QFC Financial Statement Analysis 2

Question 1

A company reports operating cash flow of $500M and net income of $200M. The large positive difference is most likely explained by:

Accepted Answer

High depreciation and amortization charges

Answer

Depreciation and amortization are non-cash charges added back in the operating section, creating a positive gap between OCF and net income.

Question 2

Under IFRS, interest paid may be classified in cash flow statements as:

Accepted Answer

Either operating or financing activities

Answer

IFRS allows interest paid to be classified as either operating or financing activities, whereas US GAAP requires it to be operating.

Question 3

A firm's times interest earned (TIE) ratio is 2.5. This means EBIT covers interest expense by:

Accepted Answer

2.5 times

Answer

TIE = EBIT / Interest Expense, so a ratio of 2.5 means EBIT is 2.5 times the annual interest obligation.

Question 4

Which inventory costing method results in the highest gross profit during a period of rising prices?

Accepted Answer

FIFO

Answer

FIFO assigns older (lower-cost) inventory to COGS during rising prices, leaving higher gross profit compared to LIFO.

Question 5

An analyst is comparing two firms and adjusts Firm B from LIFO to FIFO by adding the LIFO reserve to inventory. This adjustment also requires:

Accepted Answer

Increasing retained earnings net of tax by the LIFO reserve

Answer

The LIFO reserve is added to inventory (asset) and to retained earnings net of applicable taxes to maintain the accounting equation.

(QFC) Quantitative Finance Certification Practice Test