Financial Modeling Exam Prep 2026/2027 |
Complete Study Guide | Practice Questions
& Answers
What is financial modeling? What is a financial model used for - correct answer-A
financial model is simply a tool that's usually built in Excel to forecast a business'
financial performance into the future. The forecast is typically based on the
company's historical performance and requires preparing an income statement,
balance sheet, cash flow statement and supporting schedules (known as a 3-
statement model). From there, more advanced types of models can be built such
as discounted cash flow analysis (DCF model), leveraged-buyout, mergers and
acquisitions, and sensitivity analysis.
Can be used to:
• Raising capital (debt and/or equity)
• Making acquisitions (businesses and/or assets)
• Growing the business organically (i.e. opening new stores, entering new
markets, etc.)
• Selling or divesting assets and business units Budgeting and forecasting
(planning for the years ahead)
• Capital allocation (priority of which projects to invest in) Valuing a business
How do you build a financial model? - correct answer-1. Historical results and
assumptions
a. Building a financial model begins with collecting information from financial
statements for the past three years or more and calculating items such as revenue
, growth rate, gross margins, accounts payable days, inventory days and accounts
receivable days. These metrics are then used in combination with the financial
analyst's insights to lay out the assumptions for the forecast period as hard-codes.
2. Construct Income Statement
a. With the forecast assumptions in place, you can build the income statement
starting from revenue, COGS, all the way down to EBITDA.
3. Construct Balance Sheet
a. Balance sheet is the next thing to build. Using the assumptions such as AR days,
AP days and inventory days, balance sheet items like accounts receivable and
inventory can be forecasted into the future.
4. Build the supporting schedules
a. Before completing the income statement and balance sheet, you need to
create a schedule for capital assets such as Property, Plant & Equipment (PP&E) as
well as for debt and interest.
5. Complete I/S and B/S
a. On the income statement, link depreciation to the PP&E schedule and interest
to the debt schedule. You can then finish up the income statement by calculating
the earnings before tax, taxes and net income. On the balance sheet, link the
closing PP&E balance and closing debt balance from the supporting schedules.
Shareholder's equity is computed by adding net income and capital raised and
subtracting dividends or shares repurchased from last year's closing balance.
6. Construct cash flow statement
a. Upon completing the income statement and balance sheet, you can build the
cash flow statement using the reconciliation method. Operating cash flow is
calculated by taking the net income, adding depreciation and adjusting for
changes in non-cash working
Name three of the most common financial modeling best practices. - correct
answer-1. Excel
Complete Study Guide | Practice Questions
& Answers
What is financial modeling? What is a financial model used for - correct answer-A
financial model is simply a tool that's usually built in Excel to forecast a business'
financial performance into the future. The forecast is typically based on the
company's historical performance and requires preparing an income statement,
balance sheet, cash flow statement and supporting schedules (known as a 3-
statement model). From there, more advanced types of models can be built such
as discounted cash flow analysis (DCF model), leveraged-buyout, mergers and
acquisitions, and sensitivity analysis.
Can be used to:
• Raising capital (debt and/or equity)
• Making acquisitions (businesses and/or assets)
• Growing the business organically (i.e. opening new stores, entering new
markets, etc.)
• Selling or divesting assets and business units Budgeting and forecasting
(planning for the years ahead)
• Capital allocation (priority of which projects to invest in) Valuing a business
How do you build a financial model? - correct answer-1. Historical results and
assumptions
a. Building a financial model begins with collecting information from financial
statements for the past three years or more and calculating items such as revenue
, growth rate, gross margins, accounts payable days, inventory days and accounts
receivable days. These metrics are then used in combination with the financial
analyst's insights to lay out the assumptions for the forecast period as hard-codes.
2. Construct Income Statement
a. With the forecast assumptions in place, you can build the income statement
starting from revenue, COGS, all the way down to EBITDA.
3. Construct Balance Sheet
a. Balance sheet is the next thing to build. Using the assumptions such as AR days,
AP days and inventory days, balance sheet items like accounts receivable and
inventory can be forecasted into the future.
4. Build the supporting schedules
a. Before completing the income statement and balance sheet, you need to
create a schedule for capital assets such as Property, Plant & Equipment (PP&E) as
well as for debt and interest.
5. Complete I/S and B/S
a. On the income statement, link depreciation to the PP&E schedule and interest
to the debt schedule. You can then finish up the income statement by calculating
the earnings before tax, taxes and net income. On the balance sheet, link the
closing PP&E balance and closing debt balance from the supporting schedules.
Shareholder's equity is computed by adding net income and capital raised and
subtracting dividends or shares repurchased from last year's closing balance.
6. Construct cash flow statement
a. Upon completing the income statement and balance sheet, you can build the
cash flow statement using the reconciliation method. Operating cash flow is
calculated by taking the net income, adding depreciation and adjusting for
changes in non-cash working
Name three of the most common financial modeling best practices. - correct
answer-1. Excel
