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
In a DuPont analysis, Return on Equity (ROE) is decomposed into which three components?
Answer: Net profit margin, asset turnover, and equity multiplier
The classic DuPont formula breaks ROE into net profit margin (profitability) × asset turnover (efficiency) × equity multiplier (financial leverage).
Under FIFO inventory accounting during a period of rising prices, compared to LIFO, a company will report:
Answer: Higher net income and higher ending inventory
Under FIFO during rising prices, older (cheaper) costs flow through COGS first, leaving newer (higher) costs in ending inventory—resulting in lower COGS, higher net income, and higher ending inventory than LIFO.
Which of the following is classified as an off-balance-sheet financing arrangement?
Answer: Special purpose entity (SPE) used to transfer assets
Special purpose entities (SPEs) can be used to remove assets and liabilities from a company's consolidated balance sheet, constituting off-balance-sheet financing when consolidation is avoided.
Goodwill recorded on an acquisition must be:
Answer: Tested for impairment annually under US GAAP
Under US GAAP (ASC 350), goodwill is not amortized but must be tested for impairment at least annually or more frequently if triggering events occur.
Earnings quality is considered HIGH when a company's earnings are primarily driven by:
Answer: Recurring operating cash flows closely matching net income
High-quality earnings are sustainable and verifiable, meaning operating cash flows closely track net income without reliance on non-recurring items or aggressive accounting choices.
A deferred tax liability arises when:
Answer: Tax expense exceeds taxes currently payable
A deferred tax liability is created when book income exceeds taxable income (e.g., due to faster tax depreciation), meaning more taxes will be owed in the future than currently payable.
An analyst notes that a company's accounts receivable days (DSO) increased from 35 to 58 days over two years while revenue grew 5%. This most likely indicates:
Answer: Potential revenue recognition issues or collection problems
A significant increase in DSO relative to modest revenue growth suggests the company may be extending credit terms aggressively, recognizing revenue prematurely, or facing collection difficulties.