FIA Financial Statement Interpretation 3

Question 1

A company uses LIFO inventory accounting during a period of rising prices. Compared to FIFO, its reported gross profit will be:

Accepted Answer

Lower, because newer higher-cost inventory is expensed first

Answer

Under LIFO during rising prices, the most recently purchased (higher-cost) items are expensed first, raising COGS and reducing gross profit relative to FIFO.

Question 2

What does a negative working capital typically signal about a company?

Accepted Answer

Current liabilities exceed current assets, suggesting potential liquidity stress

Answer

Negative working capital means current liabilities exceed current assets, which can indicate difficulty meeting short-term obligations.

Question 3

An analyst notices that a company's revenue grew 20% while accounts receivable grew 40%. What risk does this signal?

Accepted Answer

Potential revenue recognition issues or loosening credit standards

Answer

Receivables growing faster than revenue may indicate that sales include uncollectible amounts or that credit terms have been loosened to inflate reported revenue.

Question 4

Which ratio measures how efficiently a company uses its assets to generate sales?

Accepted Answer

Asset turnover ratio

Answer

The asset turnover ratio (Revenue ÷ Total Assets) measures how effectively a company generates revenue from its asset base.

Question 5

Under U.S. GAAP, research costs are generally:

Accepted Answer

Expensed as incurred

Answer

U.S. GAAP requires research costs to be expensed as incurred because future benefits are too uncertain to capitalize.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Financial Statement Interpretation 3