Chartered Financial Analyst · Level I
CFA L1 Financial Statement Analysis: practice questions with answers
6 free exam-style questions on Financial Statement Analysis for CFA L1 Level I. Try each one, then open the answer to read the explanation. Fincora has 88 original questions on this syllabus area.
Question 1
Tamberlane Foods Inc. reports net income of USD 8,400,000 for the year and declares preferred dividends of USD 600,000. On 1 January it had 4,000,000 common shares outstanding. It issued 1,200,000 new common shares on 1 July and repurchased 300,000 common shares on 1 October. Basic EPS for the year is closest to:
- A USD 1.86
- B USD 1.59
- C USD 1.72
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Answer: C. Weighted average shares = 4,000,000 + 1,200,000 x 6/12 - 300,000 x 3/12 = 4,000,000 + 600,000 - 75,000 = 4,525,000.
Income available to common shareholders = 8,400,000 - 600,000 = 7,800,000.
Basic EPS = 7,800,000 / 4,525,000 = USD 1.72.
Question 2
A machine is purchased for USD 80,000. It has an estimated useful life of 5 years and an estimated residual value of USD 8,000. Using the double-declining balance method, depreciation expense in Year 2 is closest to:
- A USD 14,400
- B USD 19,200
- C USD 17,280
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Answer: B. Double-declining rate = 2 / 5 = 40%, applied to the opening carrying amount (residual value is not deducted, but the asset is not depreciated below it).
Year 1: 40% x 80,000 = 32,000; carrying amount = 48,000
Year 2: 40% x 48,000 = 19,200; carrying amount = 28,800 (still above the 8,000 residual value).
Question 3
An analyst wants to evaluate the compensation paid to the senior executives of Fenmarch Medical, a US SEC registrant that reports under US GAAP, and the matters, such as the election of directors, on which shareholders will vote at its next annual meeting. The document she should consult first is most likely Fenmarch's:
- A current report on Form 8-K.
- B quarterly report on Form 10-Q.
- C proxy statement.
Show the answer
Answer: C. SEC registrants file several kinds of reports, each a different source of information for analysts:
- Form 10-K: the annual report, with audited financial statements, notes and MD&A.
- Form 10-Q: quarterly financial statements and MD&A, generally reviewed rather than audited.
- Form 8-K: current reports on material events, such as acquisitions or disposals, changes in management or auditors, or bankruptcy.
- Proxy statement (Form DEF 14A): issued to shareholders when there are matters requiring a shareholder vote. It is the main source for the election of directors, board composition, executive compensation, stock option plans and conflicts of interest.
For executive pay and the items on the annual meeting agenda, the proxy statement is the first place to look.
Question 4
Data for Siltmoor Apparel, which reports under IFRS (EUR thousands): cash 1,100; short-term marketable securities 500; accounts receivable 1,800; inventories 2,400. Total operating expenses for the year are 14,600, including depreciation of 1,460; all other operating expenses are paid in cash. Assuming a 365-day year, Siltmoor's defensive interval ratio is closest to:
- A 85 days
- B 161 days
- C 94 days
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Answer: C. The defensive interval ratio estimates how many days a company could pay its cash expenses using only its most liquid assets, without any new cash inflows:
Defensive interval = (cash + short-term marketable investments + receivables) / daily cash expenditures
Daily cash expenditures = (14,600 - 1,460) / 365 = 13,140 / 365 = EUR 36 thousand
Defensive assets = 1,100 + 500 + 1,800 = EUR 3,400 thousand
Defensive interval = 3,400 / 36 = 94.4 days
Like the quick ratio, the defensive interval excludes inventories, which may take time to sell and may have to be sold at a discount.
Question 5
Corbel Networks files reports with the US SEC under US GAAP. In its annual report it highlights 'adjusted EBITDA', which excludes stock-based compensation and restructuring costs that it has recorded in each of the last five years. Under SEC rules, when Corbel presents this non-GAAP measure in its filings, it most likely must:
- A present the measure with greater prominence than the comparable US GAAP measure, because it reflects recurring operating performance.
- B also present the most directly comparable US GAAP measure with equal or greater prominence, together with a reconciliation between the two.
- C stop presenting the measure, because SEC rules prohibit non-GAAP measures in annual filings.
Show the answer
Answer: B. Companies often report non-GAAP (or non-IFRS) measures such as adjusted earnings or adjusted EBITDA, which exclude items management considers non-recurring or non-cash.
In the United States, when a company includes a non-GAAP financial measure in an SEC filing, it must:
- present the most directly comparable GAAP measure with equal or greater prominence; and
- provide a reconciliation between the non-GAAP measure and that GAAP measure, and explain why management believes the measure is useful.
Analysts should treat adjustments with caution. Corbel excludes stock-based compensation and restructuring costs that recur every year; such recurring 'non-recurring' items are a warning sign that the adjusted measure overstates sustainable performance.
Question 6
Drummond Quarrying buys a crushing machine for USD 640,000. It estimates a residual value of USD 40,000, a useful life of 5 years and total lifetime output of 1,500,000 tonnes. In Year 1 the machine processes 330,000 tonnes. Using the units-of-production method, depreciation expense for Year 1 is closest to:
- A USD 140,800
- B USD 132,000
- C USD 120,000
Show the answer
Answer: B. Units-of-production depreciation allocates the depreciable amount in proportion to use.
Depreciable amount = USD 640,000 - USD 40,000 = USD 600,000.
Rate per tonne = USD 600,000 / 1,500,000 = USD 0.40.
Year 1 depreciation = 330,000 x USD 0.40 = USD 132,000.
The estimated useful life in years is not needed for this method.
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