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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 511
For a growth-stage company, negative operating cash flow may be acceptable when:
Select an option first.
Correct answer: A — It results from heavy investment in working capital
Explanation: Why A is correct: Early-stage firms often invest in inventory and receivables to expand. Why others are wrong: B, C, and D indicate financial stress, not growth investment.
Question 512
In the investing section, capital expenditures represent:
Select an option first.
Correct answer: A — Cash used to acquire long-term productive assets
Explanation: Why A is correct: Capex is an investing outflow for long-term assets. Why others are wrong: B and D are financing. C is operating.
Question 513
Financing cash flows primarily reveal whether a company is:
Select an option first.
Correct answer: B — Raising or returning capital
Explanation: Why B is correct: Financing activities show borrowing, repayment, dividends, and share repurchases. Why others are wrong: A is operating. C is investing. D is working capital.
Question 514
A company that consistently borrows each year should be evaluated for:
Select an option first.
Correct answer: A — Timing of required repayments
Explanation: Why A is correct: Frequent borrowing raises concerns about future repayment obligations. Why others are wrong: B, C, and D are unrelated to borrowing sustainability.
Question 515
Free cash flow is best described as:
Select an option first.
Correct answer: B — Cash available after capital expenditures
Explanation: Why B is correct: Free cash flow = operating cash flow – capital expenditures. Why others are wrong: A is FCFE-related. C is incorrect. D is irrelevant.
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Question 516
The debt payment ratio measures:
Select an option first.
Correct answer: A — Ability to pay long-term debt using operating cash
Explanation: Why A is correct: CFO ÷ cash paid for long-term debt repayment measures debt-servicing ability. Why others are wrong: B, C, and D are unrelated.
Question 517
A company with consistently negative investing cash flow is likely:
Select an option first.
Correct answer: B — Expanding its asset base
Explanation: Why B is correct: Negative investing cash flow usually reflects capital expenditures. Why others are wrong: A is opposite. C and D are financing.
Question 518
A company with consistently positive investing cash flow may be:
Select an option first.
Correct answer: A — Selling assets
Explanation: Why A is correct: Positive investing cash flow often indicates asset sales. Why others are wrong: B and C produce negative investing cash flow. D is unrelated.
Question 519
A large increase in inventory combined with flat sales most likely signals:
Select an option first.
Correct answer: B — Weak demand or overproduction
Explanation: Why B is correct: Inventory rising without sales growth suggests goods are not selling or production exceeds demand. Why others are wrong: A contradicts the data. C is unlikely because inventory growth uses cash. D is opposite of rising inventory.
Question 520
Inventory write-downs are most likely to occur in industries where:
Select an option first.
Correct answer: B — Technological change makes products obsolete quickly
Explanation: Why B is correct: Rapid technological change increases the risk that inventory becomes outdated and must be written down. Why others are wrong: A reduces write-down risk. C does not create impairment risk. D reduces the likelihood of write-downs because LIFO inventory is already valued at older, lower costs.
Question 521
Companies using FIFO are more likely to record inventory write-downs than LIFO users because:
Select an option first.
Correct answer: B — FIFO ending inventory reflects more recent, higher costs
Explanation: Why B is correct: FIFO ending inventory is based on recent purchases, which may be higher and more vulnerable to impairment. Why others are wrong: A is the opposite of FIFO. C is incorrect; LIFO ending inventory reflects older costs. D is false.
Question 522
When inventory unit costs are falling, FIFO will generally produce:
Select an option first.
Correct answer: B — Higher cost of sales and lower income
Explanation: Why B is correct: FIFO uses older, higher costs first, increasing cost of sales and reducing profit. Why others are wrong: A describes rising cost environments. C is incorrect. D is unrelated to falling costs.
Question 523
FIFO ending inventory most closely approximates:
Select an option first.
Correct answer: B — Current replacement cost
Explanation: Why B is correct: FIFO ending inventory reflects the most recent purchases, approximating current replacement cost. Why others are wrong: A is more like LIFO. C and D are valuation concepts, not cost flow assumptions.
Question 524
A company using LIFO must disclose:
Select an option first.
Correct answer: A — LIFO reserve
Explanation: Why A is correct: LIFO users must disclose the LIFO reserve to reconcile to FIFO. Why others are wrong: B is not a required term. C and D are not required.
Question 525
Inventory turnover measures:
Select an option first.
Correct answer: B — How many times inventory is sold during a period
Explanation: Why B is correct: Inventory turnover = cost of sales ÷ average inventory. Why others are wrong: A is unrelated. C is days of inventory on hand. D is unrelated.
Question 526
Days of inventory on hand is:
Select an option first.
Correct answer: A — Inversely related to inventory turnover
Explanation: Why A is correct: More turnover means fewer days on hand. Why others are wrong: B is false. C contradicts the formula. D is incorrect.
Question 527
A very high inventory turnover ratio may indicate:
Select an option first.
Correct answer: B — Inventory shortages
Explanation: Why B is correct: Extremely high turnover may reflect insufficient inventory levels. Why others are wrong: A is opposite. C is not implied. D is unrelated.
Question 528
A very low inventory turnover ratio may indicate:
Select an option first.
Correct answer: B — Slow-moving or obsolete inventory
Explanation: Why B is correct: Low turnover suggests inventory is not selling quickly. Why others are wrong: A contradicts the data. C is unlikely. D is opposite.
Question 529
A company with high turnover but declining sales may be experiencing:
Select an option first.
Correct answer: B — Inventory shortages
Explanation: Why B is correct: High turnover with falling sales suggests inventory is too low to support demand. Why others are wrong: A contradicts declining sales. C contradicts falling sales. D is unrelated.
Question 530
A company with low turnover and rising sales may be experiencing:
Select an option first.
Correct answer: A — Overproduction
Explanation: Why A is correct: Rising sales but low turnover suggests inventory is accumulating faster than sales. Why others are wrong: B contradicts low turnover. C is opposite. D is not implied.
Question 531
Inventory write-downs reduce:
Select an option first.
Correct answer: B — Gross profit
Explanation: Why B is correct: Write-downs increase cost of sales, reducing gross profit. Why others are wrong: A increases, not decreases. C is unaffected because write-downs are non-cash. D is unrelated.
Question 532
A company with a high number of days of inventory on hand relative to peers may have:
Select an option first.
Correct answer: B — Slow-moving inventory
Explanation: Why B is correct: More days on hand suggests inventory is not selling quickly. Why others are wrong: A contradicts the data. C is opposite. D is opposite.
Question 533
A company with minimal write-downs and high turnover relative to peers likely has:
Select an option first.
Correct answer: B — Strong inventory efficiency
Explanation: Why B is correct: High turnover and few write-downs indicate effective inventory control. Why others are wrong: A contradicts the evidence. C and D are not supported.
Question 534
A company with frequent inventory write-downs and low turnover likely has:
Select an option first.
Correct answer: B — Excess or obsolete inventory
Explanation: Why B is correct: Low turnover and write-downs signal inventory that is not selling. Why others are wrong: A contradicts the data. C is unrelated. D contradicts the evidence.
Question 535
When a company purchases an intangible asset such as a patent (outside a business combination), it should initially record the asset at:
Select an option first.
Correct answer: B — Fair value at the acquisition date
Explanation: Why B is correct: Purchased intangibles are recorded at fair value, which is generally the purchase price. Why others are wrong: A applies only after acquisition. C is not the required measurement basis. D contradicts accounting standards.
Question 536
When multiple intangible assets are purchased together, the purchase price is allocated based on:
Select an option first.
Correct answer: B — Relative fair values of each asset
Explanation: Why B is correct: Allocation must reflect each asset’s fair value. Why others are wrong: A is not permitted. C does not determine allocation. D is only one component of valuation.
Question 537
Analysts often focus more on the types of intangible assets acquired rather than the assigned fair values because:
Select an option first.
Correct answer: C — Asset types reveal strategic direction
Explanation: Why C is correct: Knowing what assets were acquired provides insight into future operations and strategy. Why others are wrong: A and B are false; fair values involve judgment. D is unrelated.
Question 538
Internally developed intangible assets are usually:
Select an option first.
Correct answer: B — Expensed as incurred
Explanation: Why B is correct: Most internally developed intangibles must be expensed immediately. Why others are wrong: A applies only in limited cases. C is not allowed. D is incorrect.
Question 539
A company that develops its own intangible assets will generally report:
Select an option first.
Correct answer: B — Lower total assets than a company that purchases intangibles
Explanation: Why B is correct: Internally developed intangibles are expensed, reducing reported assets. Why others are wrong: A is opposite. C is incorrect. D is too extreme; some intangibles may still be recognized.
Question 540
On the cash flow statement, internally developed intangible costs appear as:
Select an option first.
Correct answer: B — Operating outflows
Explanation: Why B is correct: Internally developed intangible costs are expensed and thus classified as operating cash outflows. Why others are wrong: A applies to purchased intangibles. C is unrelated. D is incorrect.
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