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Financial Analysis & Reporting Flashcards

7 cards from real IAR practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. Which of the following is a non-cash charge that reduces net income but does not affect operating cash flow when using the indirect method?

    Answer: Depreciation expense

    Depreciation is added back to net income under the indirect method because it reduces income without involving any cash outflow.

  2. A company's quick ratio is 0.6. This most likely means the company:

    Answer: May struggle to meet short-term obligations without selling inventory

    A quick ratio below 1.0 means liquid assets (cash, receivables) are insufficient to cover current liabilities without liquidating inventory.

  3. When a company uses the equity method to account for an investment, it records:

    Answer: Its proportionate share of the investee's net income as investment income

    Under the equity method, the investor recognizes its pro-rata share of the investee's earnings, increasing the investment account, and reduces it when dividends are received.

  4. Goodwill on a balance sheet arises when:

    Answer: An acquirer pays more than the fair value of identifiable net assets of an acquired company

    Goodwill is recorded in a business combination as the excess of purchase price over the fair value of identifiable assets acquired minus liabilities assumed.

  5. Which financial statement analysis technique expresses each line item as a percentage of a base figure within the same period?

    Answer: Common-size analysis

    Common-size analysis normalizes financials (e.g., income statement items as % of revenue) to enable meaningful comparisons across companies or time periods.

  6. An investment adviser is reviewing a client's bond portfolio. Which measure best captures interest rate risk for a bond with embedded options?

    Answer: Effective duration

    Effective duration accounts for changes in cash flows due to embedded options (calls, puts) when interest rates change, making it superior for option-embedded bonds.

  7. Under the DuPont framework, return on equity (ROE) is decomposed into which three components?

    Answer: Net profit margin, asset turnover, and financial leverage

    The three-factor DuPont formula is ROE = Net Profit Margin × Asset Turnover × Equity Multiplier (financial leverage).