Financial Statement Analysis & Accounting Flashcards
7 cards from real AIFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Statement Analysis & Accounting flashcards as text
A common-size income statement expresses each line item as a percentage of:
Answer: Revenue (net sales)
In a common-size income statement, each item is divided by net revenue, allowing comparison of profitability structure across companies of different sizes or across time periods.
Free cash flow to the firm (FCFF) is best defined as:
Answer: EBIT multiplied by (1 – tax rate) plus non-cash charges minus changes in working capital and capex
FCFF = EBIT(1–t) + Depreciation & Amortization – Changes in Working Capital – Capital Expenditures, representing cash available to all capital providers before financing decisions.
Which of the following would cause EBITDA to overstate a company's true economic profitability?
Answer: High levels of depreciation on rapidly deteriorating equipment
EBITDA adds back depreciation, but if assets genuinely wear out quickly (requiring constant replacement capex), ignoring D&A overstates the cash earnings available to investors.
Cross-sectional (peer) analysis in financial statement analysis involves comparing:
Answer: A company's ratios against industry competitors at the same point in time
Cross-sectional analysis benchmarks a company's financial metrics against those of comparable peers or industry averages at a specific date to identify relative strengths and weaknesses.
The debt-to-equity ratio measures:
Answer: The proportion of financing provided by creditors versus shareholders
Debt-to-equity = Total Debt / Total Shareholders' Equity, indicating how much of the company is financed by debt relative to equity and reflecting financial leverage and risk.
Under the accrual basis of accounting, expenses are recognized when:
Answer: They are incurred and matched to the revenue they help generate
Accrual accounting applies the matching principle: expenses are recognized in the period they are incurred and matched to the revenues they help produce, regardless of cash timing.
An analyst performing trend analysis observes that a company's gross margin declined from 42% to 36% over three years while revenue grew 20%. The MOST likely explanation is:
Answer: Cost of goods sold grew faster than revenue, potentially due to input cost pressures or pricing competition
A falling gross margin despite revenue growth signals that COGS is rising faster than sales, which typically results from rising raw material costs, supply chain issues, or inability to pass cost increases to customers.