Wall Street Prep Financial Statement
Modeling Retake Exam Questions and
Answers with Rationales 2026/2027 | WSP
Modeling Certification | Pass Guarantee
Question 1 In a 3-statement financial model, what is the most common cause of a circular
reference?
A. Incorrect linking of revenue to the income statement B. Interest expense depending on
average debt, which depends on ending cash, which depends on net income (which includes
interest) C. Depreciation being hardcoded instead of using a schedule D. Using historical balance
sheet items as starting points
Correct Answer: B Rationale: The classic circularity in 3-statement models arises because
interest expense (on the income statement) affects net income → affects ending retained earnings
→ affects ending equity → affects ending cash (from the balance sheet) → affects average debt
(in the debt schedule) → affects interest expense. This loop is typically resolved using an
iteration toggle or circular reference enablement in Excel.
Question 2 When building a debt schedule, which of the following should be used to calculate
interest expense?
A. Beginning debt balance only B. Ending debt balance only C. Average of beginning and
ending debt balances D. Mandatory amortization amount
Correct Answer: C Rationale: Interest expense is calculated on the average debt balance
during the period (beginning + ending)/2, because debt changes throughout the period (draws,
repayments, amortization).
Question 3 A company has the following changes in working capital during the forecast period:
Accounts Receivable ↑ $50 Inventory ↓ $30 Accounts Payable ↑ $20 Accrued Expenses ↓ $10
What is the net change in net working capital?
A. +$10 increase B. –$10 decrease C. +$40 increase D. –$40 decrease
, Correct Answer: B Rationale: Net change in NWC = ΔAR + ΔInventory – ΔAP – ΔAccrued =
+50 + (-30) – (+20) – (-10) = 50 – 30 – 20 + 10 = –$10 (decrease in NWC → cash inflow on
cash flow statement)
Question 4 In a 3-statement model, if the revolver is used as the plug, what happens when the
model shows negative ending cash before revolver activity?
A. The revolver balance becomes positive (cash draw) B. The revolver balance becomes
negative (cash sweep / paydown) C. The model throws an error D. Ending cash is forced to zero
Correct Answer: B Rationale: In most integrated models, when pre-revolver cash is negative,
the revolver balance goes negative to represent a required paydown (cash sweep). This is the
standard “minimum cash” plug logic.
Question 5 Which of the following line items is most likely to be forecasted as a percentage of
revenue in a standard 3-statement model?
A. Depreciation & Amortization B. Selling, General & Administrative (SG&A) expense C.
Income tax expense D. Interest income
Correct Answer: B Rationale: SG&A is typically modeled as a percentage of revenue because
it scales with the size of the business. Depreciation is driven by PP&E schedule, taxes by EBT
and tax rate, interest income is usually small or ignored.
Question 6 A company has beginning revolver balance of $100, mandatory amortization of $20,
and ending cash before revolver of –$30. Assuming minimum cash balance of $0, what will be
the ending revolver balance?
A. $110 B. $90 C. $50 D. $70
Correct Answer: A Rationale: Pre-revolver cash = –$30 → needs $30 draw to bring cash to $0
Revolver before draw = $100 – $20 amortization = $80 Ending revolver = $80 + $30 draw =
$110
Question 7 In a leveraged buyout (LBO) model, which statement directly drives the debt
paydown schedule?
A. Income Statement B. Balance Sheet C. Cash Flow Statement D. All of the above
Modeling Retake Exam Questions and
Answers with Rationales 2026/2027 | WSP
Modeling Certification | Pass Guarantee
Question 1 In a 3-statement financial model, what is the most common cause of a circular
reference?
A. Incorrect linking of revenue to the income statement B. Interest expense depending on
average debt, which depends on ending cash, which depends on net income (which includes
interest) C. Depreciation being hardcoded instead of using a schedule D. Using historical balance
sheet items as starting points
Correct Answer: B Rationale: The classic circularity in 3-statement models arises because
interest expense (on the income statement) affects net income → affects ending retained earnings
→ affects ending equity → affects ending cash (from the balance sheet) → affects average debt
(in the debt schedule) → affects interest expense. This loop is typically resolved using an
iteration toggle or circular reference enablement in Excel.
Question 2 When building a debt schedule, which of the following should be used to calculate
interest expense?
A. Beginning debt balance only B. Ending debt balance only C. Average of beginning and
ending debt balances D. Mandatory amortization amount
Correct Answer: C Rationale: Interest expense is calculated on the average debt balance
during the period (beginning + ending)/2, because debt changes throughout the period (draws,
repayments, amortization).
Question 3 A company has the following changes in working capital during the forecast period:
Accounts Receivable ↑ $50 Inventory ↓ $30 Accounts Payable ↑ $20 Accrued Expenses ↓ $10
What is the net change in net working capital?
A. +$10 increase B. –$10 decrease C. +$40 increase D. –$40 decrease
, Correct Answer: B Rationale: Net change in NWC = ΔAR + ΔInventory – ΔAP – ΔAccrued =
+50 + (-30) – (+20) – (-10) = 50 – 30 – 20 + 10 = –$10 (decrease in NWC → cash inflow on
cash flow statement)
Question 4 In a 3-statement model, if the revolver is used as the plug, what happens when the
model shows negative ending cash before revolver activity?
A. The revolver balance becomes positive (cash draw) B. The revolver balance becomes
negative (cash sweep / paydown) C. The model throws an error D. Ending cash is forced to zero
Correct Answer: B Rationale: In most integrated models, when pre-revolver cash is negative,
the revolver balance goes negative to represent a required paydown (cash sweep). This is the
standard “minimum cash” plug logic.
Question 5 Which of the following line items is most likely to be forecasted as a percentage of
revenue in a standard 3-statement model?
A. Depreciation & Amortization B. Selling, General & Administrative (SG&A) expense C.
Income tax expense D. Interest income
Correct Answer: B Rationale: SG&A is typically modeled as a percentage of revenue because
it scales with the size of the business. Depreciation is driven by PP&E schedule, taxes by EBT
and tax rate, interest income is usually small or ignored.
Question 6 A company has beginning revolver balance of $100, mandatory amortization of $20,
and ending cash before revolver of –$30. Assuming minimum cash balance of $0, what will be
the ending revolver balance?
A. $110 B. $90 C. $50 D. $70
Correct Answer: A Rationale: Pre-revolver cash = –$30 → needs $30 draw to bring cash to $0
Revolver before draw = $100 – $20 amortization = $80 Ending revolver = $80 + $30 draw =
$110
Question 7 In a leveraged buyout (LBO) model, which statement directly drives the debt
paydown schedule?
A. Income Statement B. Balance Sheet C. Cash Flow Statement D. All of the above
