Financial Analysis & Reporting Flashcards
7 cards from real CFE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Analysis & Reporting flashcards as text
A financial examiner notices that a company's operating cash flow is consistently lower than its reported net income over multiple periods. This pattern most likely suggests:
Answer: Aggressive accrual accounting or earnings manipulation inflating reported income
Persistent operating cash flow below net income can signal that accruals are being used to overstate earnings relative to actual cash generation.
Which ratio directly measures a company's ability to service its debt obligations from operating earnings?
Answer: Interest coverage ratio (EBIT/Interest expense)
The interest coverage ratio shows how many times a company's EBIT covers its interest expense, indicating debt-servicing capacity.
Under ASC 606, variable consideration such as rebates or refunds should be recognized when:
Answer: It is probable that a significant revenue reversal will not occur
ASC 606's constraint requires including variable consideration only to the extent it is probable that a significant revenue reversal will not subsequently occur.
When analyzing a company's balance sheet, hidden liabilities are most often found in:
Answer: Off-balance-sheet arrangements, contingent liabilities, and operating lease commitments disclosed in footnotes
Financial statement footnotes frequently disclose obligations not fully reflected on the balance sheet, including contingencies and commitments.
The equity method of accounting is required when an investor has significant influence over an investee, which is generally presumed at ownership levels of:
Answer: 20% to 50%
ASC 323 presumes significant influence—and thus requires the equity method—when an investor holds 20–50% of an investee's voting stock.
In horizontal analysis of financial statements, each line item is compared to:
Answer: The same line item in a prior period (base year)
Horizontal analysis measures period-over-period changes by comparing each line item to a prior-period base, highlighting growth or decline trends.
Which of the following financial ratios is most useful to a short-term creditor evaluating whether to extend trade credit?
Answer: Quick ratio (acid-test ratio)
The quick ratio excludes inventory from current assets, giving short-term creditors a conservative view of immediately available liquidity.