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.
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Question 721
An increase in deferred tax liabilities is added to net income because it:
Select an option first.
Correct answer: B — Represents taxes accrued but not yet paid
Explanation: Why B is correct: Tax expense exceeds taxes paid → increases operating cash flow. Why others are wrong: A is incorrect. C is false. D misclassifies.
Question 722
A decrease in deferred tax liabilities is subtracted from net income because it:
Select an option first.
Correct answer: A — Indicates taxes paid exceed tax expense
Explanation: Why A is correct: Paying more tax than expensed reduces operating cash flow. Why others are wrong: B is opposite. C and D are unrelated.
Question 723
A decrease in prepaid expenses is added to net income because it:
Select an option first.
Correct answer: B — Indicates expenses recognized without new cash payments
Explanation: Why B is correct: Using prepaid assets means expenses recognized without cash outflow. Why others are wrong: A is incorrect. C and D misclassify.
Question 724
An increase in prepaid expenses is subtracted from net income because it:
Select an option first.
Correct answer: A — Represents cash paid for expenses not yet recognized
Explanation: Why A is correct: Paying cash for future expenses reduces operating cash flow. Why others are wrong: B is opposite. C and D are unrelated.
Question 725
A decrease in accrued liabilities is subtracted from net income because it:
Select an option first.
Correct answer: A — Indicates cash payments exceeded expenses
Explanation: Why A is correct: Paying off accrued liabilities reduces operating cash flow. Why others are wrong: B is opposite. C and D misclassify.
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An increase in accrued liabilities is added to net income because it:
Select an option first.
Correct answer: A — Indicates expenses recognized without cash outflow
Explanation: Why A is correct: Accrued liabilities increase when expenses exceed cash payments. Why others are wrong: B is opposite. C and D are unrelated.
Question 727
A decrease in accounts receivable is added to net income because it:
Select an option first.
Correct answer: A — Indicates more cash was collected than revenue recognized
Explanation: Why A is correct: Lower receivables mean cash collections exceeded accrual revenue. Why others are wrong: B is opposite. C and D misclassify.
Question 728
An increase in inventory is subtracted from net income because it:
Select an option first.
Correct answer: A — Represents cash spent on inventory not yet expensed
Explanation: Why A is correct: Buying inventory uses cash before it becomes an expense. Why others are wrong: B is incorrect. C and D are unrelated.
Question 729
A decrease in inventory is added to net income because it:
Select an option first.
Correct answer: B — Indicates cost of goods sold exceeded inventory purchases
Explanation: Why B is correct: Inventory falling means fewer purchases → higher operating cash flow. Why others are wrong: A is opposite. C and D misclassify.
Question 730
A gain on retirement of debt is subtracted from net income because it:
Select an option first.
Correct answer: B — Is a non-operating gain included in net income
Explanation: Why B is correct: Gains inflate net income but do not increase operating cash. Why others are wrong: A is irrelevant to operating adjustments. C is incorrect. D misclassifies.
Question 731
A loss on retirement of debt is added back to net income because it:
Select an option first.
Correct answer: B — Is a non-cash loss included in net income
Explanation: Why B is correct: Losses reduce net income but do not reduce operating cash. Why others are wrong: A is incorrect. C and D misclassify.
Question 732
A company with persistently negative operating cash flow must eventually:
Select an option first.
Correct answer: B — Rely on external financing
Explanation: Why B is correct: Negative operating cash flow forces reliance on borrowing or issuing equity. Why others are wrong: A is impossible without cash. C does not generate cash. D does not solve cash shortages.
Question 733
A key question in evaluating cash flow sources is whether:
Select an option first.
Correct answer: A — Operating cash flow exceeds capital expenditures
Explanation: Why A is correct: Positive free cash flow indicates sustainable operations. Why others are wrong: B is impossible. C is unsustainable. D is irrelevant.
Question 734
Operating cash flow exceeding net income typically indicates:
Select an option first.
Correct answer: B — Strong earnings quality
Explanation: Why B is correct: Cash flow greater than net income suggests conservative accounting and strong cash generation. Why others are wrong: A is the opposite. C and D are unrelated.
Question 735
A company with high net income but low operating cash flow may be:
Select an option first.
Correct answer: A — Using aggressive revenue recognition
Explanation: Why A is correct: Weak cash flow relative to earnings often signals aggressive accounting. Why others are wrong: B affects expenses, not cash flow. C is unrelated. D affects investing cash flow, not operating.
Question 736
Large swings in operating cash flow from year to year generally indicate:
Select an option first.
Correct answer: B — High business risk
Explanation: Why B is correct: Volatile cash flows increase uncertainty and risk. Why others are wrong: A is opposite. C contradicts volatility. D is not implied.
Question 737
A large inflow from selling equipment should prompt an analyst to ask whether:
Select an option first.
Correct answer: B — The company is shrinking or restructuring
Explanation: Why B is correct: Asset sales may indicate downsizing or liquidity issues. Why others are wrong: A is unlikely when selling assets. C and D are unrelated.
Question 738
FCFF represents cash flow available to:
Select an option first.
Correct answer: C — Both debt and equity holders
Explanation: Why C is correct: FCFF is before payments to any capital providers. Why others are wrong: A and B are incomplete. D is too narrow.
Question 739
In the FCFF formula, interest is added back because:
Select an option first.
Correct answer: B — FCFF measures cash available before financing costs
Explanation: Why B is correct: FCFF is pre-financing, so interest must be added back after tax. Why others are wrong: A is false; interest is cash. C and D are irrelevant.
Question 740
FCFF can be computed from CFO by:
Select an option first.
Correct answer: B — Adding after-tax interest and subtracting capital expenditures
Explanation: Why B is correct: FCFF = CFO + Int(1 – tax rate) – FCInv. Why others are wrong: A, C, and D do not match the formula.
Question 741
Under IFRS, if interest paid is classified as financing, then when computing FCFF:
Select an option first.
Correct answer: B — Interest must not be added back
Explanation: Why B is correct: If interest is not included in CFO, no adjustment is needed. Why others are wrong: A would double-count. C and D are unrelated.
Question 742
FCFE represents cash flow available to:
Select an option first.
Correct answer: B — Only common shareholders
Explanation: Why B is correct: FCFE is after interest, principal payments, and capex. Why others are wrong: A describes FCFF. C and D are incorrect.
Question 743
FCFE increases when:
Select an option first.
Correct answer: A — Net borrowing increases
Explanation: Why A is correct: More borrowing increases cash available to equity holders. Why others are wrong: B and D reduce FCFE. C reduces FCFE.
Question 744
FCFE decreases when:
Select an option first.
Correct answer: B — Capital expenditures increase
Explanation: Why B is correct: Higher capex reduces cash available to equity holders. Why others are wrong: A increases FCFE. C increases FCFE. D increases CFO, raising FCFE.
Question 745
Cash flow to revenue measures:
Select an option first.
Correct answer: B — Operating cash generated per dollar of sales
Explanation: Why B is correct: It shows how much cash is produced from each revenue dollar. Why others are wrong: A, C, and D measure different concepts.
Question 746
Cash return on assets measures:
Select an option first.
Correct answer: A — Cash generated per dollar of assets
Explanation: Why A is correct: CFO ÷ average total assets measures cash productivity of assets. Why others are wrong: B is ROA. C is cash return on equity. D is cash flow to revenue.
Question 747
Cash return on equity measures:
Select an option first.
Correct answer: A — Cash generated per dollar of equity
Explanation: Why A is correct: CFO ÷ average equity measures cash productivity for owners. Why others are wrong: B is ROE. C and D are different ratios.
Question 748
Cash to income measures:
Select an option first.
Correct answer: A — Cash generated relative to operating income
Explanation: Why A is correct: It evaluates how well operating income converts to cash. Why others are wrong: B, C, and D describe other relationships.
Question 749
Cash flow per share is calculated as:
Select an option first.
Correct answer: B — CFO ÷ common shares outstanding
Explanation: Why B is correct: Cash flow per share uses CFO minus preferred dividends divided by common shares. Why others are wrong: A and D are unrelated. C is earnings per share.
Question 750
Debt coverage ratio measures:
Select an option first.
Correct answer: B — Ability to repay debt using operating cash
Explanation: Why B is correct: CFO ÷ total debt shows how well cash flow covers debt. Why others are wrong: A, C, and D measure different concepts.
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