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Free Questions › CFA › Financial Statement Analysis
Free CFA Financial Statement Analysis Practice Questions & Answers
900 exam-style Financial Statement Analysis questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 1
A company reports a large goodwill impairment this year. Which is the most accurate description of this item?
Select an option first.
Correct answer: B — A non-cash charge that usually reflects overpayment in past acquisitions
Explanation: Goodwill impairment is a non-cash charge that typically signals that past acquisitions are not performing as expected, so the company reduces the carrying value of goodwill. A: It is not a routine monthly expense. C: It does not involve current cash outflow. D: It affects accounting profit, not just tax.
Question 2
If an analyst wants to understand the ongoing profitability of a company’s core business, which is the best approach?
Select an option first.
Correct answer: B — Exclude unusual, non-recurring items from profit
Explanation: To assess sustainable profitability, analysts often remove unusual or one-off items (e.g., big restructuring charges, one-time gains) to see the underlying performance. A: Including one-offs can distort the picture. C: Financing cash flows don’t show operating profitability. D: Revenue alone doesn’t show profitability.
Question 3
If an analyst removes unusual charges from profit and sees that adjusted ROE is still trending down over several years, what is the most reasonable conclusion?
Select an option first.
Correct answer: A — The core business is weakening over time
Explanation: If even after stripping out unusual items, ROE is falling, it suggests underlying operations are deteriorating. B: Tax rate may affect ROE, but the trend points to broader issues. C: The trend shows more than just unusual charges. D: Leverage might change, but the question doesn’t state that.
Question 4
A manufacturer’s balance sheet shows a rising share of goodwill and other intangibles as a percentage of total assets. Which is the most likely interpretation?
Select an option first.
Correct answer: A — The company is relying more on acquisitions for growth
Explanation: Goodwill and intangibles often increase when a company acquires other businesses. A rising share suggests acquisition-driven growth. B, D: These may affect income, not directly goodwill. C: Equity may or may not change; the key signal is acquisitions.
Question 5
A company’s long-term financial debt as a percentage of total long-term capital (debt + equity) has increased over several years. What does this indicate?
Select an option first.
Correct answer: C — Higher financial leverage
Explanation: A higher share of long-term debt in the capital mix means more leverage and higher financial risk. A: Leverage rising usually increases risk. B: It indicates more debt, not more equity. D: The structure clearly changed.
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Question 6
If a company’s defensive interval ratio (days it can cover cash expenses with liquid assets) rises, what does that suggest?
Select an option first.
Correct answer: B — Higher liquidity buffer
Explanation: A higher defensive interval ratio means the company can cover its daily cash expenses for more days using cash and near-cash assets—stronger liquidity. A: It’s the opposite. C, D: Not directly implied.
Question 7
Which situation is most consistent with low earnings quality?
Select an option first.
Correct answer: B — Earnings heavily driven by one-time gains
Explanation: If profit is driven by one-time gains (e.g., asset sales), it is less sustainable and considered lower quality. A, C: These point to higher quality. D: Excluding one-offs and still seeing stability is a good sign.
Question 8
A company’s receivables grow much faster than its sales. Which risk does this raise?
Select an option first.
Correct answer: B — Aggressive revenue recognition
Explanation: Receivables rising faster than sales can indicate revenue is being booked before cash is likely to be collected, or credit quality is deteriorating—both red flags. A, C, D: Not directly linked to receivables growth.
Question 9
If a company’s gross margin is deteriorating, what is one reason this might increase the temptation to manipulate earnings?
Select an option first.
Correct answer: B — Pressure to show stable or growing profits
Explanation: Falling margins can create pressure on management to maintain reported earnings, which may tempt them to use aggressive accounting. A, C, D: These don’t directly explain manipulation pressure.
Question 10
Which of the following is an example of “classification shifting” to inflate core earnings?
Select an option first.
Correct answer: B — Moving normal operating expenses into “restructuring charges”
Explanation: Classification shifting means moving regular expenses into special or non-recurring categories so that “core” or operating profit looks better. A, C, D: These are other forms of manipulation, not classification shifting.
Question 11
A company frequently reports “adjusted earnings” that exclude recurring restructuring costs every year. What is the main concern?
Select an option first.
Correct answer: B — The company is treating recurring costs as if they were one-time
Explanation: If restructuring costs happen every year, they are not truly one-off. Excluding them from “adjusted” earnings can mislead users about true ongoing costs. A, C, D: Not the core issue here.
Question 12
Why are audit opinions often of limited use as an early warning signal of financial distress?
Select an option first.
Correct answer: B — They are issued long after problems have already surfaced
Explanation: Audit opinions are issued after year-end and reflect past information. By the time a going-concern warning appears, the market usually already knows the company is in trouble. A: They are mainly historical, not forecast-based. C: They can mention going-concern doubts. D: They do not guarantee solvency.
Question 13
A sudden change in external auditor without a clear reason can be a warning sign because:
Select an option first.
Correct answer: B — It may indicate disagreements over accounting or reporting
Explanation: Unexplained auditor changes can signal disputes about accounting policies or concerns about reporting quality. A: Fees may or may not change. C: It doesn’t guarantee better quality. D: Internal controls are still required.
Question 14
Which note is most likely to contain detailed information about environmental provisions and legal contingencies?
Select an option first.
Correct answer: C — Provisions and contingencies note
Explanation: Provisions and contingencies notes typically describe environmental liabilities, legal disputes, and related uncertainties. A, B, D: They may mention related items but not as the main focus.
Question 15
Disclosures about pension and post-employment benefit plans are useful mainly because they:
Select an option first.
Correct answer: B — Reveal long-term obligations and key assumptions
Explanation: Pension notes show the size of obligations, plan assets, discount rates, and other assumptions that affect long-term risk. A: They include much more than current cash. C, D: They complement, not replace, the main statements.
Question 16
A company’s management commentary discusses major risks, including regulatory changes and cyber threats. Why is this section important?
Select an option first.
Correct answer: B — It reflects management’s own view of key risks
Explanation: Management commentary gives insight into what management sees as the main risks and how they plan to respond. A: It is usually not audited in the same way as the financials. C: It does not replace the notes. D: It may have marketing tone, but it still contains useful risk information.
Question 17
In analyzing a bank, the CAMELS framework includes which of the following elements?
Select an option first.
Correct answer: A — Capital, Assets, Management, Earnings, Liquidity, Sensitivity to market risk
Explanation: CAMELS stands for: Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk. B, C, D: These mix or mislabel the components.
Question 18
Life insurers often face significant interest rate risk because:
Select an option first.
Correct answer: B — Their liabilities are long term and sensitive to discount rates
Explanation: Life insurance obligations stretch far into the future and are discounted using interest rates. Changes in rates can significantly affect the present value of liabilities. A: Liabilities are usually long term. C, D: They typically hold large bond portfolios.
Question 19
In analyzing a life insurer’s investment portfolio, a high concentration in lower-rated bonds suggests:
Select an option first.
Correct answer: B — Higher credit risk and potentially higher yields
Explanation: Lower-rated bonds carry higher default risk but usually offer higher yields. This increases the insurer’s credit risk. A, C: Opposite or incomplete. D: Credit risk, not just currency risk, is key.
Question 20
Under the current rate method, which items are translated at the current exchange rate?
Select an option first.
Correct answer: C — Assets and liabilities
Explanation: The current rate method translates all assets and liabilities at the closing rate. A: Revenue uses average rates. B: Equity uses historical rates. D: Cash is included, but not the only item.
Question 21
A company’s foreign subsidiary operates independently and uses its local currency. Translation adjustments from this subsidiary typically go to:
Select an option first.
Correct answer: B — Equity
Explanation: Translation adjustments for independent foreign operations are recorded in equity. A: Only remeasurement gains/losses hit profit. C, D: Not affected by translation adjustments.
Question 22
A company’s foreign subsidiary is in a highly inflationary country. Which is most likely?
Select an option first.
Correct answer: A — Use of the temporal method
Explanation: In high inflation environments, statements are remeasured using the temporal method. B: Not used in high inflation. C: Translation is required. D: Temporal method gains/losses go to profit.
Question 23
If a company consistently reports large FX transaction gains and losses, what is the most reasonable concern?
Select an option first.
Correct answer: B — High exposure to foreign currency volatility
Explanation: Frequent FX swings indicate significant currency exposure. A, C, D: Not directly related to FX volatility.
Question 24
A company’s segment shows rising revenue but falling operating profit. What is the most likely interpretation?
Select an option first.
Correct answer: B — Costs are rising faster than revenue
Explanation: Falling profit despite rising revenue suggests cost pressure. A: Would increase profit. C: Efficiency would improve profit. D: All segments have some fixed costs.
Question 25
If a company’s largest segment is shrinking while smaller segments are growing, what is the key analytical question?
Select an option first.
Correct answer: B — Is the core business losing competitiveness?
Explanation: Decline in the main segment may signal weakening competitive position. A, C, D: Not directly tied to segment trends.
Question 26
A segment consistently shows high margins but low asset turnover. This suggests:
Select an option first.
Correct answer: B — A capital-heavy business
Explanation: Low turnover usually means heavy investment in assets. A: Capital-light businesses have high turnover. C, D: Impossible in real operations.
Question 27
If a segment’s operating profit rises but its share of total company profit falls, what does this imply?
Select an option first.
Correct answer: B — Other segments are growing faster
Explanation: Its share falls only if other segments grow faster. A: Profit rising contradicts shrinking. C: It is profitable. D: Irrelevant.
Question 28
A company’s “Other” segment becomes a large share of total profit. What is the main concern?
Select an option first.
Correct answer: A — It may hide unrelated or volatile businesses
Explanation: Large “Other” segments can obscure performance of diverse activities. B: Not necessarily fraud. C: Core business may still exist. D: Reporting is still required.
Question 29
Which situation most strongly suggests aggressive revenue recognition?
Select an option first.
Correct answer: A — Receivables rising faster than sales
Explanation: Receivables growing faster than sales may indicate early revenue booking. B, C, D: Not direct signs of revenue manipulation.
Question 30
A company repeatedly excludes “restructuring charges” from adjusted earnings every year. What does this imply?
Select an option first.
Correct answer: A — These costs are recurring
Explanation: Recurring exclusions suggest they are not one-time. B: Contradicted by repetition. C, D: Irrelevant.
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