CFA Level I Financial Statement Analysis

Questions and Answers

What is the cash flow from operations based on the provided data?

$2,000

$1,925

$1,755

$1,840 (correct)

What impact does the depreciation of $250 have on cash flow from operations?

Increases cash flow by $500

Has no impact on cash flow

Decreases cash flow by $250

Increases cash flow by $250 (correct)

How does an increase in inventory of $180 affect cash flow from operations?

Decreases cash flow by $100

Decreases cash flow by $180 (correct)

Increases cash flow by $180

Has no impact on cash flow

What is the net effect of the profit on disposal of fixed assets on cash flow from operations?

Decreases cash flow by $85 Signup and view all the answers

What would be the cash flow from operations if dividends paid of $230 are included?

It has no effect on cash flow from operations Signup and view all the answers

What is a primary focus of the Financial Statement Analysis Learning Module?

Analyzing income statements Signup and view all the answers

Which aspect of revenue recognition should a candidate be able to describe?

General principles of revenue recognition Signup and view all the answers

How do capitalized costs differ from expensed costs in financial statements?

Capitalized costs do not impact net income. Signup and view all the answers

Which of the following is not a specific application of revenue recognition?

Purchase discounts Signup and view all the answers

Why is it important to understand expense recognition choices in financial analysis?

To better compare earnings across different time periods Signup and view all the answers

Which principle contrasts with expense recognition according to the standards?

Revenue matching principle Signup and view all the answers

What is a consequence of misapplying revenue recognition principles?

Misleading financial statements Signup and view all the answers

What does it mean to capitalize a cost in financial reporting?

It is recorded as an asset and depreciated over time. Signup and view all the answers

What is the impairment condition under GAAP?

Carrying amount in balance sheet is greater than recoverable amount Signup and view all the answers

How is the impairment expense calculated under IFRS?

Recoverable amount Signup and view all the answers

What specific cash flows are used to determine impairment under GAAP?

Undiscounted expected future cash flows Signup and view all the answers

When assessing impairment for intangible assets with a finite life, which of the following could indicate possible impairment?

Significant decrease in market price Signup and view all the answers

Under IFRS, which of the following is true about the reversal of impairment?

Reversal is permitted if the recoverable amount increases Signup and view all the answers

What would be the impairment expense for PTS Inc. under GAAP if the carrying amount is $80,000 and the undiscounted future cash flows are $100,000?

$0 Signup and view all the answers

What happens to long-lived assets that are held for sale?

They remain unamortized and are tested for impairment Signup and view all the answers

If the fair value of an asset is $77,000 and selling costs are $3,000, what is the net fair value used for impairment testing under IFRS?

$76,000 Signup and view all the answers

Which business is more likely a book publisher based on the provided financials?

Business 1 Signup and view all the answers

What is the formula for calculating the current ratio?

Current assets / Current liabilities Signup and view all the answers

Which ratio indicates how well a company can cover its short-term obligations?

Quick ratio Signup and view all the answers

In the context of financial leverage, what does a high debt-to-equity ratio indicate?

Greater reliance on debt for financing Signup and view all the answers

How is the operating ROA calculated?

Operating income / Average total assets Signup and view all the answers

What does the cash conversion cycle measure?

The time taken to convert inventory into cash Signup and view all the answers

Which profitability measure indicates the percentage of revenue that becomes profit?

Net profit margin Signup and view all the answers

What is the purpose of the gross profit margin ratio?

To show profitability after production costs Signup and view all the answers

Which of the following best describes interest cover ratio?

EBIT / Interest payments Signup and view all the answers

If a company's total assets are $800,000 and net income is $120,000, what is the ROA?

10% Signup and view all the answers

Which financial ratio would you use to assess the efficiency of a company in using its assets to generate sales?

Total asset turnover Signup and view all the answers

What does the debt-to-EBITDA ratio evaluate?

Leverage and debt repayment capacity Signup and view all the answers

What does the average inventory represent in financial analysis?

The average amount of inventory held within a period Signup and view all the answers

What does FIFO stand for in inventory valuation?

First-in, first-out Signup and view all the answers

Which inventory method results in a higher cost of sales when prices are rising?

LIFO Signup and view all the answers

Which of the following statements about LIFO is true?

LIFO inventory values resemble outdated costs. Signup and view all the answers

What is the LIFO reserve?

The difference between FIFO and LIFO inventory values. Signup and view all the answers

When using Weighted Average Cost, how is the cost of sales calculated?

It averages the cost of all inventory available for sale Signup and view all the answers

What effect does the LIFO method have on the income statement when prices are stable?

There will be little difference compared to FIFO. Signup and view all the answers

If an analyst has a LIFO cost of sales of $40,000 and a LIFO reserve increase of $2,000, what would the FIFO cost of goods sold be?

$42,000 Signup and view all the answers

What is the main impact of using LIFO during periods of rising prices?

It leads to a lower ending inventory valuation. Signup and view all the answers

In which scenario is FIFO more likely to show higher retained earnings compared to LIFO?

When inventory prices are rising. Signup and view all the answers

How is gross profit calculated under the FIFO method in the provided example?

Revenue - Cost of Sales Signup and view all the answers

Which method leads to an understated profit when prices are rising?

LIFO Signup and view all the answers

What can be inferred if a company shows a large LIFO reserve?

The company is likely experiencing rising costs. Signup and view all the answers

Which inventory valuation method is not permitted under IFRS?

LIFO Signup and view all the answers

What typically happens to the balance sheet when FIFO is applied during inflation?

It reflects higher current asset values. Signup and view all the answers

Study Notes

Financial Statement Analysis Overview

The Chartered Financial Analyst Program Level I includes comprehensive coverage of financial statement analysis topics.
Key areas of focus include income statements, cash flow statements, and various financial ratios.

Analyzing Income Statements

Understand principles of revenue recognition and implications for financial analysis.
Differentiate between capitalized costs and expensed costs, analyzing their effects on financial statements.
Analyze specific financial scenarios to determine gains and losses from asset sales based on data provided, including depreciation effects.

Cash Flow Statement Analysis

Ability to create and interpret cash flow statements, noting both reported and common-size formats.
Evaluate cash flow from operations by adjusting net income with depreciation, changes in inventory, accounts receivable, and accounts payable.

Common Ratios in Financial Analysis

Operational Activity Ratios: Include fixed asset turnover, total asset turnover, and working capital turnover to assess efficiency.
Liquidity Ratios: Current ratio, quick ratio, and cash ratio measure a company's ability to meet short-term obligations.
Solvency Ratios: Debt-to-assets, debt-to-equity, and interest coverage ratios assess a company's long-term financial viability.
Profitability Ratios: Analyze gross profit margin, operating profit margin, return on assets (ROA), and return on equity (ROE) to evaluate operational efficiency.

DuPont Analysis

Basic DuPont decomposition reveals relationships between net income, assets, and shareholders’ equity.
Extended DuPont decomposition factors in tax burden and interest burden alongside profit margins and asset turnover to identify drivers of ROE.

Inventory Valuation Methods

FIFO (First-In, First-Out) means the oldest inventory sold first, affecting cost of goods sold and gross profits positively during price rises.
LIFO (Last-In, First-Out) reflects the newest inventory sold first, potentially understating profits in times of increasing prices due to inflated costs.
Weighted average cost smoothens price variations by averaging costs over inventory purchased.

LIFO Reserve

Necessary to disclose the LIFO reserve, representing the difference between LIFO and FIFO inventory valuation, under US GAAP.
Critical for adjusting retained earnings and net income when comparing financial performance based on different inventory accounting methods.

Impairment of Assets

Understanding impairment considerations for tangible and intangible assets under US GAAP and IFRS.
Impairment occurs when carrying amount exceeds fair value; involves evaluating expected future cash flows.
IFRS allows for reversals of impairment, while US GAAP typically does not.

Summary of Financial Statement Analysis

Knowledge of financial statement components, recognition rules, and key ratios aids in constructing a comprehensive view of a company’s performance.
Emphasis on practical applications, scenarios, and calculations support analysts in deriving insights critical for investment decisions.

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Description

Test your understanding of financial statement analysis as part of the Chartered Financial Analyst® Program Level I for Phase 2 (2025). This quiz will cover key concepts and skills necessary for effective financial analysis. Prepare yourself for success in the CFA journey!

CFA Level I Financial Statement Analysis

Questions and Answers

What is the cash flow from operations based on the provided data?

What impact does the depreciation of $250 have on cash flow from operations?

How does an increase in inventory of $180 affect cash flow from operations?

What is the net effect of the profit on disposal of fixed assets on cash flow from operations?

What would be the cash flow from operations if dividends paid of $230 are included?

What is a primary focus of the Financial Statement Analysis Learning Module?

Which aspect of revenue recognition should a candidate be able to describe?

How do capitalized costs differ from expensed costs in financial statements?

Which of the following is not a specific application of revenue recognition?

Why is it important to understand expense recognition choices in financial analysis?

Which principle contrasts with expense recognition according to the standards?

What is a consequence of misapplying revenue recognition principles?

What does it mean to capitalize a cost in financial reporting?

What is the impairment condition under GAAP?

How is the impairment expense calculated under IFRS?

What specific cash flows are used to determine impairment under GAAP?

When assessing impairment for intangible assets with a finite life, which of the following could indicate possible impairment?

Under IFRS, which of the following is true about the reversal of impairment?

What would be the impairment expense for PTS Inc. under GAAP if the carrying amount is $80,000 and the undiscounted future cash flows are $100,000?

What happens to long-lived assets that are held for sale?

If the fair value of an asset is $77,000 and selling costs are $3,000, what is the net fair value used for impairment testing under IFRS?

Which business is more likely a book publisher based on the provided financials?

What is the formula for calculating the current ratio?

Which ratio indicates how well a company can cover its short-term obligations?

In the context of financial leverage, what does a high debt-to-equity ratio indicate?

How is the operating ROA calculated?

What does the cash conversion cycle measure?

Which profitability measure indicates the percentage of revenue that becomes profit?

What is the purpose of the gross profit margin ratio?

Which of the following best describes interest cover ratio?

If a company's total assets are $800,000 and net income is $120,000, what is the ROA?

Which financial ratio would you use to assess the efficiency of a company in using its assets to generate sales?

What does the debt-to-EBITDA ratio evaluate?

What does the average inventory represent in financial analysis?

What does FIFO stand for in inventory valuation?

Which inventory method results in a higher cost of sales when prices are rising?

Which of the following statements about LIFO is true?

What is the LIFO reserve?

When using Weighted Average Cost, how is the cost of sales calculated?

What effect does the LIFO method have on the income statement when prices are stable?

If an analyst has a LIFO cost of sales of $40,000 and a LIFO reserve increase of $2,000, what would the FIFO cost of goods sold be?

What is the main impact of using LIFO during periods of rising prices?

In which scenario is FIFO more likely to show higher retained earnings compared to LIFO?

How is gross profit calculated under the FIFO method in the provided example?

Which method leads to an understated profit when prices are rising?

What can be inferred if a company shows a large LIFO reserve?

Which inventory valuation method is not permitted under IFRS?

What typically happens to the balance sheet when FIFO is applied during inflation?

Study Notes

Financial Statement Analysis Overview

Analyzing Income Statements

Cash Flow Statement Analysis

Common Ratios in Financial Analysis

DuPont Analysis

Inventory Valuation Methods

LIFO Reserve

Impairment of Assets

Summary of Financial Statement Analysis

Studying That Suits You

Description

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