Free CFM Financial Statement Modeling Questions and Answers

Question 1

Which financial statement typically serves as the starting point for a financial model?

Accepted Answer

Income Statement

Answer

The Income Statement provides a clear picture of a company's revenues and expenses over a period, culminating in net income. This net income figure is a crucial starting point for projecting future profitability and is directly linked to both the Balance Sheet (via retained earnings) and the Cash Flow Statement (as the initial line item for operating activities). Therefore, it forms the foundational layer for building comprehensive financial projections.

Question 2

Which of the following is a typical assumption made when projecting a financial model?

Accepted Answer

Revenue growth rate

Answer

Projecting a company's future financial performance heavily relies on assumptions about its top-line growth. The revenue growth rate is a fundamental driver in a financial model, as it directly influences future sales, and subsequently, profitability and cash flows. Other assumptions like cost of goods sold as a percentage of revenue or operating expenses are often built upon this initial revenue projection.

Question 3

In a three-statement financial model, which statement is typically built first?

Accepted Answer

Income Statement

Answer

In a three-statement financial model, the Income Statement is typically built first because it calculates Net Income, which is a critical input for both the Cash Flow Statement (as the starting point for operating activities) and the Balance Sheet (as part of retained earnings). Its structure of revenues minus expenses to arrive at profit provides the initial framework for projecting a company's financial performance.

Question 4

Which financial statement shows a company’s liquidity position at a specific point in time?

Accepted Answer

Balance Sheet

Answer

The Balance Sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. By examining current assets (like cash and accounts receivable) against current liabilities (like accounts payable), one can assess the company's ability to meet its short-term obligations. This makes it the primary statement for evaluating a company's liquidity and solvency position.

Question 5

Which section of the cash flow statement adjusts net income for non-cash items?

Accepted Answer

Operating Activities

Answer

The operating activities section of the cash flow statement starts with net income and then adjusts it for non-cash items and changes in working capital. Non-cash items like depreciation and amortization are added back because they reduce net income but do not involve an actual outflow of cash. This adjustment helps to reconcile net income with the actual cash generated from a company's core operations.

CFM - Certified Financial Modeler Practice Test

CFM - Certified Financial Modeler Practice Test

Free CFM Financial Statement Modeling Questions and Answers