Free CISI CMP Sec/Deriv Practice Questions: Securities: Accounting Analysis

CISI means Chartered Institute for Securities & Investment. CMP means Capital Markets Programme, and this page is for the Securities/Derivatives unit. Use this focused CISI CMP Securities/Derivatives page as a short practice test for Securities: Accounting Analysis. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Securities: Accounting Analysis

A UK securities house is preparing internal financial statements for the year ended 31 December. Ignore tax and depreciation.

Year-end facts:

• It completed bookrunner services for a corporate bond issue on 27 December and earned a contractual fee of £90,000; cash will be received in January.
• It paid £12,000 on 1 December for a market-data subscription covering December, January, and February evenly.
• It incurred a £6,000 exchange-admission related charge on 29 December; the invoice will be settled in January.
• It received £40,000 cash from shareholders for newly issued ordinary shares.
• It bought £30,000 of trade-processing equipment for cash, expected to be used for several years.

Which statement is the single best answer at 31 December under accrual accounting?

• A. Accrual-based profit is £42,000; the bookrunner fee and charge are accrued, but the full subscription and the equipment purchase are current-period expenses.
• B. Accrual-based profit is a £2,000 loss; only cash receipts and payments are recognised, so the shareholder cash is income and the January fee and charge are ignored.
• C. Accrual-based profit is £80,000; the unpaid bookrunner fee is income with a receivable asset, the £6,000 charge is an expense with a liability, the unused £8,000 subscription and equipment are assets, and the share proceeds increase equity.
• D. Accrual-based profit is £120,000; the bookrunner fee and shareholder cash are both income, while only the December subscription cost and the charge are expenses.

Best answer: C

What this tests: Securities: Accounting Analysis

Explanation: Accrual accounting recognises income when earned and expenses when incurred or consumed, not simply when cash is received or paid. The £90,000 bookrunner fee has been earned before year-end, so it is income and creates a receivable asset until cash is collected. The £6,000 charge has been incurred, so it is an expense and creates a payable liability. Only one month of the three-month data subscription has been consumed, so £4,000 is an expense and £8,000 remains a prepaid asset. The equipment is an asset because it will be used over several years, and depreciation is being ignored. The £40,000 share issue is equity, not income. Accrual profit is therefore £90,000 - £4,000 - £6,000 = £80,000.

• Treating shareholder cash as income confuses an equity contribution with trading or service income.
• Waiting for January cash before recognising the bookrunner fee applies cash-basis thinking rather than accrual accounting.
• Expensing all of the subscription or equipment ignores the distinction between consumed expenses and assets with future benefit.

Profit is £90,000 income less £4,000 consumed subscription and £6,000 accrued charge, while the other items are classified as assets or equity rather than current-period profit.

Question 2

Topic: Securities: Accounting Analysis

An analyst is reviewing a draft comment on an equity holding. Which interpretation is best supported by the information in the note?

Portfolio note:

• The financial statements are audited for the year ended 31 December 2025.
• Market data was observed on 15 March 2026, after the results announcement.

• A. Treat market capitalisation as the audited value of the company’s net assets because it is based on the latest traded share price.
• B. Treat audited net assets per share as the company’s forward-looking valuation because it comes from the statement of financial position.
• C. Treat consensus EPS growth as historical accounting performance because it was observed after the results announcement.
• D. Treat profit after tax and net assets as historical accounting measures, and the share price and consensus growth as market expectations about future prospects.

Best answer: D

What this tests: Securities: Accounting Analysis

Explanation: Financial statements mainly provide historical information: profit after tax reports performance over a past period, and net assets report the accounting position at the reporting date. These figures are useful for ratio analysis, trend review, and comparability checks, but they do not by themselves state what the company is worth today. A traded share price reflects supply and demand in the market and incorporates expectations about future earnings, risk, growth, interest rates, and investor sentiment. Consensus EPS growth is also forward-looking because it is an estimate of future earnings growth, not a recorded accounting result. Market capitalisation may be above or below accounting net assets without proving that the accounts are wrong.

• Market capitalisation is a market valuation, not an audited balance-sheet amount.
• Consensus growth is a forecast, even if it follows an audited results announcement.
• Net assets per share is based on historical accounting records, not a direct forecast of market value.

The accounts describe past performance and financial position, while market price and forecasts reflect investors’ forward-looking valuation views.

Question 3

Topic: Securities: Accounting Analysis

An analyst at a broker is preparing a brief credit note for clients considering a new sterling corporate bond from a listed issuer.

Ratio conventions used in the note:

• Current ratio = current assets / current liabilities
• Gearing = total borrowings / shareholders’ equity
• Interest cover = operating profit / finance costs
• Return on equity = profit after tax / shareholders’ equity

Latest annual extract:

Using those conventions, which statement should the analyst include?

• A. Gearing is 37.5% and return on equity is 12%.
• B. Current ratio is 2.0 times and interest cover is 5.0 times.
• C. Return on equity is 18% and current ratio is 0.5 times.
• D. Gearing is 60% and interest cover is 3.3 times.

Best answer: B

What this tests: Securities: Accounting Analysis

Explanation: Apply the definitions consistently. The current ratio is current assets divided by current liabilities: £160 million / £80 million = 2.0 times. Interest cover is operating profit divided by finance costs: £90 million / £18 million = 5.0 times. Gearing on the stated convention is total borrowings divided by shareholders’ equity: £300 million / £500 million = 60%. Return on equity is profit after tax divided by shareholders’ equity: £60 million / £500 million = 12%. A bond investor would use these measures to assess liquidity, financial leverage, and the issuer’s ability to meet finance costs.

• Gearing at 60% is correct, but interest cover is not 3.3 times; operating profit divided by finance costs gives 5.0 times.
• Return on equity is 12%, not 18%, and the current ratio should not be inverted.
• Gearing of 37.5% uses debt divided by debt plus equity, not the convention stated in the note.

Current ratio is £160 million divided by £80 million, and interest cover is £90 million divided by £18 million.

Question 4

Topic: Securities: Accounting Analysis

An analyst is reviewing a listed manufacturer’s year-end financial-statement extract. The team defines free cash flow as operating cash flow less net capital expenditure.

Which interpretation is best supported?

• A. The company reported an accounting profit, but free cash flow was negative because operating cash flow did not cover net capital expenditure.
• B. Profit after tax and operating cash flow are the same because both measure performance after expenses.
• C. The company had negative operating cash flow because the purchase of plant and equipment was a cash outflow.
• D. The £9m financing cash flow should be added to operating cash flow when assessing free cash flow.

Best answer: A

What this tests: Securities: Accounting Analysis

Explanation: Profit is an accounting measure based on recognised income and expenses, not simply cash received and paid. Operating cash flow shows cash generated from the company’s normal trading operations. Investing cash flow includes items such as purchases and sales of plant, equipment, and investments. Financing cash flow reflects how the business is funded, such as borrowings, share issues, dividends, or debt repayment. Free cash flow is a residual cash measure after allowing for capital expenditure. Here, net capital expenditure is £30m less £4m, or £26m. Operating cash flow of £18m does not cover that amount, so free cash flow is negative £8m despite the company reporting a £24m profit.

• Treating plant purchases as operating cash flow confuses investing cash flow with operating cash flow.
• Adding financing cash flow to free cash flow would mask whether operations covered capital expenditure.
• Equating profit with operating cash flow ignores accrual accounting and non-cash or timing differences.

Profit after tax was £24m, while free cash flow was £18m minus net capital expenditure of £26m, giving negative free cash flow of £8m.

Question 5

Topic: Securities: Accounting Analysis

An equity analyst is comparing two listed manufacturers with similar products and sales cycles. Review the following financial-statement extract:

Which interpretation is best supported by the extract?

• A. Company B is clearly the lower-risk business because its return on assets is higher.
• B. The analyst should adjust or qualify the comparison because accounting policies and estimates affect reported profit, assets, and ratios.
• C. Company A is clearly more operationally efficient because its operating margin is higher.
• D. The figures are directly comparable because both companies disclose their accounting treatments.

Best answer: B

What this tests: Securities: Accounting Analysis

Explanation: Accounting policies and estimates affect how transactions are recognised and measured. A longer estimated useful life reduces annual depreciation compared with a shorter life, increasing reported profit and the carrying amount of assets in the near term. Capitalising development expenditure also tends to increase current profit and assets compared with expensing the same expenditure immediately. These choices do not necessarily make either company better or worse, but they can distort direct comparisons of operating margin, return on assets, gearing, and asset intensity. Disclosure helps the analyst understand the basis of preparation, but it does not by itself remove the comparability issue. The sound interpretation is to normalise the figures where possible or clearly qualify any conclusion drawn from the reported ratios.

• Treating Company A’s higher margin as proof of efficiency ignores the profit effect of longer depreciation and capitalised expenditure.
• Treating Company B’s higher return on assets as proof of lower risk adds a conclusion not supported by the extract.
• Disclosure improves transparency, but the analyst still needs to assess or adjust for different measurement bases.

Different depreciation lives and development-cost treatments can make reported performance and asset ratios less directly comparable.

Question 6

Topic: Securities: Accounting Analysis

An equity analyst is reviewing a listed UK industrial company for a morning sales note.

Relevant facts:

• The latest audited financial statements are for the year ended 31 December 2025.
• Those accounts show profit after tax, book equity, and trailing EPS of 40p.
• The shares trade continuously on an exchange order book and are currently priced at 600p.
• The share price rose after year end when management announced a higher expected order pipeline.
• The analyst calculates a trailing P/E ratio of 15 times.

Which conclusion best distinguishes the accounting information from the market valuation?

• A. The P/E ratio is wholly historical because it uses audited EPS, so the post-year-end order pipeline announcement is irrelevant to it.
• B. The share price should be treated as historical accounting information because it is observable on a regulated exchange.
• C. The audited profit, book equity, and trailing EPS mainly describe past performance and financial position, while the share price, market capitalisation, and P/E ratio reflect current market expectations as well as historic data.
• D. The book equity figure should normally equal the company’s market capitalisation unless the accounts contain an error.

Best answer: C

What this tests: Securities: Accounting Analysis

Explanation: Financial statements report an entity’s past performance and financial position using accounting recognition and measurement rules. Figures such as profit after tax, book equity, and trailing EPS come from those historical accounts. By contrast, a traded share price is set in the market and can change immediately as investors revise expectations about future cash flows, risk, growth, and required returns. A trailing P/E ratio combines both perspectives: the denominator is historical EPS, while the numerator is the current market price. This is why market capitalisation can differ substantially from book equity without implying an accounting error.

• Treating an exchange price as accounting information confuses observable market evidence with audited historical reporting.
• Expecting book equity to equal market capitalisation ignores goodwill, growth expectations, risk, and unrecognised economic value.
• Calling the P/E ratio wholly historical overlooks that the current share price can react to new forward-looking information.

Audited accounts are primarily historical, whereas traded prices and valuation ratios incorporate investors’ forward-looking expectations.

Question 7

Topic: Securities: Accounting Analysis

A listed company has the following year-end figures. There are no preference shares or minority interests.

Which interpretation of these figures is correct?

• A. EPS is 40p, DPS is 10p, dividend yield is 10%, P/E is 2.5 times, and NAV is 400p per share.
• B. EPS is 40p, DPS is 10p, dividend yield is 2.5%, P/E is 10 times, and NAV is 300p per share.
• C. EPS is 300p, DPS is 10p, dividend yield is 2.5%, P/E is 1.33 times, and NAV is 40p per share.
• D. EPS is 10p, DPS is 40p, dividend yield is 10%, P/E is 40 times, and NAV is 300p per share.

Best answer: B

What this tests: Securities: Accounting Analysis

Explanation: Earnings per share measures profit attributable to ordinary shareholders divided by the number of ordinary shares. Here, £20 million across 50 million shares gives EPS of 40p. Dividend per share is £5 million across 50 million shares, giving 10p. Dividend yield compares the dividend with the current share price, so 10p divided by 400p is 2.5%. The price-earnings ratio compares the market price with earnings per share, so 400p divided by 40p gives a P/E of 10 times. Net asset value per share is net assets divided by shares in issue, so £150 million across 50 million shares is £3, or 300p, per share.

• Swapping EPS and DPS reverses earnings and dividends; profit is £20 million, not £5 million.
• Dividend yield must use dividend per share divided by market price, not earnings per share divided by price.
• NAV per share uses net assets, while EPS uses annual profit; mixing these produces misleading valuation figures.

Dividing earnings, dividends, and net assets by 50 million shares gives 40p EPS, 10p DPS, and 300p NAV per share; 10p divided by 400p is 2.5%, and 400p divided by 40p is 10.

Question 8

Topic: Securities: Accounting Analysis

A securities analyst is reviewing a company’s latest statement of financial position extract.

Using current assets divided by current liabilities, the ratio is approximately 0.86:1. What type of financial-statement issue is most directly indicated?

• A. Solvency
• B. Efficiency
• C. Profitability
• D. Liquidity

Best answer: D

What this tests: Securities: Accounting Analysis

Explanation: Current assets are cash, inventories and trade receivables, totalling £3.0m. Dividing by current liabilities of £3.5m gives a current ratio of about 0.86:1. This ratio is used to assess liquidity: the ability to meet near-term obligations as they fall due. A low current ratio does not directly measure whether the company earns adequate margins, whether its long-term capital structure is sustainable, or how efficiently it uses assets. Those would be assessed with other ratios such as profit margin, gearing, interest cover, inventory turnover or receivables days.

• Profitability concerns margins and returns, not the comparison of current assets with current liabilities.
• Solvency focuses on longer-term financial stability, such as gearing or interest cover.
• Efficiency measures asset use or working-capital turnover, such as inventory days or receivables days.

A current ratio below 1:1 points to pressure in meeting short-term liabilities from short-term assets.

Question 9

Topic: Securities: Accounting Analysis

An analyst is reviewing a listed manufacturer and wants a simple estimate of cash generated by the business after tax and reinvestment, but before financing payments to lenders or shareholders.

Use the following extracts for the year ended 31 December:

Which measure and estimated amount should the analyst use?

• A. Cash remaining after interest and dividends, £30 million
• B. Operating cash flow before capital expenditure, £76 million
• C. Free cash flow before financing payments, £46 million
• D. Operating profit after cash tax, £72 million

Best answer: C

What this tests: Securities: Accounting Analysis

Explanation: The analyst’s objective is to estimate cash generated by the operating business after necessary reinvestment, before payments to debt or equity providers. A simple free cash flow estimate is most relevant. Start with EBIT of £90 million, deduct cash tax of £18 million, add back depreciation and amortisation of £12 million, deduct capital expenditure of £30 million, and deduct the £8 million working capital increase. This gives £46 million. Interest and dividends are financing cash flows, so they are not deducted when the objective is to assess cash flow before financing payments.

• Operating cash flow before capital expenditure omits reinvestment in fixed assets, so it is too high for a free cash flow objective.
• Operating profit after cash tax ignores non-cash depreciation and the cash absorbed by capital expenditure and working capital.
• Cash remaining after interest and dividends deducts financing payments, which conflicts with a before-financing objective.

Free cash flow before financing is EBIT less cash tax, plus non-cash depreciation, less capital expenditure and the working capital increase.

Question 10

Topic: Securities: Accounting Analysis

An analyst reviews the following extract for a listed company. Based on the data shown, which interpretation is best supported?

• A. The shares trade at a discount to NAV, because the 240p share price is below net assets of £90 million.
• B. The shares trade on a P/E ratio of 10 times, with a dividend yield of 2.5% and NAV per share of 180p.
• C. The shares trade on a P/E ratio of 20 times, with a dividend yield of 1.25% and NAV per share of 90p.
• D. The dividend yield is 12.5%, because dividends of £3 million are compared with profit of £12 million.

Best answer: B

What this tests: Securities: Accounting Analysis

Explanation: Investor ratios usually convert company totals into per-share figures before comparing them with the share price. Earnings per share is profit attributable to ordinary shareholders divided by ordinary shares: £12 million / 50 million = £0.24, or 24p. Dividend per share is £3 million / 50 million = £0.06, or 6p. Dividend yield compares dividend per share with market price: 6p / 240p = 2.5%. The price-earnings ratio compares market price with EPS: 240p / 24p = 10 times. Net asset value per share is net assets divided by shares: £90 million / 50 million = £1.80, or 180p. The 240p share price is above NAV per share, not below it.

• Treating total net assets as if they were pence per share produces the wrong NAV figure.
• Comparing the share price with total net assets, rather than NAV per share, does not show whether the share trades at a discount or premium.
• Dividend yield uses dividend per share divided by share price; dividends divided by profit gives dividend cover or payout information, not yield.

EPS is 24p, DPS is 6p, so the 240p share price implies a P/E of 10 times, a 2.5% yield, and NAV per share of 180p.

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