Wall Street Prep Financial Statement Modeling
Exam Questions And Correct Answers (Verified
Answers) Plus Rationales 2025/2026 Q&A | Instant
Download Pdf
1. What is the first step in building a financial model?
A. Forecasting depreciation
B. Inputting historical financials
C. Calculating enterprise value
D. Creating a DCF model
The model begins by inputting and organizing historical financial data to
identify trends and ensure accuracy before making forecasts.
2. Which of the following financial statements is typically built first in a three-
statement model?
A. Balance Sheet
B. Cash Flow Statement
C. Income Statement
D. Retained Earnings Statement
,The income statement is usually built first because it contains critical
components like net income, which flow into both the balance sheet and cash
flow statement.
3. Which Excel function is most commonly used to ensure a forecasted
balance sheet balances?
A. VLOOKUP
B. OFFSET
C. SUM
D. IFERROR
SUM is used to total assets and liabilities + equity to check that they balance
properly.
4. In financial modeling, circular references are most often caused by:
A. Wrong tax assumptions
B. Interest expense linked to debt balances
C. Depreciation forecasts
D. Share repurchases
Linking interest expense to debt balances creates feedback loops when interest
expense affects net income, which then affects debt balances.
5. What does the plug in the balance sheet typically adjust?
,A. Total assets
B. Accounts payable
C. Cash
D. Net income
Cash is often the "plug" that adjusts to balance the assets and liabilities + equity
sections.
6. If depreciation increases by $10, what is the net effect on cash, assuming a
30% tax rate?
A. -$10
B. +$3
C. +$7
D. $0
Depreciation reduces taxable income, saving $3 in taxes. Cash increases by $3
but depreciation is non-cash, so the net effect is +$7.
7. How is deferred revenue typically treated in a forecast model?
A. Part of COGS
B. Reduced from net income
C. Added to liabilities
D. Subtracted from cash
Deferred revenue is a liability because the company owes a service/product in
the future.
, 8. What happens to free cash flow if capital expenditures increase?
A. Increases
B. Decreases
C. No change
D. Depends on depreciation
Free cash flow is reduced by capital expenditures, so it decreases.
9. What is the correct formula for EBITDA?
A. Net Income + Taxes + Depreciation
B. EBIT + Depreciation + Amortization
C. Gross Profit - SG&A
D. Net Income + Interest
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and
Amortization.
10.What is typically used to forecast revenue in a financial model?
A. Past profit margins
B. Historical depreciation rates
C. Accounts receivable turnover
D. Growth rate or drivers like units sold and price
Revenue is often forecasted using a growth rate or key drivers like price ×
quantity.
Exam Questions And Correct Answers (Verified
Answers) Plus Rationales 2025/2026 Q&A | Instant
Download Pdf
1. What is the first step in building a financial model?
A. Forecasting depreciation
B. Inputting historical financials
C. Calculating enterprise value
D. Creating a DCF model
The model begins by inputting and organizing historical financial data to
identify trends and ensure accuracy before making forecasts.
2. Which of the following financial statements is typically built first in a three-
statement model?
A. Balance Sheet
B. Cash Flow Statement
C. Income Statement
D. Retained Earnings Statement
,The income statement is usually built first because it contains critical
components like net income, which flow into both the balance sheet and cash
flow statement.
3. Which Excel function is most commonly used to ensure a forecasted
balance sheet balances?
A. VLOOKUP
B. OFFSET
C. SUM
D. IFERROR
SUM is used to total assets and liabilities + equity to check that they balance
properly.
4. In financial modeling, circular references are most often caused by:
A. Wrong tax assumptions
B. Interest expense linked to debt balances
C. Depreciation forecasts
D. Share repurchases
Linking interest expense to debt balances creates feedback loops when interest
expense affects net income, which then affects debt balances.
5. What does the plug in the balance sheet typically adjust?
,A. Total assets
B. Accounts payable
C. Cash
D. Net income
Cash is often the "plug" that adjusts to balance the assets and liabilities + equity
sections.
6. If depreciation increases by $10, what is the net effect on cash, assuming a
30% tax rate?
A. -$10
B. +$3
C. +$7
D. $0
Depreciation reduces taxable income, saving $3 in taxes. Cash increases by $3
but depreciation is non-cash, so the net effect is +$7.
7. How is deferred revenue typically treated in a forecast model?
A. Part of COGS
B. Reduced from net income
C. Added to liabilities
D. Subtracted from cash
Deferred revenue is a liability because the company owes a service/product in
the future.
, 8. What happens to free cash flow if capital expenditures increase?
A. Increases
B. Decreases
C. No change
D. Depends on depreciation
Free cash flow is reduced by capital expenditures, so it decreases.
9. What is the correct formula for EBITDA?
A. Net Income + Taxes + Depreciation
B. EBIT + Depreciation + Amortization
C. Gross Profit - SG&A
D. Net Income + Interest
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and
Amortization.
10.What is typically used to forecast revenue in a financial model?
A. Past profit margins
B. Historical depreciation rates
C. Accounts receivable turnover
D. Growth rate or drivers like units sold and price
Revenue is often forecasted using a growth rate or key drivers like price ×
quantity.
