FMVA® CERTIFICATION: FINANCIAL MODELING & VALUATION ANALYST
2026/2027 | 100% VERIFIED EXAM QUESTIONS AND CORRECT ANSWERS |
LATEST CFI OFFICIAL VERSION
FMVA: Financial Modeling & Valuation Analyst
Q1. What are the three core financial statements?
ANSWER : The three core financial statements are: (1) Income Statement –
shows revenues, expenses, and net income over a period; (2) Balance Sheet –
shows assets, liabilities, and equity at a point in time; (3) Cash Flow Statement –
shows cash inflows and outflows from operating, investing, and financing
activities.
Q2. How are the three financial statements linked?
ANSWER : Net income from the Income Statement flows into Retained
Earnings on the Balance Sheet and is the starting point of the Cash Flow
Statement. Changes in working capital (from Balance Sheet) adjust operating
cash flow. CapEx appears in investing activities and increases PP&E. Debt
issuances appear in financing activities and on the Balance Sheet. Ending cash
ties to cash on the Balance Sheet.
Q3. What is the accounting equation?
ANSWER : Assets = Liabilities + Shareholders' Equity. This equation must
always balance. Assets are what the company owns, Liabilities are what it owes,
and Equity is the residual interest of shareholders.
Q4. What is the difference between accrual and cash basis accounting?
ANSWER : Accrual accounting records revenue when earned and expenses
when incurred, regardless of cash movement. Cash basis records transactions
only when cash is received or paid. GAAP and IFRS require accrual accounting
for public companies. The difference is reconciled in the Cash Flow Statement.
,Q5. What is EBITDA and why is it used in valuation?
ANSWER : EBITDA = Earnings Before Interest, Taxes, Depreciation &
Amortization. It is used as a proxy for operating cash flow, removes the effects
of capital structure (interest), taxes, and non-cash charges (D&A), enabling
comparison across companies with different leverage and accounting policies. It
is the most common denominator in EV/EBITDA valuation multiples.
Q6. What is the difference between gross profit and operating income?
ANSWER : Gross Profit = Revenue – Cost of Goods Sold (COGS). It
measures profitability after direct production costs. Operating Income (EBIT) =
Gross Profit – Operating Expenses (SG&A, R&D, D&A). It measures
profitability after all operating expenses before interest and taxes.
Q7. What is working capital and how is it calculated?
ANSWER : Working Capital = Current Assets – Current Liabilities. It
measures a company's short-term liquidity. Positive working capital means the
company can cover short-term obligations. In financial modeling, changes in
working capital affect operating cash flow: an increase in working capital is a
cash use; a decrease is a cash source.
Q8. How does depreciation affect the three financial statements?
ANSWER : Income Statement: Depreciation is an expense that reduces pre-tax
income and thus taxes. Cash Flow Statement: Added back to net income in
operating activities (non-cash expense). Balance Sheet: Reduces PP&E (via
accumulated depreciation) and reduces Retained Earnings (through lower net
income). Net effect: No cash impact but reduces book value of assets and equity.
Q9. What is the difference between operating and capital leases under IFRS
16?
ANSWER : Under IFRS 16, most leases are recognized on the balance sheet as
a right-of-use asset and a lease liability. Operating leases were previously off-
balance-sheet (under old IAS 17). The distinction now affects EBITDA: lease
payments previously in operating expenses are now split into depreciation (non-
,cash) and interest, boosting EBITDA. Finance (capital) leases always appeared
on the balance sheet.
Q10. What is deferred revenue and how is it treated?
ANSWER : Deferred revenue (unearned revenue) is cash received before
services or products are delivered. It is a liability on the balance sheet because
the company owes performance to the customer. As the obligation is fulfilled,
deferred revenue is reduced and recognized as revenue on the income statement.
Example: annual SaaS subscription paid upfront.
Q11. What is goodwill and when does it arise?
ANSWER : Goodwill arises in an acquisition when the purchase price exceeds
the fair value of the acquired company's identifiable net assets. Goodwill =
Purchase Price – Fair Value of Net Identifiable Assets. Under GAAP, goodwill
is not amortized but tested annually for impairment. Under IFRS, same
treatment. Goodwill represents intangible value like brand, customer
relationships, and synergies.
Q12. What is the difference between LIFO and FIFO inventory
accounting?
ANSWER : FIFO (First-In, First-Out) assumes oldest inventory is sold first,
resulting in lower COGS and higher profits during inflation. LIFO (Last-In,
First-Out) assumes newest inventory is sold first, resulting in higher COGS and
lower taxes during inflation. LIFO is not permitted under IFRS but allowed
under US GAAP. FIFO produces higher inventory values on the balance sheet in
inflationary environments.
Q13. What are deferred tax assets and liabilities?
ANSWER : Deferred Tax Liability (DTL): Created when taxable income <
book income (e.g., accelerated tax depreciation). The company pays less tax
now but will pay more later. Deferred Tax Asset (DTA): Created when taxable
income > book income (e.g., warranty expense recognized on books but not yet
deductible for tax). It represents future tax savings.
, Q14. What is the difference between revenue recognition under ASC 606?
ANSWER : ASC 606 (IFRS 15) established a 5-step model: (1) Identify the
contract; (2) Identify performance obligations; (3) Determine transaction price;
(4) Allocate price to obligations; (5) Recognize revenue when each obligation is
satisfied. This replaced industry-specific rules and requires more judgment
about when and how much revenue to recognize.
Q15. How do you calculate free cash flow (FCF)?
ANSWER : Unlevered Free Cash Flow (UFCF) = EBIT × (1 – Tax Rate) +
D&A – CapEx – Change in Working Capital. Levered Free Cash Flow (LFCF)
= Net Income + D&A – CapEx – Change in Working Capital – Mandatory Debt
Repayments. UFCF is used in DCF analysis (discounted at WACC); LFCF is
discounted at the cost of equity.
Q16. What is the difference between book value and market value?
ANSWER : Book Value is the accounting value of equity = Total Assets –
Total Liabilities, based on historical cost. Market Value (Market Cap) = Share
Price × Shares Outstanding, reflecting what investors are willing to pay. Market
value usually exceeds book value for profitable companies due to intangibles,
growth expectations, and goodwill not reflected on the balance sheet.
Q17. What is a common-size income statement?
ANSWER : A common-size income statement expresses each line item as a
percentage of revenue. It allows comparison across companies of different sizes
and across time periods. For example, if COGS is $60M and revenue is $100M,
COGS is 60% on a common-size basis. This reveals margin trends and structural
differences between companies.
Q18. What are non-recurring items and why are they adjusted?
ANSWER : Non-recurring items are one-time charges or gains that do not
reflect normal business operations — e.g., restructuring charges, impairments,
litigation settlements, M&A costs. Analysts adjust (strip out) these items to
calculate 'normalized' or 'adjusted' EBITDA/EPS, which better reflects ongoing
earnings power and enables cleaner peer comparisons.
2026/2027 | 100% VERIFIED EXAM QUESTIONS AND CORRECT ANSWERS |
LATEST CFI OFFICIAL VERSION
FMVA: Financial Modeling & Valuation Analyst
Q1. What are the three core financial statements?
ANSWER : The three core financial statements are: (1) Income Statement –
shows revenues, expenses, and net income over a period; (2) Balance Sheet –
shows assets, liabilities, and equity at a point in time; (3) Cash Flow Statement –
shows cash inflows and outflows from operating, investing, and financing
activities.
Q2. How are the three financial statements linked?
ANSWER : Net income from the Income Statement flows into Retained
Earnings on the Balance Sheet and is the starting point of the Cash Flow
Statement. Changes in working capital (from Balance Sheet) adjust operating
cash flow. CapEx appears in investing activities and increases PP&E. Debt
issuances appear in financing activities and on the Balance Sheet. Ending cash
ties to cash on the Balance Sheet.
Q3. What is the accounting equation?
ANSWER : Assets = Liabilities + Shareholders' Equity. This equation must
always balance. Assets are what the company owns, Liabilities are what it owes,
and Equity is the residual interest of shareholders.
Q4. What is the difference between accrual and cash basis accounting?
ANSWER : Accrual accounting records revenue when earned and expenses
when incurred, regardless of cash movement. Cash basis records transactions
only when cash is received or paid. GAAP and IFRS require accrual accounting
for public companies. The difference is reconciled in the Cash Flow Statement.
,Q5. What is EBITDA and why is it used in valuation?
ANSWER : EBITDA = Earnings Before Interest, Taxes, Depreciation &
Amortization. It is used as a proxy for operating cash flow, removes the effects
of capital structure (interest), taxes, and non-cash charges (D&A), enabling
comparison across companies with different leverage and accounting policies. It
is the most common denominator in EV/EBITDA valuation multiples.
Q6. What is the difference between gross profit and operating income?
ANSWER : Gross Profit = Revenue – Cost of Goods Sold (COGS). It
measures profitability after direct production costs. Operating Income (EBIT) =
Gross Profit – Operating Expenses (SG&A, R&D, D&A). It measures
profitability after all operating expenses before interest and taxes.
Q7. What is working capital and how is it calculated?
ANSWER : Working Capital = Current Assets – Current Liabilities. It
measures a company's short-term liquidity. Positive working capital means the
company can cover short-term obligations. In financial modeling, changes in
working capital affect operating cash flow: an increase in working capital is a
cash use; a decrease is a cash source.
Q8. How does depreciation affect the three financial statements?
ANSWER : Income Statement: Depreciation is an expense that reduces pre-tax
income and thus taxes. Cash Flow Statement: Added back to net income in
operating activities (non-cash expense). Balance Sheet: Reduces PP&E (via
accumulated depreciation) and reduces Retained Earnings (through lower net
income). Net effect: No cash impact but reduces book value of assets and equity.
Q9. What is the difference between operating and capital leases under IFRS
16?
ANSWER : Under IFRS 16, most leases are recognized on the balance sheet as
a right-of-use asset and a lease liability. Operating leases were previously off-
balance-sheet (under old IAS 17). The distinction now affects EBITDA: lease
payments previously in operating expenses are now split into depreciation (non-
,cash) and interest, boosting EBITDA. Finance (capital) leases always appeared
on the balance sheet.
Q10. What is deferred revenue and how is it treated?
ANSWER : Deferred revenue (unearned revenue) is cash received before
services or products are delivered. It is a liability on the balance sheet because
the company owes performance to the customer. As the obligation is fulfilled,
deferred revenue is reduced and recognized as revenue on the income statement.
Example: annual SaaS subscription paid upfront.
Q11. What is goodwill and when does it arise?
ANSWER : Goodwill arises in an acquisition when the purchase price exceeds
the fair value of the acquired company's identifiable net assets. Goodwill =
Purchase Price – Fair Value of Net Identifiable Assets. Under GAAP, goodwill
is not amortized but tested annually for impairment. Under IFRS, same
treatment. Goodwill represents intangible value like brand, customer
relationships, and synergies.
Q12. What is the difference between LIFO and FIFO inventory
accounting?
ANSWER : FIFO (First-In, First-Out) assumes oldest inventory is sold first,
resulting in lower COGS and higher profits during inflation. LIFO (Last-In,
First-Out) assumes newest inventory is sold first, resulting in higher COGS and
lower taxes during inflation. LIFO is not permitted under IFRS but allowed
under US GAAP. FIFO produces higher inventory values on the balance sheet in
inflationary environments.
Q13. What are deferred tax assets and liabilities?
ANSWER : Deferred Tax Liability (DTL): Created when taxable income <
book income (e.g., accelerated tax depreciation). The company pays less tax
now but will pay more later. Deferred Tax Asset (DTA): Created when taxable
income > book income (e.g., warranty expense recognized on books but not yet
deductible for tax). It represents future tax savings.
, Q14. What is the difference between revenue recognition under ASC 606?
ANSWER : ASC 606 (IFRS 15) established a 5-step model: (1) Identify the
contract; (2) Identify performance obligations; (3) Determine transaction price;
(4) Allocate price to obligations; (5) Recognize revenue when each obligation is
satisfied. This replaced industry-specific rules and requires more judgment
about when and how much revenue to recognize.
Q15. How do you calculate free cash flow (FCF)?
ANSWER : Unlevered Free Cash Flow (UFCF) = EBIT × (1 – Tax Rate) +
D&A – CapEx – Change in Working Capital. Levered Free Cash Flow (LFCF)
= Net Income + D&A – CapEx – Change in Working Capital – Mandatory Debt
Repayments. UFCF is used in DCF analysis (discounted at WACC); LFCF is
discounted at the cost of equity.
Q16. What is the difference between book value and market value?
ANSWER : Book Value is the accounting value of equity = Total Assets –
Total Liabilities, based on historical cost. Market Value (Market Cap) = Share
Price × Shares Outstanding, reflecting what investors are willing to pay. Market
value usually exceeds book value for profitable companies due to intangibles,
growth expectations, and goodwill not reflected on the balance sheet.
Q17. What is a common-size income statement?
ANSWER : A common-size income statement expresses each line item as a
percentage of revenue. It allows comparison across companies of different sizes
and across time periods. For example, if COGS is $60M and revenue is $100M,
COGS is 60% on a common-size basis. This reveals margin trends and structural
differences between companies.
Q18. What are non-recurring items and why are they adjusted?
ANSWER : Non-recurring items are one-time charges or gains that do not
reflect normal business operations — e.g., restructuring charges, impairments,
litigation settlements, M&A costs. Analysts adjust (strip out) these items to
calculate 'normalized' or 'adjusted' EBITDA/EPS, which better reflects ongoing
earnings power and enables cleaner peer comparisons.
