CFE Financial Analysis & Reporting 3

Question 1

An examiner is reviewing a company's financial statements and finds that goodwill on the balance sheet has remained unchanged for five consecutive years. Which concern should this raise?

Accepted Answer

Management may be avoiding required impairment testing or recognizing impairment losses

Answer

Under ASC 350, goodwill must be tested for impairment at least annually; an unchanged figure for five years may indicate impairment testing is not being performed properly.

Question 2

The DuPont analysis decomposes return on equity (ROE) into which three components?

Accepted Answer

Net profit margin, asset turnover, and financial leverage

Answer

DuPont breaks ROE into net profit margin × asset turnover × equity multiplier (financial leverage), revealing the drivers of shareholder returns.

Question 3

A company capitalizes an expenditure that should have been expensed. The immediate effect on financial statements is:

Accepted Answer

Overstated assets and understated expenses, leading to overstated net income

Answer

Improper capitalization inflates assets and defers expense recognition, overstating current-period net income.

Question 4

When comparing financial statements across companies that use different inventory costing methods, an analyst should use the LIFO reserve to:

Accepted Answer

Convert LIFO financials to a FIFO-equivalent basis for comparability

Answer

The LIFO reserve is the cumulative difference between LIFO and FIFO costs; adding it back to LIFO inventory converts it to approximate FIFO values for comparability.

Question 5

Which of the following is most indicative of earnings management through channel stuffing?

Accepted Answer

Revenue increasing sharply at period end while receivables grow disproportionately

Answer

Channel stuffing artificially inflates period-end revenues by pushing excess product to distributors, causing receivables to spike disproportionately to sales growth.

(CFE) Certified Financial Examiner Practice Test

(CFE) Certified Financial Examiner Practice Test

CFE Financial Analysis & Reporting 3