Financial Modeling & Forecasting 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 Modeling & Forecasting flashcards as text
In a three-statement financial model, which statement serves as the 'anchor' that the other two statements are built around?
Answer: Income Statement
The Income Statement is the anchor because revenues and expenses flow into net income, which then drives the balance sheet (retained earnings) and cash flow statement.
When building a revenue forecast using a bottoms-up approach, what is the primary input?
Answer: Unit volume and price assumptions
A bottoms-up approach builds revenue from granular unit economics — number of units sold multiplied by average selling price — rather than top-down macro drivers.
What does a 'circular reference' in a financial model typically involve?
Answer: Interest expense depending on debt, which depends on cash, which depends on net income including interest
Circularity arises when interest expense affects net income, net income affects the cash balance, and the cash balance affects the debt level used to calculate interest expense.
In scenario analysis for a financial model, what is the primary distinction between a 'base case' and a 'downside case'?
Answer: The downside case assumes adverse conditions such as lower revenue growth or higher costs
The downside case stress-tests the model under pessimistic assumptions (e.g., revenue decline, margin compression) to evaluate business resilience.
Which financial modeling concept refers to projecting the minimum cash balance a company needs to operate without external financing?
Answer: Minimum cash balance or operating cash buffer
A minimum cash balance assumption ensures the model doesn't project the company running out of cash needed for day-to-day operations.
When forecasting days sales outstanding (DSO), an increase in DSO relative to historical levels most likely indicates:
Answer: Slower collection of receivables and potential credit quality deterioration
Rising DSO means customers are taking longer to pay, which ties up cash in receivables and may signal collection problems or loosened credit standards.
In an LBO (leveraged buyout) model, what is the primary metric used to assess whether the deal generates an acceptable return for the private equity sponsor?
Answer: Internal rate of return (IRR) and multiple of invested capital (MOIC)
PE sponsors evaluate LBO returns primarily through IRR (time-weighted return) and MOIC (total cash returned relative to equity invested).