INTRODUCTION TO
FINANCIAL STATEMENT
K
MODELING EXAM QUESTIONS
C
AND CORRECT DETAILED /
LO
VERIFIED ANSWERS
YC
D
U
ST
, Steps to develop a sales-based pro forma company model - ANS 1) Model line items in income
statement
2) Model line items in cash flow statement
3) Project current line items in balance sheet (AR, AP, Inventory)
4) Link all statements together
K
Overconfidence - ANS when people demonstrate unwarranted faith in their own abilities.
Impact of overconfidence on analyst forecasts and remedies - ANS - Impact is individual has a
C
higher likelihood of being in correct
Remedies include
LO
- Conduct scenario analysis
- Record and share their forecasts and review them regularly, identifying both the correct and
incorrect forecasts they have made.
Illusion of control - ANS a tendency by people to overestimate their ability to control events
YC
Impact of illusion of control on analyst forecasts and remedies - ANS - Impact is that individual
may overcomplicate their model through making it too granular
Remedies include
- restricting modeling variables to those that are regularly disclosed by the company
D
- focusing on the most important or impactful variables, and
- speaking only with those who are likely to have unique or significant perspectives.
U
Conservatism bias - ANS where people maintain their prior views or forecasts by inadequately
incorporating new information.
ST
Impact of conservatism bias on analyst forecasts and remedies - ANS - Impact is analysts fails
to incorporate new information to their model leading to a higher likelihood of having inaccurate
forecasts
Remedies include
- reviews of forecasts and models by an investment team at a regular interval, such as each
quarter, and
- creating flexible models with fewer variables, to make changing assumptions easier
Representativeness bias - ANS the tendency to classify information based on past
experiences and known classifications.
FINANCIAL STATEMENT
K
MODELING EXAM QUESTIONS
C
AND CORRECT DETAILED /
LO
VERIFIED ANSWERS
YC
D
U
ST
, Steps to develop a sales-based pro forma company model - ANS 1) Model line items in income
statement
2) Model line items in cash flow statement
3) Project current line items in balance sheet (AR, AP, Inventory)
4) Link all statements together
K
Overconfidence - ANS when people demonstrate unwarranted faith in their own abilities.
Impact of overconfidence on analyst forecasts and remedies - ANS - Impact is individual has a
C
higher likelihood of being in correct
Remedies include
LO
- Conduct scenario analysis
- Record and share their forecasts and review them regularly, identifying both the correct and
incorrect forecasts they have made.
Illusion of control - ANS a tendency by people to overestimate their ability to control events
YC
Impact of illusion of control on analyst forecasts and remedies - ANS - Impact is that individual
may overcomplicate their model through making it too granular
Remedies include
- restricting modeling variables to those that are regularly disclosed by the company
D
- focusing on the most important or impactful variables, and
- speaking only with those who are likely to have unique or significant perspectives.
U
Conservatism bias - ANS where people maintain their prior views or forecasts by inadequately
incorporating new information.
ST
Impact of conservatism bias on analyst forecasts and remedies - ANS - Impact is analysts fails
to incorporate new information to their model leading to a higher likelihood of having inaccurate
forecasts
Remedies include
- reviews of forecasts and models by an investment team at a regular interval, such as each
quarter, and
- creating flexible models with fewer variables, to make changing assumptions easier
Representativeness bias - ANS the tendency to classify information based on past
experiences and known classifications.
