AIFA Financial Statement Analysis & Accounting 2

Question 1

In a DuPont analysis, Return on Equity (ROE) is decomposed into which three components?

Accepted Answer

Net profit margin, asset turnover, and equity multiplier

Answer

The classic DuPont formula breaks ROE into net profit margin (profitability) × asset turnover (efficiency) × equity multiplier (financial leverage).

Question 2

Under FIFO inventory accounting during a period of rising prices, compared to LIFO, a company will report:

Accepted Answer

Higher net income and higher ending inventory

Answer

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.

Question 3

Which of the following is classified as an off-balance-sheet financing arrangement?

Accepted Answer

Special purpose entity (SPE) used to transfer assets

Answer

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.

Question 4

Goodwill recorded on an acquisition must be:

Accepted Answer

Tested for impairment annually under US GAAP

Answer

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.

Question 5

Earnings quality is considered HIGH when a company's earnings are primarily driven by:

Accepted Answer

Recurring operating cash flows closely matching net income

Answer

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.

AIFA - Applied Investment & Finance Analyst Practice Test

AIFA - Applied Investment & Finance Analyst Practice Test

AIFA Financial Statement Analysis & Accounting 2