FIA Financial Statement Interpretation 4

Question 1

Which of the following is classified as a non-cash item that must be added back to net income under the indirect method?

Accepted Answer

Depreciation expense

Answer

Depreciation is a non-cash charge deducted in computing net income, so it must be added back when reconciling to operating cash flow.

Question 2

A company's gross margin is 40% and its net profit margin is 5%. The large difference is most likely attributable to:

Accepted Answer

High operating expenses, interest, or taxes below the gross profit line

Answer

The gap between gross margin and net margin reflects operating expenses, interest expense, and income taxes that reduce gross profit to net income.

Question 3

A contingent liability should be recorded on the balance sheet when it is:

Accepted Answer

Probable and the amount can be reasonably estimated

Answer

Under U.S. GAAP, a contingent liability is recognized when the loss is probable and the amount can be reasonably estimated.

Question 4

Book value per share is calculated as:

Accepted Answer

Total equity divided by shares outstanding

Answer

Book value per share equals total stockholders' equity divided by the number of common shares outstanding.

Question 5

A high price-to-book (P/B) ratio generally suggests that:

Accepted Answer

Investors expect returns above the cost of equity or anticipate future growth

Answer

A high P/B ratio means investors are willing to pay more than book value, typically because they expect high future profitability or growth.

(FIA) Financial Information Associate Certification Practice Test