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

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.

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

FCFF = EBIT(1–t) + Depreciation & Amortization – Changes in Working Capital – Capital Expenditures, representing cash available to all capital providers before financing decisions.

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

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.

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

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.

Question 5

The debt-to-equity ratio measures:

Accepted Answer

The proportion of financing provided by creditors versus shareholders

Answer

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.

AIFA - Applied Investment & Finance Analyst Practice Test

AIFA - Applied Investment & Finance Analyst Practice Test

AIFA Financial Statement Analysis & Accounting 3