Financial Statement Analysis
FSA is where the exam checks whether you can read a company rather than recite a definition. The recurring demand is comparability: two firms report the same economics differently, and you have to say what the difference does to earnings, assets, and the ratios built on them.
What you need to be able to do
- Trace a transaction through all three statements, not just the one it obviously touches
- Adjust for inventory and depreciation choices when comparing firms
- Separate deferred tax presentation from deferred tax substance
- Spot the reporting-quality signals that precede a restatement
Where candidates lose marks
Treating IFRS and US GAAP as interchangeable. A large share of FSA questions exists purely because the two treatments differ.
10 free FSA practice questions
Real questions from the CFAQuiz bank, one or two per subtopic, with the full explanation. No account needed.
Which of the following is classified as a current liability on the balance sheet?
- A.Deferred revenue for services to be rendered over the next six months
- B.Refundable security deposit received from a tenant, due to be returned at the end of a 3-year lease
- C.Deferred tax liability expected to reverse in three years
Show answer and explanation
Correct answer: A
Deferred revenue for services to be delivered within the next 12 months is a current liability because it will be settled by providing services within one operating cycle.
- Option B is non-current because the refundable deposit is not due within 12 months (it is due at the end of a 3-year lease).
- Option C is non-current because deferred tax liabilities are presented as non-current under both IFRS and US GAAP and are not expected to reverse within a year.
Under IFRS and US GAAP, classifications of cash interest and dividends can differ. Which of the following classifications is permitted under IFRS but not permitted under US GAAP?
- A.Classifying interest paid as a financing cash flow
- B.Classifying dividends received as a financing cash flow
- C.Classifying interest received as a financing cash flow
Show answer and explanation
Correct answer: A
Under IFRS, interest paid may be classified as either operating or financing. Under US GAAP, interest paid is classified only as operating. Therefore, classifying interest paid as financing is permitted under IFRS but not under US GAAP.
- Option B: Dividends received can be operating or investing under IFRS, not financing.
- Option C: Interest received can be operating or investing under IFRS, not financing.
A new accounting intern asks about the primary objective of general purpose financial reporting under the IASB Conceptual Framework. Which statement best describes this objective?
- A.Provide useful financial information to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
- B.Ensure compliance with tax regulations and calculate the entity’s tax obligations for the period.
- C.Maximize the entity’s net income and shareholder wealth through managerial reporting choices.
Show answer and explanation
Correct answer: A
The IASB states that the objective of general purpose financial reporting is to provide useful information to existing and potential investors, lenders, and other creditors to help them make decisions about providing resources to the entity.
- Option B: Tax compliance is not the primary objective of general purpose financial reporting; it is a separate, jurisdiction-specific purpose.
- Option C: Maximizing net income/shareholder wealth is a managerial goal, not the stated objective of financial reporting.
Which scenario most likely signals lower financial reporting quality due to aggressive revenue recognition?
- A.Revenue growth is matched by proportionate CFO growth and stable days sales outstanding over multiple years.
- B.Receivables growth significantly exceeds revenue growth, days sales outstanding trend higher, and CFO lags net income.
- C.Inventory levels decline while gross margin improves due to a disclosed shift toward higher-margin products.
Show answer and explanation
Correct answer: B
Receivables outpacing sales alongside rising DSO and CFO lagging net income are classic red flags for premature or aggressive revenue recognition.
- Option A is wrong because stable DSO and CFO tracking revenue signal good cash realization of sales, not manipulation.
- Option C is wrong because a product mix shift can legitimately raise margins and reduce inventories without implying revenue overstatement.
Which item is presented net of tax and reported below income from continuing operations on the income statement?
- A.Unusual or infrequent item within continuing operations (e.g., a restructuring charge)
- B.Results of a discontinued operation
- C.Change in accounting estimate
Show answer and explanation
Correct answer: B
Discontinued operations are reported net of tax, below income from continuing operations, under both IFRS and U.S. GAAP.
- Option A: Unusual or infrequent items are included in income from continuing operations (typically pre-tax in operating or other income), not net of tax below the line.
- Option C: A change in estimate is treated prospectively in continuing operations; it is not presented net of tax below income from continuing operations.
During the year, a company recognizes a warranty expense of $60,000 in accounting income. For tax purposes, warranty costs are deductible only when paid, and none were paid this year. The enacted tax rate is 30%. What deferred tax item is recorded at year-end, and for what amount?
- A.Deferred tax asset of $18,000
- B.No deferred tax item (amount $0)
- C.Deferred tax asset of $60,000
Show answer and explanation
Correct answer: A
A deductible temporary difference (expense recognized now, deduction later) creates a deferred tax asset (DTA):
- Option B assumes future deductible amounts are not recognized as deferred taxes and records no asset (incorrect under both IFRS and US GAAP when realization is expected).
- Option C uses the gross temporary difference and forgets to apply the tax rate, yielding 60,000 instead of 18,000.
In a period of rising input prices and stable or increasing inventory quantities (no significant liquidations), which cost flow method under U.S. GAAP produces the highest COGS, the lowest ending inventory, and the lowest gross profit?
- A.FIFO
- B.Weighted-average cost
- C.LIFO
Show answer and explanation
Correct answer: C
With rising prices and no significant LIFO liquidation, LIFO assigns the most recent (higher) costs to COGS, yielding the highest COGS, lowest ending inventory, and lowest gross profit.
- Option A (FIFO) is wrong because it assigns older (lower) costs to COGS, producing the lowest COGS, highest ending inventory, and highest gross profit in rising prices.
- Option B (Weighted-average) is wrong because it yields results between FIFO and LIFO, not the extreme (highest COGS/lowest ending inventory) outcome.
On 1 January Year 1, Delta Manufacturing purchases equipment for $480,000 with an expected useful life of 8 years and no residual value. The company uses straight-line depreciation. At 31 December Year 3, the equipment is tested for impairment under IFRS. Management estimates fair value less costs of disposal at $275,000 and value in use at $280,000. What impairment loss, if any, should be recognized at 31 December Year 3?
- A.$25,000
- B.$200,000
- C.$20,000
Show answer and explanation
Correct answer: C
Annual depreciation (straight-line):
Accumulated depreciation after 3 years:
Carrying amount at 31 Dec Year 3:
Recoverable amount under IFRS is the higher of fair value less costs of disposal and value in use:
Impairment loss:
- Option A ($25,000) uses fair value less costs of disposal instead of the recoverable amount: .
- Option B ($200,000) incorrectly compares historical cost to the recoverable amount, ignoring accumulated depreciation: .
A company issues a 3-year zero-coupon note with a maturity (face) value of $1,000,000 and receives $800,000 in proceeds at issuance. Using the effective interest method, what is the carrying amount of the note at the end of Year 1?
- A.$866,667
- B.$861,774
- C.$800,000
Show answer and explanation
Correct answer: B
Implied yield y satisfies: . Thus and .
End of Year 1 carrying amount (accretion):
- Option A ($866,667) uses a naive rate of for one year: .
- Option C ($800,000) assumes no interest accrues because there is no coupon, ignoring accretion of the discount.
- Option B is correct: accretion at the effective rate gives $861,774 (rounded).
A company has total current assets of $250 million and total current liabilities of $150 million. It pays $30 million of accounts payable in cash. No other current accounts change. What is the current ratio immediately after the payment?
- A.1.67
- B.1.47
- C.1.83
Show answer and explanation
Correct answer: C
Paying accounts payable with cash reduces both current assets and current liabilities by the same amount.
Current balances after payment:
- Option A uses the initial ratio without reflecting the payment:
- Option B subtracts the cash from current assets but forgets to reduce current liabilities:
Other Level I topics
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