Free CFA Level I Financial Statement Analysis Practice Questions
Financial statement analysis is one of the most heavily weighted topics on the CFA Level I exam at 11-14% (CFA Institute). Questions cover income statements, balance sheets, cash flow statements, financial ratios, and the impact of accounting choices on reported results.
Sample Questions
Question 1
Easy
Depreciation of a company's equipment is best described as:
Solution
C is correct.
Depreciation is a non-cash expense that systematically allocates the historical cost of a tangible asset over its estimated useful life in accordance with the matching principle.
Depreciation is a non-cash expense that systematically allocates the historical cost of a tangible asset over its estimated useful life in accordance with the matching principle.
Question 2
Medium
A deferred tax liability most likely arises when:
Solution
C is correct.
A deferred tax liability (DTL) arises when pretax accounting income exceeds taxable income in the current period, creating a temporary difference that will reverse in the future. The company pays less tax now but expects to pay more later (e.g., when using accelerated depreciation for tax purposes but straight-line for financial reporting).
A deferred tax liability (DTL) arises when pretax accounting income exceeds taxable income in the current period, creating a temporary difference that will reverse in the future. The company pays less tax now but expects to pay more later (e.g., when using accelerated depreciation for tax purposes but straight-line for financial reporting).
Question 3
Hard
A company operating in a high-inflation environment switches from FIFO to weighted average cost for inventory. This switch will most likely result in:
Solution
A is correct.
During inflation, FIFO produces the lowest COGS (oldest, cheapest units sold first) and highest ending inventory, while LIFO produces the highest COGS and lowest ending inventory. Weighted average cost yields COGS and ending inventory values between these two extremes because it blends old and new costs.
During inflation, FIFO produces the lowest COGS (oldest, cheapest units sold first) and highest ending inventory, while LIFO produces the highest COGS and lowest ending inventory. Weighted average cost yields COGS and ending inventory values between these two extremes because it blends old and new costs.