CFA Level I Financial Statement Analysis practice questions
25 exam-style questions from across Financial Statement Analysis, which is 11–14% of the Level I exam (roughly 20–25 of the 180 questions). Pick an answer to see whether you were right, why each option is right or wrong, and the lesson to go back to.
Module 1 Introduction to Financial Statement Analysis
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1A portfolio manager says: "We read three years of annual reports mainly to judge what the company is likely to earn and owe over the next two years." This use of financial statements is best described as:
Show the answer
The answer is B.
A. Checking compliance with standards is the auditor's work. The analyst takes the reports as given and looks ahead. The trap
B. The role of the analysis is to use reported information to form expectations that support an economic decision.
C. Preparing the reports is management's job.
From the lesson What financial statement analysis is for
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2An analyst computes revenue growth and operating margins for a company and its three peers, then writes that margins fell because input costs rose. These two activities belong, in order, to:
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The answer is B.
A. Collecting is gathering the statements and other data. Computing growth and margins goes beyond that.
B. Calculating growth and margins is processing. Explaining why margins fell is interpretation.
C. Treats the calculations as analysis. Calculations are the output of processing and the input to analysis. The trap
From the lesson The six-step financial statement analysis framework
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3An auditor could not obtain enough evidence about the inventory of one subsidiary. The issue is material but confined to that balance, and the rest of the statements are fairly presented. The auditor will most likely issue:
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The answer is B.
A. An adverse opinion says the statements are materially misstated and not fairly presented. Here the problem is limited.
B. A limited scope restriction, with the rest fairly presented, gives a qualified ("except for") opinion.
C. A disclaimer is for when the auditor cannot form an opinion at all, such as a severe or pervasive limitation. The trap
From the lesson Regulatory filings, notes, MD&A and the audit report
Module 2 Analyzing Income Statements
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4Which of the following is the last step of the five-step revenue recognition model?
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The answer is C.
A. Allocation is step 4, after the price is determined. The trap
B. Determining the price is step 3.
C. Recognition is step 5: revenue is recorded when (or as) each obligation is satisfied.
From the lesson Revenue recognition: the five-step model
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5Compared with expensing, capitalizing an expenditure in the year it is made will most likely result in:
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The answer is B.
A. Reverses the effect. Expensing is what puts the outflow in operating cash flow.
B. The outflow is classified as investing, so CFO is higher.
C. Total cash is the same either way. Only the classification changes. The trap
From the lesson Expense recognition: capitalizing vs expensing
Module 3 Analyzing Balance Sheets
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6A company pays CHF 640m for a target whose net assets have a book value of CHF 380m. At fair value, the target's PP&E is CHF 60m above book value and it holds an unrecorded customer list worth CHF 40m. Liabilities are already at fair value. Goodwill is closest to:
Show the answer
The answer is A.
A. Net identifiable assets = 380 + 60 + 40 = 480. Goodwill = 640 − 480 = 160.
B. Misses the unrecorded customer list: 640 − (380 + 60) = 200.
C. Uses book value: 640 − 380 = 260. The trap
On your calculator- 640−380−60−40= 160
- 640ENTER380−60−40− 160
ENTER enter (on the HP, puts the number on the stack)
From the lesson Goodwill: how it is measured and tested
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7A company buys a bond at par for USD 2,000k with a 4% coupon and classifies it at fair value through other comprehensive income. At year-end the bond's fair value is USD 2,060k. The effect on net income for the year is closest to:
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The answer is B.
A. Forgets the coupon: interest income always reaches profit.
B. Coupon = 2,000 × 4% = 80 goes to profit. The 60 gain goes to OCI.
C. This is the FVPL answer: 80 + 60. The trap
On your calculator- 2000×0.04= 80
- 2000ENTER0.04× 80
ENTER enter (on the HP, puts the number on the stack)
From the lesson Financial instruments: amortized cost, FVOCI and FVPL
Module 4 Analyzing Statements of Cash Flows I
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8A company's cost of goods sold is EUR 4,500k. Inventory rose from EUR 800k to EUR 950k. Purchases of inventory were closest to:
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The answer is C.
A. Subtracts the inventory build: 4,500 − 150. The trap
B. Treats purchases as equal to COGS, ignoring the change in inventory.
C. Purchases = COGS + closing − opening = 4,500 + 950 − 800 = 4,650.
On your calculator- 4500+950−800= 4650
- 4500ENTER950+800− 4650
ENTER enter (on the HP, puts the number on the stack)
From the lesson How the cash flow statement links to the balance sheet and income statement
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9Net income is GBP 800k and depreciation is GBP 150k. The company booked a gain of GBP 40k on selling a machine. Receivables rose GBP 70k, inventory fell GBP 30k and payables fell GBP 25k. Cash flow from operations is closest to:
Show the answer
The answer is A.
A. 800 + 150 − 40 − 70 + 30 − 25 = 845.
B. Adds the gain instead of subtracting it: 800 + 150 + 40 − 70 + 30 − 25. The trap
C. Reverses the working capital signs: 800 + 150 − 40 + 70 − 30 + 25.
On your calculator- 800+150−40−70+30−25= 845
- 800ENTER150+40−70−30+25− 845
ENTER enter (on the HP, puts the number on the stack)
From the lesson Cash flow from operations: the indirect method
Module 5 Analyzing Statements of Cash Flows II
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10A company reports negative operating cash flow, large investing outflows and large financing inflows from share issues. It is most likely:
Show the answer
The answer is A.
A. Operations do not yet fund the business, so investment is paid for with outside capital. That is the growth pattern.
B. A mature company has strongly positive CFO and negative financing flows. The trap
C. A declining company shows positive investing cash flow from asset sales, not large outflows.
From the lesson Reading a cash flow statement: sources, uses and common-size
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11A US GAAP company reports CFO of USD 2,400m. Interest paid is USD 300m, the tax rate is 30%, capital expenditures are USD 900m and proceeds from asset sales are USD 100m. FCFF is closest to:
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The answer is B.
A. Omits the interest add-back: 2,400 − 800.
B. 2,400 + 300 × 0.70 − (900 − 100) = 2,400 + 210 − 800 = 1,810.
C. Adds interest before tax: 2,400 + 300 − 800. The trap
On your calculator- 300×0.7+2400−900+100= 1810
- 300ENTER0.7×2400+900−100+ 1810
ENTER enter (on the HP, puts the number on the stack)
From the lesson Free cash flow to the firm (FCFF) and to equity (FCFE)
Module 6 Analysis of Inventories
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12Under IFRS, inventory with a cost of EUR 80,000 was written down to its net realizable value of EUR 68,000 last year. This year the net realizable value has risen to EUR 85,000. The carrying amount of the inventory this year is closest to:
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The answer is B.
A. No reversal at all. That is the US GAAP result. The trap
B. The recovery is 85,000 − 68,000 = 17,000, but the reversal is capped at the original write-down of 12,000. 68,000 + 12,000 = 80,000, which is cost.
C. Carries the inventory above its original cost, which is never allowed.
On your calculator- 85000−68000= recovery 17,000, capped at the 12,000 write-down
- 68000+12000= 80,000
- 85000ENTER68000− recovery 17,000, capped at the 12,000 write-down
- 68000ENTER12000+ 80,000
ENTER enter (on the HP, puts the number on the stack)
From the lesson Lower of cost and net realizable value (and write-down reversals)
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13A company begins the year with 50 units at CHF 20, buys 100 units at CHF 18 and then 100 units at CHF 16, and sells 160 units. Under FIFO, cost of goods sold is closest to:
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The answer is C.
A. This is LIFO: 100 × 16 + 60 × 18 = 2,680. The trap
B. This is weighted average: 4,400 ÷ 250 = 17.60, then × 160.
C. FIFO takes the oldest costs first: 50 × 20 + 100 × 18 + 10 × 16 = 1,000 + 1,800 + 160 = 2,960.
On your calculator- (50×20)+(100×18)+(10×16)= 2960
- 50ENTER20×100ENTER18×+10ENTER16×+ 2960
ENTER enter (on the HP, puts the number on the stack)
From the lesson FIFO, LIFO and weighted average when prices rise or fall
Module 7 Analysis of Long-Term Assets
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14Compared with a company that develops a similar patent internally under US GAAP, a company that purchases the patent will most likely report, in the year of the spending:
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The answer is B.
A. The purchased patent is capitalized, so total assets are higher, not lower.
B. The purchase is an investing outflow and is capitalized. The builder's spending is expensed and reduces operating cash flow.
C. The buyer expenses only a slice of the cost as amortization, so its net income is higher than the builder's, which expensed everything. The trap
From the lesson Purchased, internally developed and acquired intangibles
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15Under IFRS, an asset has a carrying amount of 900, fair value less costs to sell of 740, value in use of 820 and undiscounted future cash flows of 950. The impairment loss is closest to:
Show the answer
The answer is B.
A. Applies the US GAAP recoverability test (900 < 950). IFRS has no such step.
B. Recoverable amount = max(740, 820) = 820. Loss = 900 − 820 = 80.
C. Uses the lower measure: 900 − 740 = 160. The trap
On your calculator- 900−820= 80
- 900ENTER820− 80
ENTER enter (on the HP, puts the number on the stack)
From the lesson Impairment and derecognition of PP&E and intangibles
Module 8 Topics in Long-Term Liabilities and Equity
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16A lessee reporting under IFRS signs a 3-year lease with payments of EUR 20,000 at each year-end. The discount rate is 5% and the right-of-use asset is depreciated straight-line. Total lease expense in year 1 is closest to:
Show the answer
The answer is B.
A. This is the cash payment, which equals the US GAAP operating lease cost. It ignores the front-loading of depreciation plus interest. The trap
B. PV = 54,465. Depreciation 54,465 ÷ 3 = 18,155 plus interest 5% × 54,465 = 2,723 gives 20,878.
C. Adds interest to the cash payment (20,000 + 2,723). The payment already contains the interest.
On your calculator- 2NDCLR TVM
- 3N5I/Y20000PMT
- CPTPV −54,464.96
- +|-×(1÷3+0.05)= 20,878.23
2ND second function (the shifted label above a key) · CLR TVM clear the time value of money keys · N number of periods · I/Y interest rate per year (per period when P/Y is 1) · PMT payment · CPT compute · PV present value · +|- change sign
- fCLEAR FIN
- 3n5i20000PMT
- PV −54,464.96
- CHS1ENTER3÷0.05+× 20,878.23
f gold shift key · CLEAR FIN clear the financial registers · n number of periods · i interest rate per period · PMT payment · PV present value · CHS change sign · ENTER enter (on the HP, puts the number on the stack)
From the lesson Leases: finance vs operating and lessee accounting (IFRS vs US GAAP)
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17Under a lease classified as operating, the lessor most likely reports:
Show the answer
The answer is B.
A. A lease receivable belongs to a finance lease, where the asset is derecognized. The trap
B. In an operating lease the lessor keeps the asset and goes on depreciating it, while booking lease revenue.
C. Interest income arises on the receivable of a finance lease. An operating lease is a rental.
From the lesson Lessor accounting: finance vs operating leases
Module 9 Analysis of Income Taxes
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18Which item is most likely a permanent difference between accounting profit and taxable income?
Show the answer
The answer is B.
A. It reverses over the asset's life and creates a deferred tax liability. The trap
B. It will never be deducted, so nothing reverses. It affects only the effective tax rate.
C. The deduction arrives later, so it is a temporary difference creating a deferred tax asset.
From the lesson Accounting profit vs taxable income: temporary and permanent differences
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19Income taxes payable are EUR 520k. During the year the deferred tax liability increased by EUR 45k and the deferred tax asset increased by EUR 15k. Income tax expense is closest to:
Show the answer
The answer is B.
A. Reverses both signs: 520 − 45 + 15. The trap
B. 520 + 45 − 15 = 550. A rising DTL adds, a rising DTA subtracts.
C. Adds both changes: 520 + 45 + 15.
On your calculator- 520+45−15= 550
- 520ENTER45+15− 550
ENTER enter (on the HP, puts the number on the stack)
From the lesson Deferred tax assets and liabilities
Module 10 Financial Reporting Quality
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20Which statement about financial reporting quality and earnings quality is most accurate?
Show the answer
The answer is B.
A. Compliance is necessary but not sufficient. Compliant reports can show unsustainable results.
B. If the information is poor, the analyst cannot tell whether the results are good. Assessment needs a basic level of reporting quality.
C. Reversed: reporting quality is about the information, earnings quality about the results. The trap
From the lesson Reporting quality vs earnings quality, and the quality spectrum
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21A company extends the useful life of its delivery vehicles from 6 years to 9 years with no change in how the vehicles are used. This choice is most likely:
Show the answer
The answer is B.
A. A longer life lowers each year's depreciation, so carrying amounts stay higher, not lower.
B. Spreading the same cost over more years cuts the annual charge, which lifts profit now with no change in the business.
C. Permitted is not the same as neutral. A change that flatters the period with no business reason is biased. The trap
From the lesson Conservative vs aggressive accounting
Module 11 Financial Analysis Techniques
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22A company has 45 days of inventory on hand, 38 days of sales outstanding and 30 days of payables. Its cash conversion cycle is closest to:
Show the answer
The answer is B.
A. Subtracts days of sales outstanding and adds days of payables: 45 + 30 − 38.
B. 45 + 38 − 30 = 53 days.
C. Adds days of payables instead of subtracting: 45 + 38 + 30. The trap
On your calculator- 45+38−30= 53
- 45ENTER38+30− 53
ENTER enter (on the HP, puts the number on the stack)
From the lesson Activity ratios: turnover, days and the cash conversion cycle
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23A company has short-term debt of 150, long-term debt of 450, accounts payable of 200 and equity of 900. Its debt-to-capital ratio is closest to:
Show the answer
The answer is A.
A. Debt = 150 + 450 = 600. Capital = 600 + 900 = 1,500. 600 ÷ 1,500 = 0.40.
B. Counts accounts payable as debt: 800 ÷ (800 + 900) = 0.47. The trap
C. Debt-to-equity, 600 ÷ 900, not debt-to-capital.
On your calculator- 150+450=÷(150+450+900)= 0.4
- 150ENTER450+ total debt 600
- 150ENTER450+900+ capital 1,500
- ÷ 0.4
ENTER enter (on the HP, puts the number on the stack)
From the lesson Liquidity and solvency ratios: can the company pay?
Module 12 Introduction to Financial Statement Modeling
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24Revenue last year was USD 500m. Volume is forecast to grow 8%, price/mix to add 6% and currency to reduce revenue by 5%. Forecast revenue is closest to:
Show the answer
The answer is B.
A. Leaves out price/mix: 500 × 1.08 × 0.95.
B. 500 × 1.08 × 1.06 × 0.95 = 543.78.
C. Ignores the currency effect: 500 × 1.08 × 1.06. The trap
On your calculator- 500×1.08×1.06×0.95= 543.78
- 500ENTER1.08×1.06×0.95× 543.78
ENTER enter (on the HP, puts the number on the stack)
From the lesson Building a sales-based pro forma income statement
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25An analyst builds a forecast model with hundreds of line items, many of them not disclosed by the company, believing that this level of detail improves accuracy. This behavior best illustrates:
Show the answer
The answer is B.
A. Conservatism is a failure to update after new information, not an appetite for detail. The trap
B. Believing that extra detail and extra inputs give control over an uncertain outcome is the illusion of control.
C. Representativeness is judging by resemblance to a familiar class and neglecting base rates.
From the lesson Behavioral biases in analyst forecasts and how to fix them
Keep going
Study the topic module by module in the Financial Statement Analysis lessons, look up a word in the Level I glossary, or run a timed practice set that tracks your score by topic.