CPA Financial Analysis & Reporting 3

Question 1

Which inventory costing method results in the highest net income during a period of rising prices?

Accepted Answer

FIFO

Answer

FIFO assigns the oldest (lowest) costs to cost of goods sold during rising prices, leaving the most recent (higher) costs in ending inventory, which produces the highest gross profit.

Question 2

A firm's debt-to-equity ratio is 1.5 and total equity is $400,000. What is total debt?

Accepted Answer

$600,000

Answer

Total debt = Debt-to-equity ratio × Total equity = 1.5 × $400,000 = $600,000.

Question 3

Under US GAAP, which method is permitted for measuring inventory at the lower of cost or net realizable value?

Accepted Answer

FIFO, LIFO, and weighted-average

Answer

US GAAP permits FIFO, LIFO, and weighted-average cost methods, all subject to the lower of cost or net realizable value (or market for LIFO/retail).

Question 4

An analyst notices that a company's days sales outstanding (DSO) increased from 35 to 52 days year-over-year. This most likely indicates:

Accepted Answer

Slower collection of receivables or relaxed credit terms

Answer

A rising DSO signals that receivables are taking longer to collect, which may reflect relaxed credit policies, customer financial stress, or billing issues.

Question 5

Which of the following is a non-cash item that must be added back to net income when using the indirect method to prepare the cash flow from operations?

Accepted Answer

Amortization of intangible assets

Answer

Amortization is a non-cash charge that reduced net income but did not use cash, so it is added back under the indirect method.

(CPA) Certified Practicing Accountant Practice Test

(CPA) Certified Practicing Accountant Practice Test

CPA Financial Analysis & Reporting 3