1
Wall Street Prep Analyzing Financial
Reports Exam 2025/2026 | 40 Questions
with Verified Answers | 35 MCQs + 5
Statement Analysis Exercises | WSP
Certification | Pass Guarantee
SECTION A – MULTIPLE-CHOICE (35 questions)
All options are listed vertically to match Wall Street Prep house style.
1. When reviewing a software company’s 2025 income statement, you notice
revenue grew 18 % YoY while accounts receivable grew 32 %. Which
conclusion is most appropriate?
A. The company is potentially channel-stuffing and quality of revenue is
deteriorating
B. The company has improved its collection cycle
C. Deferred revenue must have increased significantly
D. Free cash flow will automatically rise because of higher sales
Answer: A
Rationale: A/R growing markedly faster than sales is a classic red flag that
customers are paying more slowly (or bill-and-hold/channel-stuffing exists). The
other choices either describe the opposite trend or are not automatic corollaries.
2. Under ASC 842 (leases) adopted in 2025, operating lease right-of-use (ROU)
assets appear on the balance sheet. Which ratio is least likely to be affected?
A. Debt / EBITDA
B. Return on assets (ROA)
C. Current ratio
D. Fixed-charge coverage
, 2
Answer: C
Rationale: Operating lease liabilities are non-current, so current liabilities and
current assets are unchanged; therefore the current ratio is unaffected.
3. A retailer presents the following LIFO inventory disclosure (in $ mm): 2025
FIFO inventory 820; LIFO reserve 140 (vs 95 in 2024). What is the 2025 cost
of goods sold under FIFO?
A. COGS FIFO = COGS LIFO – 45
B. COGS FIFO = COGS LIFO + 45
C. COGS FIFO = COGS LIFO – 140
D. COGS FIFO = COGS LIFO + 95
Answer: B
Rationale: ΔLIFO reserve = +45. To convert LIFO COGS to FIFO COGS, add the
increase (lower FIFO COGS because older, cheaper layers are being sold). Thus
FIFO COGS is lower by 45.
4. A manufacturer discloses “Adjusted EBITDA” that excludes stock-based
compensation. Which critique best aligns with SEC 2025 compliance &
disclosure interpretations?
A. The adjustment is acceptable as long as it is labeled “non-recurring”
B. The adjustment is prohibited under Regulation G
C. The company must present the nearest GAAP metric with equal prominence and
reconcile SBC
D. Excluding SBC increases comparability with European peers
Answer: C
Rationale: Regulation G (and 2025 SEC guidance) allows non-GAAP metrics but
requires equal prominence and reconciliation; SBC is a normal recurring expense.
5. A firm capitalizes software development costs under ASC 985-20 once
technological feasibility is reached. In 2025 total dev cost is $40 mm, $12 mm
met the criterion. Which statement is correct?
, 3
A. Operating margin will be higher in the year of capitalization than if all costs had
been expensed
B. Cash from operations will increase because of the capitalization
C. Total cash flow will decrease versus immediate expensing
D. Balance-sheet asset has no future impairment risk
Answer: A
Rationale: Capitalizing shifts expense to future amortization, boosting current -
year operating margin. Cash flow classification moves the outflow to investing, but
total cash is unaffected.
6. A company’s 2025 cash-flow statement shows: Net income 200; depreciation
45; gain on asset sale 15; A/R ↑ 25; inventory ↓ 10; A/P ↓ 8. What is CFO?
A. 207
B. 217
C. 227
D. 197
Answer: A
Rationale: 200 + 45 – 15 – 25 + 10 – 8 = 207.
7. Which combination of 2025 events most reliably signals impending
impairment of goodwill?
A. Stock price 15 % above book value and rising interest rates
B. Carrying amount of reporting unit exceeds fair value and declining EBITDA
margins
C. New competitor enters market and dividend initiation
D. Upgrade by credit-rating agency and covenant-light refinancing
Answer: B
Rationale: Step-zero impairment test compares carrying amount to fair value;
sustained margin compression is a triggering event under ASC 350.
Wall Street Prep Analyzing Financial
Reports Exam 2025/2026 | 40 Questions
with Verified Answers | 35 MCQs + 5
Statement Analysis Exercises | WSP
Certification | Pass Guarantee
SECTION A – MULTIPLE-CHOICE (35 questions)
All options are listed vertically to match Wall Street Prep house style.
1. When reviewing a software company’s 2025 income statement, you notice
revenue grew 18 % YoY while accounts receivable grew 32 %. Which
conclusion is most appropriate?
A. The company is potentially channel-stuffing and quality of revenue is
deteriorating
B. The company has improved its collection cycle
C. Deferred revenue must have increased significantly
D. Free cash flow will automatically rise because of higher sales
Answer: A
Rationale: A/R growing markedly faster than sales is a classic red flag that
customers are paying more slowly (or bill-and-hold/channel-stuffing exists). The
other choices either describe the opposite trend or are not automatic corollaries.
2. Under ASC 842 (leases) adopted in 2025, operating lease right-of-use (ROU)
assets appear on the balance sheet. Which ratio is least likely to be affected?
A. Debt / EBITDA
B. Return on assets (ROA)
C. Current ratio
D. Fixed-charge coverage
, 2
Answer: C
Rationale: Operating lease liabilities are non-current, so current liabilities and
current assets are unchanged; therefore the current ratio is unaffected.
3. A retailer presents the following LIFO inventory disclosure (in $ mm): 2025
FIFO inventory 820; LIFO reserve 140 (vs 95 in 2024). What is the 2025 cost
of goods sold under FIFO?
A. COGS FIFO = COGS LIFO – 45
B. COGS FIFO = COGS LIFO + 45
C. COGS FIFO = COGS LIFO – 140
D. COGS FIFO = COGS LIFO + 95
Answer: B
Rationale: ΔLIFO reserve = +45. To convert LIFO COGS to FIFO COGS, add the
increase (lower FIFO COGS because older, cheaper layers are being sold). Thus
FIFO COGS is lower by 45.
4. A manufacturer discloses “Adjusted EBITDA” that excludes stock-based
compensation. Which critique best aligns with SEC 2025 compliance &
disclosure interpretations?
A. The adjustment is acceptable as long as it is labeled “non-recurring”
B. The adjustment is prohibited under Regulation G
C. The company must present the nearest GAAP metric with equal prominence and
reconcile SBC
D. Excluding SBC increases comparability with European peers
Answer: C
Rationale: Regulation G (and 2025 SEC guidance) allows non-GAAP metrics but
requires equal prominence and reconciliation; SBC is a normal recurring expense.
5. A firm capitalizes software development costs under ASC 985-20 once
technological feasibility is reached. In 2025 total dev cost is $40 mm, $12 mm
met the criterion. Which statement is correct?
, 3
A. Operating margin will be higher in the year of capitalization than if all costs had
been expensed
B. Cash from operations will increase because of the capitalization
C. Total cash flow will decrease versus immediate expensing
D. Balance-sheet asset has no future impairment risk
Answer: A
Rationale: Capitalizing shifts expense to future amortization, boosting current -
year operating margin. Cash flow classification moves the outflow to investing, but
total cash is unaffected.
6. A company’s 2025 cash-flow statement shows: Net income 200; depreciation
45; gain on asset sale 15; A/R ↑ 25; inventory ↓ 10; A/P ↓ 8. What is CFO?
A. 207
B. 217
C. 227
D. 197
Answer: A
Rationale: 200 + 45 – 15 – 25 + 10 – 8 = 207.
7. Which combination of 2025 events most reliably signals impending
impairment of goodwill?
A. Stock price 15 % above book value and rising interest rates
B. Carrying amount of reporting unit exceeds fair value and declining EBITDA
margins
C. New competitor enters market and dividend initiation
D. Upgrade by credit-rating agency and covenant-light refinancing
Answer: B
Rationale: Step-zero impairment test compares carrying amount to fair value;
sustained margin compression is a triggering event under ASC 350.
