CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling
Which statement about the limitations of a financial statement model is most accurate?
The most accurate statement is that model outputs are only as reliable as the assumptions and historical data used to build them. Added detail does not eliminate uncertainty, and forecast errors stem from many sources beyond accounting estimates, so sensitivity and scenario analysis remain necessary.
- AModel outputs are only as reliable as the assumptions and historical data used to build them.Correct
- BA detailed model with many line items removes the need for sensitivity analysis.
- COnce a model is built from audited statements, forecast error arises only from accounting estimates.
Explanation
Models depend on inputs and assumptions, so errors in either flow into forecasts. Detail does not remove uncertainty, and forecast error also comes from economic, competitive and judgment factors, not just accounting estimates.
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