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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 751
Interest coverage using cash flow is calculated as:
Select an option first.
Correct answer: B — (CFO + interest paid + taxes paid) ÷ interest paid
Explanation: Why B is correct: This formula measures cash ability to meet interest obligations. Why others are wrong: A omits taxes. C uses earnings, not cash. D is irrelevant.
Question 752
The reinvestment ratio measures:
Select an option first.
Correct answer: B — Ability to acquire long-term assets using operating cash
Explanation: Why B is correct: CFO ÷ cash paid for long-term assets shows reinvestment capacity. Why others are wrong: A, C, and D are different ratios.
Question 753
The dividend payment ratio measures:
Select an option first.
Correct answer: A — Ability to pay dividends using operating cash
Explanation: Why A is correct: CFO ÷ dividends paid shows dividend sustainability. Why others are wrong: B is payout ratio. C and D are incorrect.
Question 754
The investing and financing ratio measures:
Select an option first.
Correct answer: B — Ability to cover investing and financing outflows with operating cash
Explanation: Why B is correct: CFO ÷ (investing + financing outflows) shows overall cash sufficiency. Why others are wrong: A, C, and D measure different concepts.
Question 755
A company with CFO < capital expenditures is likely:
Select an option first.
Correct answer: B — Using external financing to fund investments
Explanation: Why B is correct: If CFO cannot cover capex, financing must fill the gap. Why others are wrong: A is impossible. C and D are unrelated.
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Question 756
A company with CFO >> net income likely has:
Select an option first.
Correct answer: A — Strong cash conversion
Explanation: Why A is correct: High CFO relative to earnings indicates strong cash generation. Why others are wrong: B is opposite. C and D are unrelated.
Question 757
A company with net income >> CFO may be:
Select an option first.
Correct answer: A — Recognizing revenue aggressively
Explanation: Why A is correct: Weak cash flow relative to earnings often signals aggressive accounting. Why others are wrong: B is opposite. C and D are unrelated.
Question 758
A large increase in receivables generally indicates:
Select an option first.
Correct answer: B — Revenue recognized faster than cash collected
Explanation: Why B is correct: Receivables rise when accrual revenue exceeds cash receipts. Why others are wrong: A is opposite. C and D are not implied.
Question 759
A large decrease in payables generally indicates:
Select an option first.
Correct answer: A — Cash payments exceeded expenses
Explanation: Why A is correct: Paying down payables reduces cash. Why others are wrong: B is opposite. C and D are unrelated.
Question 760
A company that issues new debt will show:
Select an option first.
Correct answer: B — Financing inflow
Explanation: Why B is correct: Borrowing is a financing activity. Why others are wrong: A and C are incorrect. D is unrelated.
Question 761
A company that repurchases shares will show:
Select an option first.
Correct answer: A — Financing outflow
Explanation: Why A is correct: Share repurchases reduce equity and are financing outflows. Why others are wrong: B and C misclassify. D is opposite.
Question 762
A company with high FCFF but low FCFE likely has:
Select an option first.
Correct answer: B — High debt repayments
Explanation: Why B is correct: Large debt repayments reduce FCFE but not FCFF. Why others are wrong: A increases FCFE. C increases both FCFF and FCFE. D affects FCFE only if dividends are paid from CFO.
Question 763
A company with high FCFE but low FCFF likely has:
Select an option first.
Correct answer: A — High net borrowing
Explanation: Why A is correct: Borrowing increases FCFE but not FCFF. Why others are wrong: B reduces both. C and D reduce both.
Question 764
A company with CFO equal to zero but positive net income likely has:
Select an option first.
Correct answer: B — Weak cash conversion
Explanation: Why B is correct: Zero CFO despite earnings indicates poor cash generation. Why others are wrong: A is opposite. C and D are unrelated.
Question 765
A company with CFO far below operating income likely has:
Select an option first.
Correct answer: B — Weak working capital management
Explanation: Why B is correct: Poor working capital management reduces cash conversion. Why others are wrong: A is opposite. C and D are unrelated.
Question 766
A company with CFO far above operating income likely has:
Select an option first.
Correct answer: A — Strong cash conversion
Explanation: Why A is correct: When operating cash flow significantly exceeds operating income, it indicates that accrual earnings are being supported by strong cash inflows—evidence of excellent cash conversion. Why others are wrong: B is the opposite of the situation. C is unrelated to the relationship between CFO and operating income. D affects investing cash flows, not the CFO–operating income relationship.
Question 767
A company showing rising CFO but declining net income most likely indicates:
Select an option first.
Correct answer: B — Improving earnings quality
Explanation: Why B is correct: When cash flow strengthens while earnings fall, it often signals conservative accounting and high-quality earnings. Why others are wrong: A contradicts rising CFO. C is unrelated unless CFO is negative. D affects investing cash flows, not this pattern.
Question 768
A company showing rising net income but falling CFO most likely indicates:
Select an option first.
Correct answer: B — Potentially aggressive accounting
Explanation: Why B is correct: Earnings rising while cash flow falls is a classic warning sign of aggressive revenue recognition or poor working capital management. Why others are wrong: A contradicts the evidence. C affects investing cash flows. D contradicts falling CFO.
Question 769
A company with consistently positive financing cash flow is most likely:
Select an option first.
Correct answer: A — Raising capital through debt or equity
Explanation: Why A is correct: Positive financing cash flow indicates inflows from borrowing or issuing stock. Why others are wrong: B, C, and D typically create financing outflows, not inflows.
Question 770
A company with consistently negative financing cash flow is most likely:
Select an option first.
Correct answer: B — Returning capital to investors
Explanation: Why B is correct: Negative financing cash flow usually reflects debt repayment, dividends, or share repurchases—forms of returning capital. Why others are wrong: A would create positive financing cash flow. C is opposite of negative financing cash flow. D is unrelated.
Question 771
A company with negative FCFE but positive FCFF most likely has:
Select an option first.
Correct answer: B — High debt repayments
Explanation: Why B is correct: FCFE becomes negative when debt repayments exceed new borrowing, even if FCFF is strong. Why others are wrong: A would increase FCFE, not reduce it. C would increase both FCFF and FCFE. D does not explain the FCFE–FCFF divergence.
Question 772
Inventory write-downs matter to analysts primarily because they:
Select an option first.
Correct answer: B — Can distort key financial ratios
Explanation: Why B is correct: Write-downs reduce assets and income, affecting leverage, profitability, and liquidity ratios. Why others are wrong: A is false; write-downs are non-cash. C is incorrect; write-downs affect cost of sales, not revenue. D is not necessarily true.
Question 773
Under LIFO, inventory write-downs are less common because:
Select an option first.
Correct answer: B — Ending inventory reflects the oldest, lowest costs
Explanation: Why B is correct: LIFO ending inventory consists of older, lower-cost layers, reducing the chance of impairment. Why others are wrong: A describes FIFO. C is unrelated. D is false.
Question 774
When inventory unit costs are rising, FIFO will generally produce:
Select an option first.
Correct answer: B — Lower cost of sales
Explanation: Why B is correct: FIFO uses older, cheaper costs first, lowering cost of sales and increasing profit. Why others are wrong: A is LIFO. C is incorrect; FIFO ending inventory is higher. D contradicts the effect.
Question 775
LIFO cost of sales most closely approximates:
Select an option first.
Correct answer: A — Current replacement cost
Explanation: Why A is correct: LIFO uses the most recent costs in cost of sales, reflecting current replacement cost. Why others are wrong: B describes FIFO cost of sales. C and D are unrelated.
Question 776
Under IFRS, companies must disclose:
Select an option first.
Correct answer: C — Inventory valuation method and write-downs
Explanation: Why C is correct: IFRS requires disclosure of valuation methods, write-downs, reversals, and classifications. Why others are wrong: A and B are incomplete. D is only one category.
Question 777
Under US GAAP, inventory write-down reversals are:
Select an option first.
Correct answer: C — Prohibited
Explanation: Why C is correct: GAAP prohibits reversing prior write-downs. Why others are wrong: A and B contradict GAAP. D is not a valid exception.
Question 778
Companies selling luxury goods typically have:
Select an option first.
Correct answer: A — High gross margins and low turnover
Explanation: Why A is correct: Luxury goods sell at high margins but move slowly. Why others are wrong: B describes staple goods. C is unlikely. D is rare.
Question 779
Companies selling staple goods typically have:
Select an option first.
Correct answer: B — Low margins and high turnover
Explanation: Why B is correct: Staple goods sell frequently but at lower margins. Why others are wrong: A describes luxury goods. C is unlikely. D is rare.
Question 780
A reversal of an inventory write-down under IFRS will:
Select an option first.
Correct answer: B — Reduce cost of sales
Explanation: Why B is correct: Reversals reduce cost of sales, increasing profit. Why others are wrong: A is opposite. C is incorrect. D is unaffected (non-cash).
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