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Financial Analysis & Reporting Flashcards

7 cards from real CPA 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

  1. A vertical common-size income statement expresses each line item as a percentage of:

    Answer: Net revenues (sales)

    In a common-size income statement, each item is divided by net revenues to show relative proportions regardless of company size.

  2. Under US GAAP, how are trading securities reported on the balance sheet?

    Answer: At fair value with unrealized gains/losses in net income

    Trading securities are reported at fair value, and changes in fair value flow through the income statement, not OCI.

  3. Return on equity (ROE) can be decomposed using the DuPont formula into:

    Answer: Net profit margin × Asset turnover × Equity multiplier

    The three-factor DuPont model breaks ROE into net profit margin (profitability), asset turnover (efficiency), and equity multiplier (leverage).

  4. A company leases equipment under a finance lease. Which financial statement is most directly affected compared to an operating lease?

    Answer: Both the balance sheet and income statement, because an asset, liability, depreciation, and interest are recognized

    A finance lease results in recognizing a right-of-use asset and lease liability on the balance sheet, plus depreciation and interest expense on the income statement.

  5. Which ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?

    Answer: Cash ratio

    The cash ratio (cash + cash equivalents divided by current liabilities) is the most stringent liquidity measure, excluding receivables and inventory.

  6. In a footnote, a company discloses that changing from straight-line to double-declining-balance depreciation would decrease net income by $50,000. This is an example of:

    Answer: A change in accounting principle

    Switching depreciation methods is a change in accounting principle, which under ASC 250 is generally applied retrospectively.

  7. Goodwill arising from a business combination is:

    Answer: Tested for impairment at least annually under US GAAP

    Under US GAAP (ASC 350), goodwill is not amortized but must be tested for impairment at least annually or whenever a triggering event occurs.