Financial Statement Analysis

CFA® Level I, published weight 11–14%. The three statements, inventories, long-lived assets, quality of earnings.

What the outline covers

Introduction to Financial Statement Analysis
Analyzing Income Statements
Analyzing Balance Sheets
Analyzing Statements of Cash Flows I
Analyzing Statements of Cash Flows II
Analysis of Inventories
Analysis of Long-Term Assets
Topics in Long-Term Liabilities and Equity
Analysis of Income Taxes
Financial Reporting Quality
Financial Analysis Techniques
Introduction to Financial Statement Modeling

Sample questions

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Question 1

A company reports net income of $480,000, depreciation of $95,000, a $40,000 increase in accounts receivable and a $25,000 increase in accounts payable. Cash flow from operations is closest to:

NI 480,000 · Dep 95,000 · ΔAR +40,000 · ΔAP +25,000

A. $510,000
B. $560,000
C. $600,000
D. $640,000

Show the answer

B. 480,000 + 95,000 − 40,000 + 25,000 = $560,000. An increase in a receivable uses cash; an increase in a payable provides it.

Reading: FSA — Analyzing Statements of Cash Flows I, LOS 4.c

Question 2

During a period of rising prices with stable inventory quantities, a firm using LIFO rather than FIFO will report:

A. Higher ending inventory and higher net income
B. Lower ending inventory and lower net income
C. Higher ending inventory and lower net income
D. Lower ending inventory and higher net income

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B. LIFO charges the most recent, highest costs to COGS, lowering net income, and leaves older, cheaper costs in ending inventory.

Reading: FSA — Analysis of Inventories, LOS 6.b

Question 3

Under IFRS, which classification of interest paid on the statement of cash flows is permitted?

A. Operating only
B. Financing only
C. Either operating or financing
D. Investing only

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C. IFRS allows interest paid to be classified as either operating or financing. US GAAP requires it to be classified as operating.

Reading: FSA — Analyzing Statements of Cash Flows I, LOS 4.a

Question 4

A firm consistently reports net income well above cash flow from operations over several years. This is best interpreted as a signal of:

A. Strong earnings quality
B. A high accruals component and potentially lower earnings quality
C. Aggressive but permissible tax planning
D. Nothing — the two measures are unrelated

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B. A persistent gap between net income and operating cash flow indicates a large accruals component, which historically predicts lower earnings persistence.

Reading: FSA — Financial Reporting Quality, LOS 10.d

Question 5

A company capitalises rather than expenses a cost in the current year. In that year, the firm will report:

A. Lower net income and lower assets
B. Higher net income and higher assets
C. Higher net income and lower assets
D. Lower net income and higher assets

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B. Capitalising moves the cost to the balance sheet, raising assets and deferring the expense, which raises current-year net income. Later years bear the amortisation.

Reading: FSA — Analysis of Long-Term Assets, LOS 7.a

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