CFA Level I Financial Statement Analysis Practice Questions
Financial Statement Analysis makes up 6 of every 50 questions on a Tigertest CFA Level I practice test. Here are 10 of the 24 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on CFA Institute's Level I topic weights for 2027. Original questions with four choices (the real exam has three). Not affiliated with CFA Institute.
1. Under US GAAP, interest paid on a company's debt is classified in the statement of cash flows as:
- A.Operating or financing, by choice
- B.Operating activities
- C.Financing activities
- D.Investing activities
Answer: B. US GAAP puts interest paid in operating activities. IAS 7 has let IFRS reporters choose operating or financing, and the IAS 7 amendments that come with IFRS 18 (periods from 1 January 2027) put it in financing for most companies, so check the basis before comparing cash flow from operations.
2. Under US GAAP, dividends a company receives from its investments are classified in the statement of cash flows as:
- A.Financing activities
- B.Operating or investing, by choice
- C.Investing activities
- D.Operating activities
Answer: D. US GAAP treats dividends and interest received as operating cash flows. IAS 7 has allowed IFRS reporters to show them in operating or investing activities, and with IFRS 18 (from 2027) most companies show them in investing.
3. Which model for measuring property, plant and equipment after acquisition is allowed under IFRS but not under US GAAP?
- A.The revaluation model
- B.The units-of-production method
- C.The cost model
- D.Straight-line depreciation
Answer: A. IFRS permits carrying PP&E at fair value less later depreciation and impairment (the revaluation model). US GAAP requires the cost model.
4. A US GAAP company reports LIFO ending inventory of 260 and a LIFO reserve of 40. To compare it with a FIFO company, its ending inventory restated to FIFO is:
- A.260
- B.340
- C.300
- D.220
Answer: C. FIFO inventory = LIFO inventory + LIFO reserve = 260 + 40 = 300. Subtracting the reserve gives 220, and 340 adds it twice. IFRS prohibits LIFO, so this adjustment is also needed to compare a LIFO company with an IFRS reporter.
5. Under IFRS, an earlier write-down of inventory to net realizable value may later be:
- A.Never reversed
- B.Reversed only at year-end audit
- C.Reversed, up to original cost
- D.Reversed above original cost
Answer: C. IFRS requires reversal of a write-down when NRV recovers, capped at the amount originally written down. US GAAP does not allow reversals.
6. In a period of rising prices with stable inventory levels, a LIFO company compared with an identical FIFO company reports:
- A.Higher inventory turnover
- B.Higher ending inventory
- C.Higher current ratio
- D.Higher gross margin
Answer: A. LIFO puts the newest, higher costs in cost of goods sold and older, lower costs in inventory. Higher COGS over lower inventory gives higher turnover, and lower inventory lowers the current ratio.
7. A company capitalizes a cost rather than expensing it. In the year the cost is paid, cash flow from operations is:
- A.Higher, with no outflow reported
- B.Lower, with the outflow in operating
- C.Unchanged in every section
- D.Higher, with the outflow in investing
Answer: D. A capitalized cost is an investing outflow, so CFO is higher than if it were expensed. Total cash flow is the same either way.
8. A company has a net profit margin of 5%, total asset turnover of 1.6 and financial leverage (assets to equity) of 2.0. Its return on equity is:
- A.3.2%
- B.16.0%
- C.8.0%
- D.10.0%
Answer: B. DuPont: ROE = margin x turnover x leverage = 0.05 x 1.6 x 2.0 = 16.0%. 8.0% is return on assets, which leaves out leverage.
9. A company has days of sales outstanding of 45, days of inventory on hand of 60 and days of payables of 30. Its cash conversion cycle is:
- A.135 days
- B.75 days
- C.45 days
- D.105 days
Answer: B. Cash conversion cycle = DSO + DOH - DPO = 45 + 60 - 30 = 75 days. 135 days adds payables instead of subtracting them.
10. Cash flow from operations is 500, interest paid is 40 (reported in operating activities), the tax rate is 25% and fixed capital investment is 200. Free cash flow to the firm is:
- A.340
- B.260
- C.300
- D.330
Answer: D. FCFF = CFO + interest x (1 - t) - FCInv = 500 + 30 - 200 = 330. Adding the pre-tax interest gives 340; leaving it out gives 300.
Practice all 24 financial statement analysis questions, and the rest of the 200-question bank, in the free CFA Level I training sets. Questions you miss come back until you have mastered them.
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