Free CISI IAD Securities Practice Questions: Accounts, Financial Statements, and Ratios

CISI means Chartered Institute for Securities & Investment. IAD means Investment Advice Diploma, and this page is for the Securities unit. Use this focused CISI IAD Securities page as a short practice test for Accounts, Financial Statements, and Ratios. 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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Sample questions

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: Company Accounts, Financial Statements, and Ratio Interpretation

A UK listed company is reviewing whether its proposed ordinary dividend is sustainable. The adviser uses cash generated for dividends as profit after tax plus depreciation, less the increase in working capital and maintenance capital expenditure.

Which conclusion is most appropriate?

• A. The proposed dividend cannot be paid because cash generated for dividends is only £8m, even though distributable profits are £35m.
• B. The proposed dividend is supported by distributable profits of £35m, but only £8m is generated for dividends, so the payout is not cash-sustainable at this level.
• C. The proposed dividend is sustainable because total retained earnings of £95m cover the £18m payment more than five times.
• D. The proposed dividend is sustainable because profit after tax covers it 1.33 times and depreciation increases available cash to £32m.

Best answer: B

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: Dividend sustainability should not be judged from retained earnings alone. Retained earnings may include amounts that are not distributable, and accounting profit does not necessarily translate into cash available for dividends. Here, distributable profits are £35m, calculated as £95m retained earnings less £60m of unrealised gains. That is enough to cover the proposed £18m dividend from a distributable-profits perspective. The cash test is weaker: £24m profit after tax plus £8m depreciation gives £32m before working capital and maintenance capital expenditure. Deducting the £13m working-capital increase and £11m maintenance capital expenditure leaves £8m. The proposed dividend therefore exceeds cash generated for dividends and would rely on existing cash, reserves, borrowing, or asset sales if repeated.

• Using total retained earnings of £95m ignores the £60m that is not distributable and also confuses reserves with cash.
• Using profit cover of 1.33 times ignores the cash absorbed by working capital and maintenance capital expenditure.
• Saying the dividend cannot be paid treats cash generation as a legal distribution limit, when the stated distributable profits are sufficient for the proposed payment.

Distributable profits are £95m less £60m, while cash generated for dividends is £24m plus £8m less £13m less £11m.

Question 2

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

An adviser is reviewing the dividend sustainability of a UK listed company held for income. The latest annual results show:

• Profit after tax attributable to ordinary shareholders: £48 million
• Ordinary dividends declared for the year: £60 million
• Opening retained earnings: £220 million
• No new share issue or other reserve movements

Which is the single best assessment of the dividend?

• A. It cannot be assessed without the share price because dividend yield is needed.
• B. It was covered 1.25 times because dividends divided by profit after tax equals 1.25.
• C. It was covered by earnings because retained earnings before the dividend were £220 million.
• D. It was not fully covered by current earnings; dividend cover was 0.8 times and £12 million was met from accumulated retained earnings.

Best answer: D

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: Dividend cover compares earnings available for ordinary shareholders with ordinary dividends. A cover figure above 1 means the dividend is covered by current earnings. A figure below 1 means the dividend exceeds current earnings and, assuming no other reserve movements, reduces accumulated retained earnings. Here, cover is £48 million divided by £60 million, or 0.8 times. The company earned £48 million but declared £60 million of ordinary dividends, leaving a £12 million shortfall. The positive opening retained earnings balance may mean there are accumulated reserves available, but it does not mean the current year’s earnings covered the dividend.

• A positive retained earnings balance may support a distribution, but it does not prove the year’s profit covered it.
• Dividing dividends by profit gives a payout ratio of 1.25, not dividend cover; it still shows dividends exceeded earnings.
• Dividend yield uses market price and dividend per share, but it does not assess whether earnings funded the dividend.

Dividend cover is £48 million divided by £60 million, so current earnings covered only 80% of the dividend.

Question 3

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

A UK-listed engineering company reports that operating profit has risen from £8 million to £18 million and highlights this as evidence of stronger dividend capacity. The year-end review shows:

• Operating profit includes a £6 million upward property revaluation gain.
• £4 million of development expenditure paid in cash was capitalised rather than expensed.
• Trade receivables increased by £7 million and inventories increased by £5 million.
• Cash generated from operations was £2 million.
• Maintenance capital expenditure was £3 million.

Which assessment best applies the accounting-quality principle when considering the company’s securities valuation?

• A. The higher operating profit should be valued at the sector earnings multiple because accounting profit is the main measure of shareholder returns.
• B. The earnings improvement should be treated cautiously because reported profit is not being converted into free cash flow.
• C. The capitalised development spend confirms stronger cash generation because it increases reported assets rather than expenses.
• D. The increase in receivables and inventories is irrelevant to valuation because both are included in working capital rather than profit.

Best answer: B

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: A rise in accounting profit does not necessarily mean the business is generating more cash. Here, part of operating profit comes from a non-cash revaluation gain, while capitalising development expenditure improves reported profit presentation compared with expensing it. The increases in receivables and inventories also absorb cash, and maintenance capital expenditure exceeds cash generated from operations. For securities valuation, this points to weak cash conversion and limited free cash flow, so the earnings uplift should be assessed cautiously rather than treated as fully sustainable cash-backed performance.

• Applying a sector earnings multiple without adjustment ignores the quality and cash backing of the profit figure.
• Capitalising development expenditure may be permitted, but it does not turn the cash payment into cash generation.
• Receivables and inventories matter because increases in working capital can absorb cash even when profit is rising.

Non-cash gains, capitalisation, working-capital absorption, and maintenance capital expenditure all indicate weak cash conversion despite higher reported profit.

Question 4

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

An adviser is comparing two quoted ordinary shares for a client who wants equity income but is particularly concerned about dividend cuts. The latest published figures are:

Which is the single best conclusion?

• A. Northbank plc appears better placed to sustain its dividend because earnings cover the dividend twice and profitability ratios are stronger.
• B. Westmoor plc appears better placed because paying a dividend above earnings shows a stronger income policy.
• C. Westmoor plc appears better placed because its dividend yield is higher, so it offers more secure income.
• D. Both shares appear equally sustainable because dividend yield is the main measure of dividend strength.

Best answer: A

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: Dividend sustainability is not judged by yield alone. A high dividend yield may reflect a depressed share price or market concern that the dividend could be cut. Dividend cover, commonly calculated as earnings per share divided by dividend per share, indicates how comfortably current earnings support the dividend. Northbank has cover of 2.0 times, while Westmoor’s cover is 0.8 times, meaning Westmoor is paying out more than its current earnings. Profitability measures add context: stronger operating margins and return on capital employed suggest a company has more capacity to generate profits from sales and capital employed. For an income-focused client worried about cuts, the lower-yielding share can be more attractive if the dividend is better covered and supported by stronger profitability.

• A higher dividend yield can be a warning sign if earnings do not cover the dividend.
• Paying dividends above earnings may be possible for a time, but it is less sustainable without retained profits, reserves, or improving cash generation.
• Dividend yield measures income relative to share price; it does not show whether the company can afford the dividend.

Northbank’s dividend cover is 2.0 times, and its higher margin and ROCE suggest stronger earnings capacity to support future distributions.

Question 5

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

A retail client holds ordinary shares in a UK-listed company and is considering buying its new five-year corporate bond. The latest results show rising profit after tax, but trade receivables have increased sharply. The client asks whether the company is actually generating cash from its business activities to support interest payments, rather than merely reporting accounting profits.

Which financial statement is the single best starting point for answering the client’s question?

• A. Statement of profit or loss
• B. Statement of cash flows
• C. Statement of changes in equity
• D. Statement of financial position

Best answer: B

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: The client’s concern is not simply whether the company is profitable, but whether it is producing cash from its operations. The statement of cash flows is therefore the most relevant starting point. It reconciles profit to cash movements and separates operating, investing, and financing cash flows. A rise in receivables can mean that revenue has been recognised before cash has been collected, so operating cash flow may be weaker than reported profit suggests. For a prospective bond investor, this matters because interest and principal are ultimately paid in cash, not accounting earnings.

• Profit or loss is useful for revenue, expenses, and reported profit, but it does not directly show whether profit has converted into operating cash.
• Financial position shows assets, liabilities, and equity at a point in time, but it is less direct for assessing cash generated during the period.
• Changes in equity explains movements such as dividends and retained earnings, but it is not the main statement for operating cash generation.

It shows cash generated or absorbed by operating activities, which directly addresses whether profits are being converted into cash for debt servicing.

Question 6

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

A securities analyst is reviewing the following statement-of-financial-position extract for a listed company. All figures are in £m.

Using debt-to-equity calculated as total interest-bearing borrowings divided by shareholders’ equity, which result is correct?

• A. 60%, so gross interest-bearing debt is £0.60 for each £1 of equity.
• B. 33.3%, because borrowings are compared with total assets.
• C. 37.5%, because borrowings are compared with borrowings plus equity.
• D. 50%, because cash is deducted from borrowings before comparison with equity.

Best answer: A

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: Debt-to-equity, as defined here, compares total interest-bearing borrowings with shareholders’ equity. The interest-bearing borrowings are the long-term bank loans of £180m plus short-term borrowings of £60m, giving £240m. Shareholders’ equity is ordinary share capital of £100m, share premium of £80m, and retained earnings of £220m, giving £400m. The ratio is therefore £240m divided by £400m, or 60%. Cash is not deducted because the calculation asked for total borrowings rather than net debt, and trade payables are not included because they are operating liabilities rather than interest-bearing borrowings.

• The 50% result is net debt to equity, but the required calculation uses gross interest-bearing borrowings.
• The 37.5% result compares borrowings with total capital employed in the form of debt plus equity, not with equity alone.
• The 33.3% result compares borrowings with total assets, which is not the stated debt-to-equity measure.

Interest-bearing borrowings are £240m and shareholders’ equity is £400m, giving £240m divided by £400m = 60%.

Question 7

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

An adviser is reviewing a listed retailer for a client considering its corporate bonds. The retailer reported higher profit for the year, but inventories and receivables also rose sharply. The adviser wants to assess whether the reported profit is being converted into cash available to support interest payments and debt repayment. Which part of the annual accounts is the single best source for this purpose?

• A. Statement of cash flows
• B. Statement of financial position
• C. Notes to the accounts
• D. Income statement

Best answer: A

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: The statement of cash flows explains movements in cash over the reporting period. For a bond investor, it is especially useful when profit is rising but working capital is absorbing cash, because it separates operating cash generation from investing and financing flows. The statement of financial position is a snapshot of assets, liabilities, and equity at the reporting date. The income statement reports revenue, expenses, and profit for the period, but profit can include non-cash items and accruals. The notes add detail on accounting policies, breakdowns, contingencies, and assumptions, but they are not the primary statement for analysing cash generation.

• A statement of financial position helps assess assets, liabilities, and equity at a point in time, not cash movement during the year.
• An income statement shows profit performance, but profit is not the same as cash available for debt service.
• Notes to the accounts provide supporting detail, but the cash flow statement is the direct source for operating, investing, and financing cash flows.

It shows cash generated and used by operating, investing, and financing activities, helping assess whether accounting profit is converting into cash.

Question 8

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

An adviser is reviewing a listed manufacturer before recommending its sterling corporate bond. The latest annual results show higher reported earnings, but the cash-flow statement and working-capital notes show the following:

• Revenue increased by 18%.
• Operating profit increased from £33 million to £42 million.
• Profit after tax increased from £22 million to £28 million.
• Net cash generated from operating activities fell from £25 million to £3 million.
• Trade receivables increased sharply after extended credit terms were offered to major customers.
• Inventories also increased before year end.

Which conclusion best applies when assessing the issuer’s quality?

• A. Treat the profit growth as lower quality until cash collection and inventory conversion support it.
• B. View the higher revenue and profit as clear evidence that issuer funding risk has improved.
• C. Rely mainly on profit after tax because it already captures the company’s cash-generating ability.
• D. Ignore the fall in operating cash generation because receivables and inventories are balance sheet items.

Best answer: A

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: Accounting profit is measured using accruals, so revenue and expenses can be recognised before the related cash is received or paid. Operating cash generation shows how much cash the business is producing from its core activities. For a securities analyst or adviser assessing issuer quality, profits that are not backed by operating cash flow require caution, especially where receivables and inventories are rising. The company may have made genuine sales, but extended customer credit and stock build-up mean cash is tied up in working capital. That can weaken liquidity and debt-service capacity, which is particularly relevant when assessing a corporate bond issuer.

• Profit after tax is not the same as cash generation; it can improve while operating cash flow deteriorates.
• Receivables and inventories directly affect operating cash flow through working-capital movements.
• Higher revenue and profit do not automatically reduce funding risk if cash conversion is weak.

Reported profit is accrual-based, while weak operating cash generation suggests the earnings may not yet be converting into cash for debt service.

Question 9

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

A UK-listed manufacturing company reports that operating profit rose sharply this year. An analyst wants to assess whether the improvement represents genuine cash generation rather than accounting earnings or presentation effects.

Year-end extract:

Ignoring tax, interest, and capital expenditure, which conclusion is most appropriate?

• A. Cash generated from operations is £20m, because increases in inventories and receivables show stronger sales demand.
• B. Cash generated from operations is £18m, because operating profit already measures the cash earned from trading.
• C. Cash generated from operations is £16m, because depreciation is added back and the fair-value gain is removed.
• D. Cash generated from operations is £8m, so the profit rise is partly presentation-driven and absorbed by working capital.

Best answer: D

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: Accounting profit can include non-cash items and can improve even when cash conversion is weak. To assess operating cash generation, start with operating profit, add back non-cash expenses such as depreciation, remove non-cash gains, and adjust for working capital. Increases in inventories and trade receivables use cash, while increases in trade payables provide short-term financing. Here, the fair-value gain boosts profit without generating cash, and the increases in inventories and receivables absorb cash. The resulting £8m cash generated from operations is much lower than the £18m reported operating profit, so the improvement in reported earnings should be treated cautiously.

• Treating operating profit as cash ignores accrual accounting and non-cash valuation gains.
• Stopping at £16m removes the fair-value gain and adds back depreciation, but fails to adjust for inventories, receivables, and payables.
• Treating higher inventories and receivables as immediate cash generation reverses the normal working-capital effect.

Operating cash generation is £18m + £3m - £5m - £4m - £6m + £2m = £8m, well below reported operating profit.

Question 10

Topic: Company Accounts, Financial Statements, and Ratio Interpretation

A securities analyst is reviewing a UK listed company for inclusion in an income-oriented equity list. The analyst wants to avoid relying only on dividend yield and checks whether profitability supports the ordinary dividend.

Based on the figures, which conclusion best applies the profitability and dividend-cover analysis?

• A. EPS is unchanged because the number of ordinary shares is unchanged, so the higher profit after tax has no effect.
• B. Operating profit margin and dividend cover improved, but ROCE declined because capital employed rose faster than operating profit.
• C. The ordinary dividend is uncovered because dividend cover is ordinary dividends divided by profit after tax, giving 0.33 times.
• D. Operating profit margin weakened and dividend cover fell, but ROCE improved because operating profit increased.

Best answer: B

What this tests: Company Accounts, Financial Statements, and Ratio Interpretation

Explanation: Profitability ratios need both calculation and interpretation. Operating profit margin is operating profit divided by revenue, so the latest margin is £12.0m / £80.0m = 15%, up from £10.5m / £75.0m = 14%. ROCE is operating profit divided by capital employed, so it falls from 21% to 20% because capital employed increases proportionately more than operating profit. EPS is profit after tax divided by ordinary shares, so it rises from 25p to 30p. Dividend cover is profit after tax divided by ordinary dividends, so it improves from 2.5 times to 3.0 times. The figures therefore show a stronger margin and dividend support, but slightly weaker capital efficiency.

• Treating higher operating profit as automatic ROCE improvement ignores the larger increase in capital employed.
• Dividing dividends by profit after tax gives a payout ratio, not dividend cover.
• EPS changes when profit after tax changes, even if the number of shares is unchanged.

The latest operating margin is 15%, dividend cover is 3.0 times, and ROCE is 20%, compared with 14%, 2.5 times, and 21% in the prior year.

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