CFAI Practice: M03 Balance Sheets
Total: 15 questions
Q1. Which of the following is least likely classified as a current asset?
A. Accounts receivable B. Goodwill C. Inventories
Answer: B. Goodwill is a non-current (long-term) intangible asset, not a current asset.
Q2. Goodwill is initially measured as:
A. The excess of purchase price over the fair value of net identifiable assets acquired B. The fair value of the acquired company C. The book value of the acquired company’s assets
Answer: A. Goodwill = Purchase price - Fair value of net identifiable assets (assets minus liabilities).
Q3. Unrealized gains and losses on trading securities are reported in:
A. Other comprehensive income B. Net income (income statement) C. Retained earnings directly
Answer: B. Trading securities are measured at fair value with unrealized gains/losses reported in the income statement.
Q4. Unrealized gains and losses on available-for-sale (AFS) debt securities are reported in:
A. Net income B. Retained earnings C. Accumulated other comprehensive income (AOCI)
Answer: C. AFS unrealized gains/losses are reported in OCI and accumulated in AOCI on the balance sheet.
Q5. For held-to-maturity (HTM) securities, unrealized gains and losses are:
A. Not recognized in the financial statements B. Recognized in net income C. Recognized in OCI
Answer: A. HTM securities are carried at amortized cost; unrealized gains/losses are not recognized.
Q6. A company has total assets of 305 million. On a common-size balance sheet, total liabilities are closest to:
A. 32% B. 39% C. 61%
Answer: B. Total liabilities = 305M = 195M / $500M = 39%.
Q7. Comparing common-size balance sheets over multiple periods is most useful for evaluating changes in:
A. Revenue growth B. Financial leverage C. Cash flow adequacy
Answer: B. Common-size BS over time shows changes in the composition of assets, liabilities, and equity, reflecting changes in financial leverage.
Q8. If a company writes down an impaired asset, the most likely effect is an increase in:
A. Return on equity B. Total asset turnover C. Current ratio
Answer: B. Write-down reduces total assets, increasing total asset turnover (Revenue / Average Total Assets).
Q9. To assess a company’s ability to meet near-term obligations, an analyst would most likely use the:
A. Current ratio B. Debt-to-equity ratio C. Return on assets
Answer: A. The current ratio (current assets / current liabilities) directly measures ability to meet near-term obligations.
Q10. The most stringent measure of liquidity is the:
A. Cash ratio B. Quick ratio C. Current ratio
Answer: A. The cash ratio uses only cash and short-term investments, making it the most stringent liquidity measure.
Q11. Long-term solvency is best evaluated using the:
A. Current ratio B. Quick ratio C. Debt-to-equity ratio
Answer: C. Debt-to-equity measures long-term financial leverage and solvency.
Q12. (Exhibit-based) Based on the exhibit comparing Company A and Company B balance sheets, which company has higher financial leverage?
Answer: Per answer key, determined by comparing debt-to-equity or debt-to-assets ratios from the exhibit data. The company with the higher proportion of liabilities to equity has greater financial leverage.
Q13. (Exhibit-based) Based on the exhibit, which company has a more liquid balance sheet?
Answer: Determined by comparing current ratios or quick ratios from exhibit data. The company with higher current assets relative to current liabilities is more liquid.
Q14. (Exhibit-based) Based on the exhibit, the difference in asset composition between the two companies most likely reflects:
Answer: Differences in business models, capital intensity, or industry characteristics as shown by the relative proportion of current vs. non-current assets.
Q15. (Exhibit-based) Based on the exhibit, which company’s equity structure suggests greater reliance on internally generated funds?
Answer: The company with higher retained earnings relative to contributed capital relies more on internally generated funds.