Corporate Finance CFA Exam Questions
with Correct Answers
Equity equals: - Answer-Assets - Liabilities
Shareholders' equity reported on the balance sheet is most likely to differ from the
market value of shareholders' equity because: - Answer-some factors that affect the
generation of future cash flows are excluded.
All of the following are current assets except: - Answer-goodwill.
The most likely costs included in both the cost of inventory and property, plant, and
equipment are: - Answer-delivery costs.
Debt due within one year is considered: - Answer-current.
The carrying value of inventories reflects: - Answer-the lower of historical cost or net
realizable value
Accrued expenses (accrued liabilities) are: - Answer-expenses that have been reported
on the income statement but not yet paid
Defining total asset turnover as revenue divided by average total assets, all else equal,
impairment write-downs of long-lived assets owned by a company will most likely result
in an increase for that company in: - Answer-both the debt-to-equity ratio and the total
asset turnover.
The item "retained earnings" is a component of: - Answer-shareholders' equity.
When a company buys shares of its own stock to be held in treasury, it records a
reduction in: - Answer-both assets and shareholders' equity.
Which of the following would an analyst most likely be able to determine from a
common-size analysis of a company's balance sheet over several periods? - Answer-An
increase or decrease in financial leverage.
An investor concerned whether a company can meet its near-term obligations is most
likely to calculate the: - Answer-current ratio.
The most stringent test of a company's liquidity is its: - Answer-cash ratio.
An investor worried about a company's long-term solvency would most likely examine
its: - Answer-debt-to-equity ratio.
, Based on Exhibit 1, which statement is most likely correct? - Answer-Company A has
made one or more acquisitions.
Based on Exhibit 1, the financial leverage ratio for Company B is closest to: - Answer-
2.22.
Based on Exhibit 1, which ratio indicates lower liquidity risk for Company A compared
with Company B? - Answer-Cash ratio
In order to assess a company's ability to fulfill its long-term obligations, an analyst would
most likely examine: - Answer-solvency ratios.
Which ratio would a company most likely use to measure its ability to meet short-term
obligations? - Answer-Current ratio.
Which of the following ratios would be most useful in determining a company's ability to
cover its lease and interest payments? - Answer-Fixed charge coverage.
Based on this data, what is the analyst least likely to conclude? - Answer-Inventory
management has contributed to improved liquidity.
Which of the following would be the analyst's most likely conclusion? - Answer-The
company is becoming increasingly less solvent, as evidenced by the increase in its
debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.
With regard to the data in Problem 6, what would be the most reasonable explanation of
the financial data? - Answer-The decline in the company's equity indicates that the
company may be incurring losses, paying dividends greater than income, and/or
repurchasing shares.
An analyst observes a decrease in a company's inventory turnover. Which of the
following would most likely explain this trend? - Answer-The company installed a new
inventory management system but experienced some operational difficulties resulting in
duplicate orders being placed with suppliers.
Which of the following would best explain an increase in receivables turnover? -
Answer-Due to problems with an error in its old credit scoring system, the company had
accumulated a substantial amount of uncollectible accounts and wrote off a large
amount of its receivables.
Brown Corporation had average days of sales outstanding of 19 days in the most recent
fiscal year. Brown wants to improve its credit policies and collection practices and
decrease its collection period in the next fiscal year to match the industry average of 15
days. Credit sales in the most recent fiscal year were $300 million, and Brown expects
credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal
with Correct Answers
Equity equals: - Answer-Assets - Liabilities
Shareholders' equity reported on the balance sheet is most likely to differ from the
market value of shareholders' equity because: - Answer-some factors that affect the
generation of future cash flows are excluded.
All of the following are current assets except: - Answer-goodwill.
The most likely costs included in both the cost of inventory and property, plant, and
equipment are: - Answer-delivery costs.
Debt due within one year is considered: - Answer-current.
The carrying value of inventories reflects: - Answer-the lower of historical cost or net
realizable value
Accrued expenses (accrued liabilities) are: - Answer-expenses that have been reported
on the income statement but not yet paid
Defining total asset turnover as revenue divided by average total assets, all else equal,
impairment write-downs of long-lived assets owned by a company will most likely result
in an increase for that company in: - Answer-both the debt-to-equity ratio and the total
asset turnover.
The item "retained earnings" is a component of: - Answer-shareholders' equity.
When a company buys shares of its own stock to be held in treasury, it records a
reduction in: - Answer-both assets and shareholders' equity.
Which of the following would an analyst most likely be able to determine from a
common-size analysis of a company's balance sheet over several periods? - Answer-An
increase or decrease in financial leverage.
An investor concerned whether a company can meet its near-term obligations is most
likely to calculate the: - Answer-current ratio.
The most stringent test of a company's liquidity is its: - Answer-cash ratio.
An investor worried about a company's long-term solvency would most likely examine
its: - Answer-debt-to-equity ratio.
, Based on Exhibit 1, which statement is most likely correct? - Answer-Company A has
made one or more acquisitions.
Based on Exhibit 1, the financial leverage ratio for Company B is closest to: - Answer-
2.22.
Based on Exhibit 1, which ratio indicates lower liquidity risk for Company A compared
with Company B? - Answer-Cash ratio
In order to assess a company's ability to fulfill its long-term obligations, an analyst would
most likely examine: - Answer-solvency ratios.
Which ratio would a company most likely use to measure its ability to meet short-term
obligations? - Answer-Current ratio.
Which of the following ratios would be most useful in determining a company's ability to
cover its lease and interest payments? - Answer-Fixed charge coverage.
Based on this data, what is the analyst least likely to conclude? - Answer-Inventory
management has contributed to improved liquidity.
Which of the following would be the analyst's most likely conclusion? - Answer-The
company is becoming increasingly less solvent, as evidenced by the increase in its
debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.
With regard to the data in Problem 6, what would be the most reasonable explanation of
the financial data? - Answer-The decline in the company's equity indicates that the
company may be incurring losses, paying dividends greater than income, and/or
repurchasing shares.
An analyst observes a decrease in a company's inventory turnover. Which of the
following would most likely explain this trend? - Answer-The company installed a new
inventory management system but experienced some operational difficulties resulting in
duplicate orders being placed with suppliers.
Which of the following would best explain an increase in receivables turnover? -
Answer-Due to problems with an error in its old credit scoring system, the company had
accumulated a substantial amount of uncollectible accounts and wrote off a large
amount of its receivables.
Brown Corporation had average days of sales outstanding of 19 days in the most recent
fiscal year. Brown wants to improve its credit policies and collection practices and
decrease its collection period in the next fiscal year to match the industry average of 15
days. Credit sales in the most recent fiscal year were $300 million, and Brown expects
credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal
