CFA Exam Question of the Day

Level I | Level II | Level III

2023-01-28

Question:
One solution for comparing balance sheets of two companies that vary in size is to use a technique called common-size analysis.

In common-size analysis, balance sheet items are presented as:

Select an Answer:
a percentage of current assets only.
a percentage of total liabilities.
a percentage of total assets.
a percentage of assets minus liabilities.
Rationale:
Common-size analysis involves stating all the balance sheet items as a percentage of total assets. This makes it easier to analyze companies of different sizes. It also allows a company that is growing/shrinking to compare balance sheets from year to year.

2023-01-27

Question:
A vertical analysis for the balance sheet and income statement typically uses which figures as the respective base figures (i.e. as 100%)?

Select an Answer:
current assets and total revenue
working capital and gross margin
total assets and gross margin
net assets and total revenue
total assets and total revenue
current assets and gross margin
long-term assets and total revenue
working capital and total revenue
Rationale:
Total assets and total revenue are the usual base figures for single-period vertical analysis.

2023-01-26

Question:
Repurchase of a company's own shares at an amount greater than that for which they were originally issued is an example of what kind of activity?

Select an Answer:
operating
extraordinary
investing
financing
Rationale:
Dealings in long-term liabilities or equity are signs of financing activity.

2023-01-25

Question:
The basis for classifying assets as current or noncurrent is conversion to cash within:

Select an Answer:
the operating cycle or one year, whichever is shorter.
the operating cycle or one year, whichever is longer.
the accounting cycle or one year, whichever is longer.
the accounting cycle or one year, whichever is shorter.
Rationale:
The accounting cycle is arbitrary. The operating cycle is relevant to a particular business - and may be as short as weeks or as long as several years.

2023-01-24

Question:
The current cash debt coverage ratio is often used to assess _______.

Select an Answer:
profitability
solvency
financial flexibility
liquidity
Rationale:
The key here is the word "current." The ability to pay current liabilities, as opposed to long-term ones, is referred to as liquidity.