Certified Valuation Analyst CVA Financial Statement Analysis 2

Question 1

When normalizing earnings for a closely held company, which adjustment removes the effect of an owner paying themselves above-market compensation?

Accepted Answer

Adding back excess officer compensation to pre-tax earnings

Answer

Excess compensation above a market rate is added back to normalize earnings to what an arm's-length employer would pay.

Question 2

A non-recurring lawsuit settlement expense appears in the income statement. In normalization, how should an analyst treat it?

Accepted Answer

Remove it as a non-recurring item

Answer

One-time, non-recurring items are removed so historical earnings reflect sustainable operations.

Question 3

Which ratio best measures a company's ability to cover interest obligations from operating profit?

Accepted Answer

Times interest earned (EBIT / interest expense)

Answer

Times interest earned divides EBIT by interest expense to show how easily interest is covered.

Question 4

An analyst restates LIFO inventory to FIFO for comparability. What account adjustment captures this difference?

Accepted Answer

The LIFO reserve

Answer

The LIFO reserve is added to LIFO inventory to approximate FIFO inventory values.

Question 5

What does a steadily declining gross profit margin most likely signal in financial statement analysis?

Accepted Answer

Rising input costs or pricing pressure

Answer

A falling gross margin typically reflects increasing cost of goods sold or eroding pricing power.

Certified Valuation Analyst Practice Test