Financial Analysis & Reporting Flashcards
7 cards from real IAR 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 client asks about a company whose revenue has grown 20% but operating income has declined. Which analytical step should the adviser take first?
Answer: Examine the operating expense breakdown to identify which cost categories grew faster than revenue
The first analytical step is to disaggregate operating expenses (COGS, SG&A, R&D) to identify which costs are growing disproportionately relative to revenue.
Which of the following is true about pro forma (non-GAAP) financial measures disclosed by public companies?
Answer: They must be reconciled to the nearest GAAP measure in SEC filings
SEC Regulation G requires that whenever a public company discloses a non-GAAP financial measure, it must provide a reconciliation to the most directly comparable GAAP measure.
Which scenario best illustrates channel stuffing as an earnings quality concern?
Answer: A company ships excess inventory to distributors at quarter-end with generous return rights to boost reported revenue
Channel stuffing inflates near-term revenue by pushing products to distributors before demand exists, especially when return rights make the revenue recognition questionable.
When evaluating a company's pension obligation for analysis purposes, an adviser should be aware that a higher discount rate assumption will:
Answer: Reduce the reported pension liability and pension expense
A higher discount rate reduces the present value of future benefit obligations, lowering both the pension liability on the balance sheet and the service cost component of expense.
An investment adviser reviews a company's balance sheet and notices a significant 'off-balance-sheet' operating lease commitment disclosed only in the footnotes (pre-ASC 842). To adjust the analysis, the adviser would most appropriately:
Answer: Capitalize the lease by adding the present value of future lease payments to both assets and debt
Analysts adjust for off-balance-sheet operating leases by capitalizing them — estimating the present value and adding it to assets and debt to better reflect economic leverage.
Which of the following best describes the concept of earnings quality in financial analysis?
Answer: The degree to which reported earnings reflect sustainable, cash-backed economic performance
High earnings quality means reported income is supported by actual cash generation, uses conservative accounting, and is likely to persist — not merely a product of accounting choices.
A company has a current ratio of 2.5 and a quick ratio of 0.8. What does this most likely indicate?
Answer: The company holds a large amount of inventory relative to its liquid assets
A large gap between the current ratio (which includes inventory) and the quick ratio (which excludes it) signals that inventory is a dominant component of current assets.