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Financial Services · Series 86

FINRA Series 86 – Research Analyst Exam Practice Test

Series 86 practice focuses on analytical work used in equity research, including interpreting financial statements, assessing business and market risks, and evaluating company value. Questions in the available bank also address how analysts interpret operating cash flow, beta, fixed costs, revenue comparisons, customer concentration, and enterprise value.

Exam overview

Exam providerFinancial Industry Regulatory Authority
Exam codeSeries 86
CategoryFinancial Services

About the FINRA Series 86 – Research Analyst Exam

The practice material asks you to connect accounting evidence with a company’s underlying performance. For example, you may need to investigate why reported earnings diverge from operating cash flow, distinguish cash received in advance from earned revenue, or account for expected product returns. Valuation questions involve enterprise value and discounted cash flow, including how discount rates affect present value. Other items test interpretation of beta and operating leverage, identification of customer-concentration risk, and balanced comparison of results when a prior period is atypical. Research communication is also represented: analysts should explain the basis for a recommendation and price target clearly. Together, these exercises emphasize selecting relevant evidence, applying financial concepts consistently, and explaining how assumptions and business conditions affect an investment view.

Sample Practice Questions

Review a selection from this exam's published US Practice Tests practice bank.

Question 1

A company reports a large increase in net income, but cash provided by operations is negative. Which issue would be most useful for an analyst to investigate first?

  1. AWhether receivables or inventory grew substantially relative to sales
  2. BWhether the company’s share price rose during the period
  3. CWhether the company paid a dividend in the prior year
  4. DWhether the company changed its fiscal year-end
Show answerCorrect answer: A

A sharp buildup in working capital, such as receivables or inventory growing faster than sales, can absorb cash and help explain why operating cash flow is weak despite reported earnings growth. Analysts should examine the cash flow reconciliation and relevant working-capital movements.

Question 2

A company has a beta of 1.2. Under the usual interpretation of beta, which statement is most appropriate?

  1. AThe stock has no market-related risk.
  2. BThe stock has tended to move about 20% more than the broad market in response to market movements, though beta is not a guarantee of future behavior.
  3. CThe stock’s expected return is exactly 20% higher than the market’s return.
  4. DThe stock’s total volatility is exactly 20% higher than the market’s total volatility.
Show answerCorrect answer: B

Beta measures a security’s historical sensitivity to movements in a market benchmark. A beta of 1.2 suggests roughly 20% greater market sensitivity than the benchmark, but does not by itself determine expected return or total volatility and does not guarantee future movements.

Question 3

An analyst is evaluating a company with a high proportion of fixed operating costs. If sales decline, what is the likely operating effect, all else equal?

  1. AOperating income may decline by a greater percentage than sales
  2. BOperating income must remain unchanged
  3. CVariable costs become fixed costs automatically
  4. DThe company’s interest expense necessarily declines
Show answerCorrect answer: A

High fixed operating costs create operating leverage. When sales fall, those costs do not fall in step with revenue, so operating income can decrease more sharply in percentage terms than sales.

Question 4

A retailer records cash received from customers before delivering the related goods. How is this receipt generally treated at the time the cash is received?

  1. AAs revenue, regardless of whether the goods have been delivered.
  2. BAs a liability until the retailer satisfies its obligation to deliver the goods.
  3. CAs an expense because cash has left the customer.
  4. DAs a reduction in inventory.
Show answerCorrect answer: B

Cash received before the related goods or services are delivered is generally recorded as a contract liability or deferred revenue. Revenue is recognized as the company fulfills its performance obligation.

Question 5

A company sells goods on credit. The customer has the right to return the goods for a limited period, and the company can reasonably estimate expected returns. Which treatment best reflects the sale under accrual accounting?

  1. ARecognize revenue for all shipped goods and record no related liability until returns occur.
  2. BRecognize revenue for goods expected to remain sold, with appropriate amounts for expected refunds and recoverable returned goods.
  3. CDefer all revenue until the return period expires, regardless of the company’s ability to estimate returns.
  4. DRecognize cash revenue only when the customer pays.
Show answerCorrect answer: B

When returns can be reasonably estimated, revenue is generally recognized for the amount expected to be retained, with a refund liability and an asset for the right to recover products expected to be returned. This reflects the expected transaction rather than assuming either zero or complete returns.

Question 6

An analyst estimates a company’s equity value at $1.2 billion and its net debt at $300 million. Using an enterprise-value approach, what is the implied enterprise value?

  1. A$900 million
  2. B$1.2 billion
  3. C$1.5 billion
  4. D$3.6 billion
Show answerCorrect answer: C

Enterprise value is commonly calculated as equity value plus debt and other debt-like claims, less cash. With net debt of $300 million, enterprise value is $1.2 billion + $300 million = $1.5 billion.

Question 7

A research analyst prepares a report containing a price target and a recommendation. Which practice best supports transparent research communication?

  1. AState the key assumptions and material risks that could cause actual results to differ from the analysis
  2. BPresent the price target without describing how it was derived
  3. COmit adverse factors so readers can focus on the central forecast
  4. DDescribe the target as certain whenever the valuation model produces a precise number
Show answerCorrect answer: A

Transparent research explains important assumptions, methodology, and risks, helping readers understand the basis and limitations of the analysis. A model’s numerical precision does not eliminate uncertainty or make a target price certain.

How to use this practice test

Access the free practice set to answer up to 20 randomly selected questions from the available 50-question bank. After the session, review your results and revisit missed concepts, such as cash-flow analysis, valuation assumptions, accounting treatment, or research-report transparency.

Preparation tips

  • Reconcile net income with operating cash flow by examining working-capital changes and other noncash or timing effects.
  • Practice calculating enterprise value from equity value and net debt, and explain how a higher DCF discount rate changes present value.
  • Compare beta with market sensitivity and trace how fixed operating costs can amplify the effect of falling sales on operating results.
  • For revenue questions, distinguish cash receipt from revenue recognition and account for estimated customer returns under accrual accounting.
  • When comparing periods, identify unusual base effects and state the context needed for a balanced year-over-year interpretation.
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