraint may be less valuable than a lower-CM product that uses the constraint sparingly.
Question 41
The sales VOLUME variance is computed using:
Select an option first.
Correct answer: D — BUDGETED contribution margin per unit
Explanation: Sales volume variance = (Actual units − Budgeted units) × BUDGETED CM per unit. Holding CM at BUDGET isolates the pure VOLUME effect, separating it from any price or cost effect.
Question 42
The VARIABLE overhead efficiency variance is really a measure of:
Select an option first.
Correct answer: C — Efficiency in the ALLOCATION BASE (usually labour hours) — not overhead spending at all
Explanation: The VOH efficiency variance = (Actual hours − Standard hours) × Standard rate. Because overhead is APPLIED on labour hours, this variance reflects LABOUR efficiency, not overhead spending. It says nothing about how much overhead was actually spent.
Question 43
Target costing works BACKWARD from:
Select an option first.
Correct answer: B — The MARKET PRICE, less the desired profit, to derive an allowable cost
Explanation: TARGET COSTING: Market price − Desired profit = TARGET COST. The market sets the price; the company must then engineer its costs down to fit. This inverts traditional COST-PLUS pricing, in which cost drives the price.
Question 44
A balanced scorecard includes which four perspectives?
Select an option first.
Correct answer: A — Financial, Customer, Internal Business Process, Learning & Growth
Explanation: The BALANCED SCORECARD's four perspectives: FINANCIAL; CUSTOMER; INTERNAL BUSINESS PROCESS; and LEARNING & GROWTH. Its purpose is to balance LAGGING financial indicators with LEADING non-financial drivers of future performance.
Question 45
The learning curve concept holds that:
Select an option first.
Correct answer: A — The cumulative average time per unit DECLINES by a fixed percentage each time cumulative output DOUBLES
Explanation: A LEARNING CURVE means the cumulative average time per unit falls by a constant percentage each time cumulative volume DOUBLES. An 80% learning curve means the cumulative average time is 80% of its former level at each doubling. It matters most in labour-intensive, complex production.
Question 46
Working capital equals:
Select an option first.
Correct answer: C — CURRENT ASSETS minus CURRENT LIABILITIES
Explanation: WORKING CAPITAL = Current assets − Current liabilities. It measures short-term liquidity in absolute dollars, whereas the CURRENT RATIO expresses the same relationship as a ratio.
Question 47
The cash conversion cycle equals:
Select an option first.
Correct answer: B — DSO + DIO − DPO
Explanation: CCC = Days Sales Outstanding + Days Inventory Outstanding − Days Payable Outstanding. Note the MINUS on DPO: paying suppliers more slowly SHORTENS the cycle, because suppliers effectively finance the operation. A NEGATIVE cycle means they finance it entirely.
Question 48
A firm's optimal capital structure is the mix that:
Select an option first.
Correct answer: B — MINIMISES the WACC (and thereby maximises firm value)
Explanation: The OPTIMAL capital structure MINIMISES the WACC, which maximises firm value. Debt is cheaper than equity (tax shield, senior claim) — but excessive debt raises financial distress costs and drives up BOTH the cost of debt and the cost of equity. There is a trade-off point.
Question 49
A sensitivity analysis in capital budgeting examines:
Select an option first.
Correct answer: A — How the NPV CHANGES when a single input variable is altered
Explanation: SENSITIVITY analysis flexes ONE variable at a time to see how much the NPV moves — identifying which assumptions the decision is most vulnerable to. SCENARIO analysis flexes SEVERAL variables together into coherent cases; MONTE CARLO simulates thousands of random combinations.
Question 50
The terminal (continuing) value in a DCF typically assumes:
Select an option first.
Correct answer: D — Cash flows GROW at a constant rate in perpetuity (or an exit multiple is applied)
Explanation: TERMINAL VALUE captures value beyond the explicit forecast period, usually via a GORDON GROWTH perpetuity (CF × (1+g) / (r − g)) or an EXIT MULTIPLE. It often represents the MAJORITY of total DCF value — which is why the growth assumption deserves intense scrutiny.
Question 51
A company has fixed costs of $200,000, a selling price of $50 and variable costs of $30. To earn a target profit of $100,000, it must sell:
Select an option first.
Correct answer: B — 15,000 units
Explanation: CM per unit = $50 − $30 = $20. Units = (Fixed costs + Target profit) / CM = ($200,000 + $100,000) / $20 = 15,000 units. Target profit simply joins fixed costs in the numerator.
Question 52
If the target profit above were AFTER TAX at a 25% rate, the required PRE-TAX profit would be:
Select an option first.
Correct answer: B — $133,333 — the after-tax target grossed up by (1 − t)
Explanation: Pre-tax target = After-tax target / (1 − t) = $100,000 / 0.75 = $133,333. You must GROSS UP the after-tax figure BEFORE putting it in the numerator. Dividing at the end instead of the start is the classic sequencing error.
Question 53
A company with a high DOL will see operating income:
Select an option first.
Correct answer: A — Change MORE than proportionally with sales — magnifying both gains and losses
Explanation: HIGH operating leverage means high FIXED costs, so each incremental sales dollar drops a large contribution margin straight to operating income — magnifying profits when sales rise AND losses when they fall. It is a double-edged sword, not a virtue.
Question 54
A project's NPV is positive but its IRR is below the hurdle rate. This is:
Select an option first.
Correct answer: A — IMPOSSIBLE for a conventional project — a positive NPV at the hurdle rate implies IRR EXCEEDS the hurdle rate
Explanation: For a CONVENTIONAL project (one sign change in the cash flows), NPV > 0 at the hurdle rate necessarily implies IRR > hurdle rate — they are mathematically linked. The two can only give conflicting ACCEPT/REJECT signals with unconventional cash flows (multiple IRRs), and can conflict on RANKING mutually exclusive projects.
Question 55
In a make-or-buy decision, an OPPORTUNITY COST of using internal capacity is:
Select an option first.
Correct answer: A — RELEVANT — it is the contribution forgone from the next best use of that capacity
Explanation: OPPORTUNITY COST — the contribution forgone from the best alternative use of a resource — IS relevant, even though it never appears in the accounting records. If making the part displaces production of a profitable product, that lost contribution must be added to the cost of making.
Question 56
A sunk cost is:
Select an option first.
Correct answer: D — IRRELEVANT — it is already incurred and cannot be changed by any future decision
Explanation: SUNK costs are ALREADY INCURRED and cannot be altered by any future decision, so they are NEVER relevant. The book value of an old machine is sunk; the disposal PROCEEDS are relevant (they are future and differential). Confusing the two is the classic replacement-decision error.
Question 57
When evaluating whether to replace an old machine, the old machine's BOOK VALUE is:
Select an option first.
Correct answer: B — IRRELEVANT (a sunk cost) — but its DISPOSAL PROCEEDS and any tax effect ARE relevant
Explanation: BOOK VALUE is SUNK and irrelevant. What IS relevant: the DISPOSAL PROCEEDS of the old machine, the TAX effect of any gain or loss on disposal, the cost of the new machine, and the differential operating costs. Managers resist selling at a 'loss' precisely because they wrongly treat book value as relevant.
Question 58
Under VARIABLE costing, fixed manufacturing overhead is:
Select an option first.
Correct answer: C — A PERIOD cost, expensed in full in the period incurred
Explanation: VARIABLE (direct) costing treats fixed manufacturing overhead as a PERIOD cost. It is NOT permitted for external GAAP reporting (which requires absorption costing), but it is superior for INTERNAL decision-making, because it removes the perverse incentive to build inventory to boost reported income.
Question 59
A company's ROI is 18% and the required return is 12%. A new project offering a 15% return would:
Select an option first.
Correct answer: C — Be REJECTED under ROI (it would lower the 18% average) but ACCEPTED under RESIDUAL INCOME (15% exceeds 12%)
Explanation: This is the UNDERINVESTMENT problem. A manager evaluated on ROI rejects the 15% project because it DILUTES their 18% average — even though it creates value (15% > 12% cost of capital). RESIDUAL INCOME, being a DOLLAR measure, would accept it. That divergence is the entire case for RI.
Question 60
The transfer price that best preserves goal congruence when the selling division has IDLE capacity is:
Select an option first.
Correct answer: C — At least the VARIABLE cost (the minimum) — market price would be the maximum
Explanation: With IDLE capacity, the selling division's MINIMUM acceptable transfer price is its VARIABLE (incremental) cost — it loses nothing by transferring. The MAXIMUM the buying division will pay is the external MARKET price. Any price in that range preserves goal congruence. With NO idle capacity, the minimum rises by the OPPORTUNITY COST of displaced sales.
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