AIFA Financial Statement Analysis & Accounting 3

Question 1

A common-size income statement expresses each line item as a percentage of:

Accepted Answer

Revenue (net sales)

Answer

Total assets

Answer

Net income

Answer

Total equity

Question 2

Free cash flow to the firm (FCFF) is best defined as:

Accepted Answer

EBIT multiplied by (1 – tax rate) plus non-cash charges minus changes in working capital and capex

Answer

Net income plus depreciation minus changes in working capital

Answer

Cash flow from operations minus capital expenditures

Answer

Operating income divided by total assets

Question 3

Which of the following would cause EBITDA to overstate a company's true economic profitability?

Accepted Answer

High levels of depreciation on rapidly deteriorating equipment

Answer

Low capital expenditure requirements relative to peers

Answer

A business model with minimal working capital needs

Answer

Stable long-term contracts providing predictable revenue

Question 4

Cross-sectional (peer) analysis in financial statement analysis involves comparing:

Accepted Answer

A company's ratios against industry competitors at the same point in time

Answer

A company's financial ratios over multiple time periods

Answer

A company's budget versus actual results for the same period

Answer

Foreign subsidiaries within the same consolidated group

Question 5

The debt-to-equity ratio measures:

Accepted Answer

The proportion of financing provided by creditors versus shareholders

Answer

How efficiently a company uses its assets to generate revenue

Answer

A company's ability to pay short-term obligations

Answer

The rate of return earned on shareholders' investment

Question 6

Under the accrual basis of accounting, expenses are recognized when:

Accepted Answer

They are incurred and matched to the revenue they help generate

Answer

Cash is paid to the supplier or employee

Answer

An invoice is received from a vendor

Answer

Management decides to record them

Question 7

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:

Accepted Answer

Cost of goods sold grew faster than revenue, potentially due to input cost pressures or pricing competition

Answer

The company reduced its selling and administrative expenses significantly

Answer

The company improved its asset turnover efficiency

Answer

Depreciation expense increased substantially over the period