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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 31
High accruals relative to total assets typically indicate:
Select an option first.
Correct answer: B — Lower earnings quality
Explanation: High accruals often signal less persistent earnings. A: Opposite. C: There is a known relationship. D: Accruals reduce cash flow.
Question 32
A company’s gross margin suddenly improves without any change in pricing or cost structure. What is the most reasonable concern?
Select an option first.
Correct answer: A — Inventory valuation may be aggressive
Explanation: Sudden margin jumps may reflect inventory manipulation. B, C, D: Not directly tied to gross margin anomalies.
Question 33
If a company’s expenses shift from operating expenses to “special items,” what is the likely effect?
Select an option first.
Correct answer: A — Operating profit appears higher
Explanation: Moving normal expenses out of operations inflates operating profit. B: Opposite effect. C, D: Not directly affected.
Question 34
Why are going‑concern warnings in audit reports often not timely?
Select an option first.
Correct answer: B — They appear after financial distress is already visible
Explanation: By the time auditors issue warnings, markets usually already know the company is struggling. A: Opposite. C: They rely on both history and judgment. D: They are required when appropriate.
Question 35
A company changes auditors three times in three years. What is the most reasonable concern?
Select an option first.
Correct answer: B — There may be disagreements about accounting practices
Explanation: Frequent auditor changes can signal disputes or reporting issues. A, C, D: Possible but not the main concern.
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Question 36
Which disclosure is most relevant for understanding long‑term environmental liabilities?
Select an option first.
Correct answer: B — Provisions note
Explanation: Provisions notes describe environmental and legal obligations. A, C, D: Not focused on long‑term liabilities.
Question 37
A company’s pension note shows a very low discount rate. What is the likely effect?
Select an option first.
Correct answer: B — Higher pension liability
Explanation: Lower discount rates increase the present value of obligations. A: Opposite. C, D: Not relevant.
Question 38
Risk disclosures about interest rate sensitivity help analysts understand:
Select an option first.
Correct answer: B — How earnings respond to rate changes
Explanation: Sensitivity analysis shows how profits change with rate movements. A, C, D: Not related to interest rate risk.
Question 39
A company’s management commentary highlights supply chain risks. Why is this useful?
Select an option first.
Correct answer: A — It reveals management’s view of operational vulnerabilities
Explanation: Commentary provides insight into risks management considers important. B, C, D: Not true.
Question 40
A bank’s net interest margin falls sharply. What is a likely cause?
Select an option first.
Correct answer: A — Funding costs increased faster than loan yields
Explanation: Margin compresses when borrowing costs rise faster than lending returns. B: Would increase margin. C, D: Not implied.
Question 41
A property & casualty insurer reports a combined ratio above 100%. This means:
Select an option first.
Correct answer: B — Underwriting is unprofitable
Explanation: Combined ratio >100% means claims + expenses exceed premiums. A: Opposite. C, D: Not implied.
Question 42
Life insurers are sensitive to interest rate changes mainly because:
Select an option first.
Correct answer: A — Their liabilities are long‑term
Explanation: Long‑term obligations are highly sensitive to discount rates. B, C, D: Not true.
Question 43
An insurer with a large share of assets in low‑rated bonds most likely has:
Select an option first.
Correct answer: B — Higher investment risk
Explanation: Low‑rated bonds carry higher default risk. A, C, D: Incorrect.
Question 44
A company grants stock options that vest over four years. When is compensation expense recognized?
Select an option first.
Correct answer: B — Evenly over the vesting period
Explanation: Expense is recognized as employees earn the award, typically over the vesting period. A: Exercise timing does not affect expense recognition. C: Grant date is only for valuation, not expense. D: Settlement does not determine expense timing.
Question 45
Which factor increases the fair value of a stock option?
Select an option first.
Correct answer: B — Higher expected life
Explanation: Longer expected life increases the chance the option ends in the money. A: Lower volatility reduces value. C: Lower share price reduces value. D: Lower risk‑free rate slightly reduces value.
Question 46
A company grants restricted stock units (RSUs). Which is true?
Select an option first.
Correct answer: B — RSUs typically have value equal to the share price
Explanation: RSUs are valued like shares, usually at market price. A: RSUs usually do not have voting rights. C: RSUs have no exercise price. D: RSUs can be forfeited if conditions aren’t met.
Question 47
If many employees leave before their stock awards vest, what happens?
Select an option first.
Correct answer: B — Expense decreases
Explanation: Fewer awards vesting means lower total compensation cost. A: Expense does not increase. C: Expense must be adjusted. D: Equity awards remain equity, not liabilities.
Question 48
A company settles stock options by issuing new shares. What is the effect?
Select an option first.
Correct answer: B — Share count increases
Explanation: Issuing new shares increases the number of shares outstanding. A: Exercise brings in cash. C: Shares do not decrease. D: No debt is created.
Question 49
Why do analysts adjust for share‑based compensation in valuation?
Select an option first.
Correct answer: B — It dilutes ownership
Explanation: Share‑based compensation dilutes existing shareholders, so analysts incorporate its cost. A: It does have an economic cost. C: It does not increase cash flow. D: It does not reduce liabilities.
Question 50
A defined contribution plan places investment risk on:
Select an option first.
Correct answer: B — The employee
Explanation: Employees bear investment risk in defined contribution plans. A: Employer bears risk in defined benefit plans. C, D: Not responsible for investment outcomes.
Question 51
A defined benefit plan’s obligation increases when:
Select an option first.
Correct answer: B — The discount rate falls
Explanation: Lower discount rates increase the present value of obligations. A: Higher rates reduce obligations. C: Lower life expectancy reduces obligations. D: Assets do not affect the obligation.
Question 52
Which component of pension cost reflects the cost of employees earning additional benefits in the current year?
Select an option first.
Correct answer: B — Service cost
Explanation: Service cost represents benefits earned in the current period. A: Interest cost relates to unwinding the discount. C: Asset return affects funded status, not earned benefits. D: Past service relates to plan changes.
Question 53
If plan assets fall sharply due to market losses, what happens?
Select an option first.
Correct answer: B — The pension deficit increases
Explanation: Lower assets increase the gap between assets and obligations. A: Liability is unchanged. C: Surplus does not increase. D: There is a clear impact.
Question 54
A company with a large pension deficit is most likely to face:
Select an option first.
Correct answer: A — Higher future contributions
Explanation: Deficits require additional funding. B: Opposite. C: Contributions affect cash flow. D: No investment is guaranteed.
Question 55
An investor owns 10% of another company and has no influence. Which method applies?
Select an option first.
Correct answer: C — Fair value method
Explanation: Small, passive stakes use fair value. A: Requires control. B: Requires significant influence. D: Used for joint operations.
Question 56
An investor owns 30% of another company and participates in key decisions. Which method applies?
Select an option first.
Correct answer: A — Equity method
Explanation: Significant influence typically begins around 20%. B: Used for passive stakes. C: Requires control. D: Outdated in many standards.
Question 57
Under the equity method, the investor’s share of the investee’s profit:
Select an option first.
Correct answer: A — Increases the investment balance
Explanation: Profit increases the carrying value of the investment. B: Losses decrease it. C: There is an impact. D: It affects both income and the investment account.
Question 58
Dividends received under the equity method:
Select an option first.
Correct answer: B — Decrease the investment balance
Explanation: Dividends reduce the carrying value because they are a return of investment. A: Opposite. C: Not treated as revenue. D: There is an impact.
Question 59
A company acquires 100% of another company. Which method applies?
Select an option first.
Correct answer: B — Full consolidation
Explanation: Full ownership requires full consolidation. A: Used for influence, not control. C, D: Not appropriate for full ownership.
Question 60
Goodwill arises when:
Select an option first.
Correct answer: A — Purchase price exceeds fair value of identifiable net assets
Explanation: Goodwill represents the premium paid above identifiable assets. B: Creates a bargain gain, not goodwill. C, D: Not related.
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