Introduction to Financial Statement Modelling
Questions with correct answers
Steps to develop a sales-based pro forma company model - CORRECT ANSWER-✔✔✅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
Overconfidence- CORRECT ANSWER-✔✔✅when people demonstrate unwarranted faith in
their own abilities.
Impact of overconfidence on analyst forecasts and remedies - CORRECT ANSWER-✔✔✅-
Impact is invividual has a higher likelihood of being in correct
Remedies include
- 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- CORRECT ANSWER-✔✔✅a tendency by people to overestimate their
ability to control events
Impact of illusion of control on analyst forecasts and remedies - CORRECT ANSWER-✔✔✅-
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
- focusing on the most important or impactful variables, and
- speaking only with those who are likely to have unique or significant perspectives.
Conservatism bias- CORRECT ANSWER-✔✔✅where people maintain their prior views or
forecasts by inadequately incorporating new information.
Impact of conservatism bias on analyst forecasts and remedies - CORRECT ANSWER-
✔✔✅- 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- CORRECT ANSWER-✔✔✅the tendency to classify information
based on past experiences and known classifications.
Base rate neglect- CORRECT ANSWER-✔✔✅The tendency to ignore information about
general principles in favor of very specific but vivid information.
Impact of representativeness bias on analysts forecasts and remedies - CORRECT
ANSWER-✔✔✅- impact is potentially having inaccurate forecasts due to only taking into
Questions with correct answers
Steps to develop a sales-based pro forma company model - CORRECT ANSWER-✔✔✅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
Overconfidence- CORRECT ANSWER-✔✔✅when people demonstrate unwarranted faith in
their own abilities.
Impact of overconfidence on analyst forecasts and remedies - CORRECT ANSWER-✔✔✅-
Impact is invividual has a higher likelihood of being in correct
Remedies include
- 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- CORRECT ANSWER-✔✔✅a tendency by people to overestimate their
ability to control events
Impact of illusion of control on analyst forecasts and remedies - CORRECT ANSWER-✔✔✅-
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
- focusing on the most important or impactful variables, and
- speaking only with those who are likely to have unique or significant perspectives.
Conservatism bias- CORRECT ANSWER-✔✔✅where people maintain their prior views or
forecasts by inadequately incorporating new information.
Impact of conservatism bias on analyst forecasts and remedies - CORRECT ANSWER-
✔✔✅- 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- CORRECT ANSWER-✔✔✅the tendency to classify information
based on past experiences and known classifications.
Base rate neglect- CORRECT ANSWER-✔✔✅The tendency to ignore information about
general principles in favor of very specific but vivid information.
Impact of representativeness bias on analysts forecasts and remedies - CORRECT
ANSWER-✔✔✅- impact is potentially having inaccurate forecasts due to only taking into
