IAR Financial Analysis & Reporting 3

Question 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?

Accepted Answer

Depreciation expense

Answer

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

Question 2

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

Accepted Answer

May struggle to meet short-term obligations without selling inventory

Answer

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

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

Goodwill on a balance sheet arises when:

Accepted Answer

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

Answer

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

Question 5

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

Accepted Answer

Common-size analysis

Answer

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

IAR Practice Test

IAR Practice Test

IAR Financial Analysis & Reporting 3