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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 91
A company with an unusually LONG cash conversion cycle is likely to:
Select an option first.
Correct answer: A — Require MORE working capital financing — cash is tied up longer in the operating cycle
Explanation: A LONG cash conversion cycle means cash is tied up in receivables and inventory for an extended period before suppliers are paid — so MORE working capital financing is needed. Shortening it (faster collection, faster inventory turns, slower payment) releases cash.
Question 92
A company offers terms of 2/10, net 30. The approximate ANNUALISED cost to a customer of NOT taking the discount is:
Select an option first.
Correct answer: D — About 37% — the discount forgone, annualised over the 20 extra days
Explanation: Cost of forgoing the discount ≈ [Discount % / (100% − Discount %)] × [365 / (Payment period − Discount period)] = (2/98) × (365/20) ≈ 2.04% × 18.25 ≈ 37%. Forgoing a trade discount is one of the most expensive forms of financing available — far dearer than a bank loan.
Question 93
Commercial paper is:
Select an option first.
Correct answer: D — SHORT-TERM unsecured notes issued by large, creditworthy corporations — usually cheaper than bank borrowing
Explanation: COMMERCIAL PAPER is unsecured, short-term (typically under 270 days to avoid SEC registration) debt issued by highly-rated corporations. It is CHEAPER than a bank line, but is available only to strong credits — and the market can vanish abruptly in a crisis, which is precisely when it is most needed.
Question 94
A compensating balance requirement on a bank loan:
Select an option first.
Correct answer: C — INCREASES the effective interest rate — the borrower cannot use part of the borrowed funds
Explanation: A COMPENSATING BALANCE requires the borrower to leave a portion of the loan on deposit, so they receive less usable cash while paying interest on the full amount. This RAISES the effective interest rate above the stated rate.
Question 95
A company's degree of operating leverage is HIGHEST:
Select an option first.
Correct answer: A — NEAR the BREAK-EVEN point — where EBIT is small, so the CM/EBIT ratio is large
Explanation: DOL = CM / EBIT. NEAR break-even, EBIT approaches zero, so DOL approaches INFINITY — tiny sales changes produce enormous percentage swings in operating income. As sales rise well above break-even, DOL falls toward 1. Leverage is not a constant; it depends on where you are operating.
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Question 96
A scenario analysis differs from sensitivity analysis in that scenario analysis:
Select an option first.
Correct answer: D — Flexes SEVERAL variables TOGETHER into coherent cases (best case, base case, worst case)
Explanation: SENSITIVITY analysis flexes ONE variable at a time. SCENARIO analysis flexes SEVERAL variables together into internally CONSISTENT cases — recognising that in a recession, volume AND price AND collections all deteriorate together. MONTE CARLO simulation generates thousands of random combinations.
Question 97
The real option to ABANDON a project has value because it:
Select an option first.
Correct answer: B — LIMITS the DOWNSIDE — the firm can exit and recover salvage value if things go badly
Explanation: REAL OPTIONS have value precisely because of FLEXIBILITY. The option to ABANDON truncates the downside (a put option). The option to EXPAND captures the upside (a call). Standard NPV, which assumes a fixed path, systematically UNDERVALUES projects with significant embedded flexibility.
Question 98
A company using a single plant-wide overhead rate based on direct labour hours will likely:
Select an option first.
Correct answer: D — OVER-cost HIGH-VOLUME simple products and UNDER-cost LOW-VOLUME complex ones
Explanation: A volume-based rate assumes overhead is consumed in proportion to labour hours. In reality, LOW-VOLUME, COMPLEX products consume disproportionate setup, engineering and handling resources. The result is a CROSS-SUBSIDY: simple high-volume products are OVER-costed, complex low-volume ones UNDER-costed. Revealing this is ABC's central purpose.
Question 99
A company that is over-costing its high-volume product may:
Select an option first.
Correct answer: A — PRICE ITSELF OUT of a competitive market for that product, while unknowingly underpricing its complex products
Explanation: The strategic consequence of the ABC cross-subsidy: the over-costed high-volume product appears unprofitable, so the company raises its price and LOSES share in a competitive market — while the under-costed complex products look profitable and are aggressively pursued, destroying value. The costing error becomes a strategic error.
Question 100
Kaizen costing focuses on:
Select an option first.
Correct answer: A — CONTINUOUS, INCREMENTAL cost reduction during the PRODUCTION phase
Explanation: KAIZEN costing pursues CONTINUOUS, incremental cost reduction during MANUFACTURING. TARGET costing operates earlier, at the DESIGN stage, where the majority of a product's cost is locked in. The two are complementary: target costing designs cost out; kaizen grinds it down further in production.
Question 101
Life-cycle costing considers:
Select an option first.
Correct answer: B — ALL costs across the product's entire life — R&D, design, production, marketing, distribution and customer service
Explanation: LIFE-CYCLE costing captures ALL costs from conception to abandonment. The critical insight: 80–90% of a product's total life-cycle cost is COMMITTED at the DESIGN stage, even though little has yet been SPENT. Cost management must therefore happen upstream, before the cost is locked in.
Question 102
A value chain analysis examines:
Select an option first.
Correct answer: D — ALL activities from suppliers through to customers — identifying where value is added and where it is destroyed
Explanation: VALUE CHAIN analysis spans the entire sequence — from upstream SUPPLIERS, through the firm's internal activities, to downstream DISTRIBUTORS and CUSTOMERS. It identifies which activities genuinely add customer value, which are pure cost, and where the firm's competitive advantage actually resides.
Question 103
A company's inventory turnover falls while gross margin RISES. A red flag is that:
Select an option first.
Correct answer: B — COSTS may be sitting in INVENTORY rather than flowing through COGS — inflating both inventory and margin
Explanation: Falling turnover means inventory is accumulating. When that coincides with a RISING gross margin, the concern is that costs which should have hit COGS are being CAPITALISED into inventory — inflating both the balance and the margin. It can also signal unrecognised obsolescence.
Question 104
A DECLINING cash flow from operations while net income RISES may indicate:
Select an option first.
Correct answer: D — AGGRESSIVE REVENUE RECOGNITION or deteriorating collections — earnings not backed by cash
Explanation: A widening gap between rising NET INCOME and falling OPERATING CASH FLOW is one of the most reliable warning signs in financial analysis. It suggests revenue is being recognised without cash following — through aggressive recognition, channel stuffing, or deteriorating receivables quality.
Question 105
Free cash flow to EQUITY (FCFE) is discounted at:
Select an option first.
Correct answer: A — The COST OF EQUITY — giving EQUITY value directly
Explanation: FCFE is the cash available to EQUITY holders after debt service, so it is discounted at the COST OF EQUITY, yielding EQUITY value directly. FCFF (available to ALL capital providers) is discounted at WACC, yielding ENTERPRISE value. Mismatching the two is a fundamental valuation error.
Question 106
Enterprise value equals:
Select an option first.
Correct answer: C — Market cap PLUS debt MINUS cash (and cash equivalents)
Explanation: ENTERPRISE VALUE = Market capitalisation + Total debt + Preferred + Minority interest − Cash. It represents the value of the OPERATING business, independent of capital structure — which is why EV/EBITDA is comparable across firms with different leverage, while P/E is not.
Question 107
EV/EBITDA is preferred to P/E when comparing companies because it:
Select an option first.
Correct answer: A — Is INDEPENDENT of CAPITAL STRUCTURE and of differing depreciation policies
Explanation: EV/EBITDA is capital-structure NEUTRAL — both the numerator (EV) and the denominator (EBITDA, pre-interest) ignore financing. P/E, by contrast, is distorted by leverage and by differing tax and depreciation policies. That neutrality is why EV/EBITDA dominates in M&A.
Question 108
A high P/E ratio may indicate:
Select an option first.
Correct answer: C — HIGH EXPECTED GROWTH — or, alternatively, temporarily DEPRESSED earnings
Explanation: A high P/E can mean the market expects strong GROWTH — or that earnings are temporarily DEPRESSED (a cyclical trough), which mechanically inflates the ratio. The multiple alone tells you nothing; you must know which story is driving it.
Question 109
The Gordon growth model breaks down when:
Select an option first.
Correct answer: A — g APPROACHES or EXCEEDS r — the denominator (r − g) goes to zero or negative, producing an infinite or meaningless value
Explanation: Terminal value = CF × (1+g) / (r − g). As g approaches r, the denominator collapses and the value explodes toward infinity. A growth rate exceeding the discount rate produces a NEGATIVE value — economically meaningless. Terminal growth must be modest (typically at or below long-run GDP growth).
Question 110
A capital rationing situation requires ranking by:
Select an option first.
Correct answer: C — PROFITABILITY INDEX — maximising NPV per dollar of the limited capital
Explanation: With UNLIMITED capital, take every positive-NPV project. Under CAPITAL RATIONING, the goal is to maximise TOTAL NPV from a LIMITED budget — so rank by PROFITABILITY INDEX (NPV per dollar invested). Ranking by raw NPV would favour large projects that consume the whole budget inefficiently.
Question 111
The 'hurdle rate' for a division with HIGHER risk than the firm should be:
Select an option first.
Correct answer: C — HIGHER than the firm's WACC — using a single corporate WACC systematically over-invests in risky divisions
Explanation: Applying a SINGLE corporate WACC to every division systematically OVER-invests in high-risk divisions (their true cost of capital is understated) and UNDER-invests in low-risk ones. Each division should carry a RISK-ADJUSTED hurdle rate, estimated using the pure-play method.
Question 112
A company's operating cycle is the time from:
Select an option first.
Correct answer: D — Purchasing INVENTORY to COLLECTING the resulting receivable (DIO + DSO)
Explanation: OPERATING CYCLE = DIO + DSO — from acquiring inventory to collecting the cash from its sale. The CASH CONVERSION CYCLE subtracts DPO, because supplier credit finances part of that period. Operating cycle measures duration; CCC measures the cash gap that must be financed.
Question 113
The economic order quantity increases when:
Select an option first.
Correct answer: A — ORDERING costs rise or DEMAND rises
Explanation: EOQ = √(2DS/H). The EOQ RISES with higher DEMAND (D) or higher ORDERING cost per order (S), and FALLS with higher CARRYING cost (H). Intuitively: if ordering is expensive, order less often in bigger batches; if holding is expensive, order more often in smaller batches.
Question 114
Safety stock is justified when:
Select an option first.
Correct answer: C — Demand or LEAD TIME is VARIABLE, and the STOCKOUT cost exceeds the carrying cost of the buffer
Explanation: SAFETY STOCK buffers VARIABILITY in demand or lead time. The optimal level balances the CARRYING cost of the buffer against the expected STOCKOUT cost (lost sales, expedited freight, lost customers). With perfectly predictable demand and lead time, safety stock would be zero.
Question 115
Fixed costs $300,000; price $40; variable cost $25. Break-even in UNITS is:
Select an option first.
Correct answer: C — 20,000
Explanation: CM per unit = $40 − $25 = $15. Break-even units = $300,000 / $15 = 20,000 units.
Question 116
Using the same facts, break-even in DOLLARS is:
Select an option first.
Correct answer: D — $800,000
Explanation: CM ratio = $15 / $40 = 37.5%. Break-even $ = $300,000 / 0.375 = $800,000. Cross-check: 20,000 units × $40 = $800,000. Both routes reconcile.
Question 117
Same facts, with a target PROFIT of $150,000. Units required are:
Select an option first.
Correct answer: B — 30,000
Explanation: Units = (Fixed costs + Target profit) / CM per unit = ($300,000 + $150,000) / $15 = 30,000 units.
Question 118
Same facts, but the $150,000 target is AFTER TAX at a 25% rate. Units required are:
Select an option first.
Correct answer: C — 33,333
Explanation: Pre-tax target = $150,000 / (1 − 0.25) = $200,000. Units = ($300,000 + $200,000) / $15 = 33,333 units. You must GROSS UP the after-tax target BEFORE adding it to fixed costs.
Question 119
Actual sales are 25,000 units; break-even is 20,000 units; price is $40. The MARGIN OF SAFETY in dollars is:
Select an option first.
Correct answer: B — $200,000
Explanation: Margin of safety = (Actual sales − Break-even sales) = (25,000 − 20,000) × $40 = $200,000. As a PERCENTAGE: $200,000 / $1,000,000 actual sales = 20%.
Question 120
Contribution margin is $500,000 and operating income is $100,000. DOL is:
Select an option first.
Correct answer: A — 5.0
Explanation: DOL = Contribution margin / EBIT = $500,000 / $100,000 = 5.0. A 10% increase in sales would raise operating income by 5 × 10% = 50%.
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