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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 151
A growing perpetuity of $50,000 (next year), growing at 3%, discounted at 8%, has a value of:
Select an option first.
Correct answer: C — $1,000,000
Explanation: PV = CF₁ / (r − g) = $50,000 / (0.08 − 0.03) = $50,000 / 0.05 = $1,000,000. Note how sensitive this is: raising g to 5% would give $1,666,667 — a 67% increase from a 2-point change.
Question 152
Terminal cash flow: after-tax salvage of $40,000 plus recovery of $25,000 of working capital. Total terminal cash flow is:
Select an option first.
Correct answer: D — $65,000
Explanation: Terminal cash flow = After-tax salvage ($40,000) + Recovery of net working capital ($25,000) = $65,000. Forgetting the working capital recovery is a common omission.
Question 153
Applied overhead is $180,000 and actual overhead is $195,000. Overhead is:
Select an option first.
Correct answer: C — UNDERAPPLIED by $15,000 — typically closed to COGS, INCREASING it
Explanation: Actual ($195,000) EXCEEDS applied ($180,000), so overhead is UNDERAPPLIED by $15,000 — not enough cost was charged to production. The balance is closed to COGS (increasing it) if immaterial, or prorated if material.
Question 154
A division has operating income of $240,000 and average operating assets of $1,200,000. ROI is:
Select an option first.
Correct answer: D — 20%
Explanation: ROI = Operating income / Average operating assets = $240,000 / $1,200,000 = 20%.
Question 155
Same division, with a required return of 14%. RESIDUAL INCOME is:
Select an option first.
Correct answer: B — $72,000 — $240,000 less (14% × $1,200,000)
Explanation: RI = $240,000 − (14% × $1,200,000) = $240,000 − $168,000 = $72,000. Positive RI means the division earned above its 14% required return — consistent with its 20% ROI.
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Question 156
A new project would earn $30,000 on $200,000 of assets (15% return). The division's current ROI is 20% and the required return is 14%. Under ROI, the manager would:
Select an option first.
Correct answer: C — REJECT it — the 15% return would DILUTE the 20% ROI, even though RI would rise
Explanation: This is the UNDERINVESTMENT problem in numbers. New project ROI = $30,000/$200,000 = 15%, BELOW the division's current 20% — so accepting it LOWERS the manager's measured ROI, and they reject it. But RI would INCREASE by $30,000 − (14% × $200,000) = $30,000 − $28,000 = $2,000. The project CREATES value and ROI rejects it.
Question 157
Inventory turnover is 6 and receivables turnover is 12. Payables turnover is 10. The CASH CONVERSION CYCLE (365 days) is:
Select an option first.
Correct answer: B — 55 days
Explanation: DIO = 365/6 = 60.8 days. DSO = 365/12 = 30.4 days. DPO = 365/10 = 36.5 days. CCC = 60.8 + 30.4 − 36.5 = 54.7 ≈ 55 days.
Question 158
Market cap is $800m, debt is $300m, and cash is $50m. ENTERPRISE VALUE is:
Select an option first.
Correct answer: A — $1,050m
Explanation: EV = Market cap ($800m) + Debt ($300m) − Cash ($50m) = $1,050m. Cash is SUBTRACTED because an acquirer would use it to pay down the purchase price.
Question 159
With an EV of $1,050m and EBITDA of $150m, the EV/EBITDA multiple is:
Select an option first.
Correct answer: D — 7.0x
Explanation: EV/EBITDA = $1,050m / $150m = 7.0x. Because both the numerator and denominator ignore financing, this multiple is comparable across firms with different capital structures — unlike P/E.
Question 160
A company's cost of debt is 7% pre-tax and the tax rate is 21%. The AFTER-TAX cost of debt is:
Select an option first.
Correct answer: D — 5.53%
Explanation: After-tax cost of debt = Pre-tax rate × (1 − t) = 7% × (1 − 0.21) = 7% × 0.79 = 5.53%. The tax deductibility of interest is what makes debt cheaper than equity.
Question 161
Preferred stock pays a $6 dividend and the net issue price is $80. The cost of PREFERRED is:
Select an option first.
Correct answer: C — 7.5% — $6/$80, with NO tax adjustment
Explanation: Cost of preferred = Dividend / Net issue price = $6 / $80 = 7.5%. There is NO (1 − t) adjustment — preferred dividends are NOT tax-deductible, which is why preferred is expensive relative to debt.
Question 162
A stock pays a $2.00 dividend NEXT year, trades at $40, and dividends grow at 4%. The cost of equity (Gordon) is:
Select an option first.
Correct answer: A — 9% — $2/$40 + 4%
Explanation: Re = (D₁/P₀) + g = ($2.00/$40) + 4% = 5% + 4% = 9%. Note D₁ is NEXT year's dividend. If the question gave D₀ (this year's), you would first multiply by (1+g).
Question 163
A company's DOL is 4 and its margin of safety is 25%. These figures are:
Select an option first.
Correct answer: D — CONSISTENT — DOL = 1 / margin of safety, and 1/0.25 = 4
Explanation: DOL = 1 / Margin of safety %. Here 1/0.25 = 4 — exactly consistent. The two measures are reciprocals: a 25% cushion before break-even corresponds precisely to a leverage factor of 4. Recognising this identity is a genuine insight, not a formula.
Question 164
A special order for 2,000 units at $18 arrives. Variable cost is $14; fixed cost is $6 per unit at normal volume. The company has IDLE capacity. It should:
Select an option first.
Correct answer: A — ACCEPT — the $4 incremental CM per unit generates $8,000; the fixed cost is IRRELEVANT with idle capacity
Explanation: With IDLE CAPACITY, the fixed cost of $6 continues regardless and is IRRELEVANT. The relevant comparison is price ($18) versus VARIABLE cost ($14) = $4 incremental CM × 2,000 units = $8,000 of additional profit. Comparing to the $20 FULL cost (option A) is the intended trap and would forgo $8,000.
Question 165
Same special order, but the company is at FULL CAPACITY and would displace regular sales with a CM of $10 per unit. It should:
Select an option first.
Correct answer: B — REJECT — the $4 incremental CM is less than the $10 OPPORTUNITY COST of displaced sales
Explanation: At FULL CAPACITY, the OPPORTUNITY COST of displaced regular sales ($10 CM per unit) becomes relevant. The special order contributes only $4 per unit — a NET LOSS of $6 per unit. Reject. Note the price would have to reach $24 ($14 variable + $10 opportunity cost) to break even. Capacity changes the answer entirely.
Question 166
A company can make a part for $22 (variable $16, allocated fixed $6) or buy it for $19. Only $2 of the fixed cost is AVOIDABLE if it buys. It should:
Select an option first.
Correct answer: D — MAKE - the RELEVANT cost of making is $18 ($16 variable + $2 avoidable fixed), BELOW the $19 purchase price
Explanation: RELEVANT cost to MAKE = variable $16 + AVOIDABLE fixed $2 = $18. The other $4 of allocated fixed cost is UNAVOIDABLE - it continues whether the company makes or buys - and is therefore IRRELEVANT. Since $18 (make) < $19 (buy), the company should MAKE, saving $1 per unit. Including the FULL $6 of allocated fixed cost gives a make cost of $22 and wrongly signals BUY (option A) - the classic make-or-buy error, and it usually pushes the decision the wrong way.
Question 167
A constrained machine has 1,000 hours available. Product X: CM $60, uses 3 hours. Product Y: CM $30, uses 1 hour. The company should prioritise:
Select an option first.
Correct answer: A — Y — its CM PER CONSTRAINED HOUR is $30 versus X's $20
Explanation: CM PER CONSTRAINED HOUR is what matters. X: $60/3 hrs = $20 per hour. Y: $30/1 hr = $30 per hour. Y generates 50% MORE contribution per scarce hour despite its lower CM per unit. Ranking by CM per UNIT (option A) is the intended trap and would destroy $10,000 of contribution across the 1,000 hours.
Question 168
A project has an NPV of $50,000 over 5 years; a mutually exclusive alternative has an NPV of $60,000 over 10 years. Using the EQUIVALENT ANNUAL ANNUITY at 10% (5-yr factor 3.7908; 10-yr factor 6.1446), the better project is:
Select an option first.
Correct answer: D — The 5-YEAR project — its EAA of $13,190 exceeds the 10-year project's $9,765
Explanation: EAA = NPV / Annuity factor. Five-year: $50,000/3.7908 = $13,190 per year. Ten-year: $60,000/6.1446 = $9,765 per year. The SHORTER project creates MORE value per year, and can be repeated. Comparing raw NPVs (option A) unfairly favours the longer project, which simply had more time to accumulate value.
Question 169
A division's ROI rose from 18% to 22%, but its RESIDUAL INCOME fell. This can happen if the division:
Select an option first.
Correct answer: A — SHRANK its asset base by disposing of assets earning ABOVE the cost of capital but BELOW the divisional average
Explanation: Disposing of an asset earning, say, 15% (above the 12% cost of capital but below the 18% divisional average) RAISES the ROI percentage while DESTROYING value — so RI FALLS. This is the mirror image of the underinvestment problem: ROI encourages managers to shed value-creating assets to flatter a ratio.
Question 170
A company's WACC is 10%. A division with LOWER business risk is evaluated using the corporate WACC. The consequence is:
Select an option first.
Correct answer: C — UNDER-investment in the low-risk division — its true cost of capital is BELOW 10%, so genuinely good projects are rejected
Explanation: Using a single corporate WACC systematically MISPRICES risk. For a LOW-risk division, the true hurdle rate is BELOW 10%, so applying 10% REJECTS value-creating projects — under-investment. Conversely, HIGH-risk divisions face too low a hurdle and OVER-invest. Each division needs a risk-adjusted rate (the pure-play method).
Question 171
A company reports rising net income and rising DAYS SALES OUTSTANDING, while operating cash flow declines. The most concerning interpretation is:
Select an option first.
Correct answer: D — Revenue is being recognised without CASH following — aggressive recognition, channel stuffing, or deteriorating receivable quality
Explanation: Three signals CONVERGE: rising income, rising DSO (collections slowing), and falling operating cash flow. Together they suggest revenue is being booked without cash following. Any one alone might be benign; all three together is the classic earnings-quality warning.
Question 172
A firm's EOQ is 500 units. If ordering costs QUADRUPLE, the new EOQ is:
Select an option first.
Correct answer: D — 1,000 units — EOQ varies with the SQUARE ROOT of ordering cost, so quadrupling S DOUBLES the EOQ
Explanation: EOQ = √(2DS/H). Since S appears under the SQUARE ROOT, quadrupling it multiplies the EOQ by √4 = 2. New EOQ = 500 × 2 = 1,000 units. Assuming a proportional (4×) increase gives 2,000 — the intended trap. The square-root relationship makes EOQ relatively INSENSITIVE to estimation errors.
Question 173
A company's cost structure shifts from mostly VARIABLE to mostly FIXED (automation). The effects are:
Select an option first.
Correct answer: B — HIGHER break-even and HIGHER DOL — more risk, but greater profit at high volumes
Explanation: Automating substitutes FIXED costs for VARIABLE. Fixed costs RISE (raising break-even) and variable cost per unit FALLS (raising the CM per unit). The result is HIGHER operating leverage: greater profits at high volume, but far greater losses at low volume. It is a bet on sustained volume.
Question 174
A company's beta is 1.5 with a debt/equity ratio of 1.0 and a 25% tax rate. The UNLEVERED (asset) beta is approximately:
Select an option first.
Correct answer: B — 0.86 — βU = βL / [1 + (1 − t)(D/E)] = 1.5 / [1 + 0.75 × 1.0]
Explanation: Unlevered beta = Levered beta / [1 + (1 − t) × (D/E)] = 1.5 / [1 + (0.75 × 1.0)] = 1.5 / 1.75 = 0.857 ≈ 0.86. Removing the leverage effect isolates the BUSINESS risk. To value a division, you would then RELEVER this asset beta at the division's own capital structure.
Question 175
A terminal value uses next-year cash flow of $10m with a 9% discount rate. If the perpetual growth estimate rises from 3% to 5%, terminal value changes from:
Select an option first.
Correct answer: C — $166.7m to $250m - a 50% increase from a 2-percentage-point change
Explanation: TV = CF1 / (r - g). At g = 3%: $10m / (0.09 - 0.03) = $10m / 0.06 = $166.7m. At g = 5%: $10m / (0.09 - 0.05) = $10m / 0.04 = $250m. A 2-POINT change in a single assumption swings terminal value by 50%. Terminal value often represents the MAJORITY of a DCF's total value - which is why the growth assumption deserves far more scrutiny than it usually receives.
Question 176
A company's ABC analysis reveals that Product X (high volume, simple) was being over-costed by 30% and Product Y (low volume, complex) under-costed by 60%. The strategic implication is:
Select an option first.
Correct answer: B — The firm may have been LOSING profitable X business to competitors while aggressively selling UNPROFITABLE Y — the costing error became a strategic error
Explanation: The CROSS-SUBSIDY has strategic consequences. Over-costed X looks unprofitable → the firm raises its price → loses share in a competitive market for a product that was ACTUALLY profitable. Under-costed Y looks profitable → the firm chases it aggressively → destroys value. The accounting distortion propagates directly into pricing and portfolio decisions.
Question 177
A company's transfer price is set at FULL COST. The selling division has idle capacity. The likely dysfunction is:
Select an option first.
Correct answer: C — The BUYING division may REJECT an internally beneficial transfer, because full cost EXCEEDS the true incremental cost to the firm
Explanation: With IDLE capacity, the firm's true incremental cost is the VARIABLE cost. Setting the transfer price at FULL COST (including fixed cost) makes the internal source look artificially expensive, so the buying division may source externally — or reject the transfer entirely — destroying firm-wide value. Full-cost transfer pricing is a classic source of goal incongruence.
Question 178
A company evaluates a project using PAYBACK and rejects it despite a positive NPV. This most likely occurred because:
Select an option first.
Correct answer: D — The project's cash flows are BACK-LOADED — payback ignores everything after the cutoff, including the large later inflows that create the NPV
Explanation: PAYBACK ignores ALL cash flows AFTER the payback point AND the time value of money. A project with modest early cash flows and large LATER inflows (an R&D or infrastructure project) will fail a payback screen while having a strongly positive NPV. Using payback as a decision RULE systematically rejects long-horizon value creation.
Question 179
A firm with high operating leverage and high financial leverage faces a 10% sales decline. If DOL is 3 and DFL is 2, EPS falls by approximately:
Select an option first.
Correct answer: A — 60% — DCL = 3 × 2 = 6, so a 10% sales decline produces a 60% EPS decline
Explanation: DCL = DOL × DFL = 3 × 2 = 6. %ΔEPS = DCL × %ΔSales = 6 × (−10%) = −60%. The leverages COMPOUND multiplicatively. A modest 10% revenue shortfall wipes out 60% of EPS — which is precisely why high-fixed-cost, high-debt businesses fail in recessions.
Question 180
Goodwill in a business combination equals:
Select an option first.
Correct answer: A — Consideration transferred + FV of NCI + FV of previously held interest − FV of identifiable net assets
Explanation: Goodwill = Consideration + FV of NCI + FV of any previously held interest − FV of IDENTIFIABLE net assets. Goodwill is the residual PLUG. A negative result is a BARGAIN PURCHASE GAIN, recognised in income immediately.
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