Certified Valuation Analyst (CVA) Practice Exam

How many years of income statements are suggested for consideration during a valuation?

1. Three years

2. Five years

3. One year

4. Two years

The correct answer is: Five years

When performing a valuation, the recommended practice is to consider five years of income statements. This duration allows for a more comprehensive analysis of the company's financial performance and trends. By evaluating five years of data, analysts can identify long-term patterns, fluctuations in revenue and expenses, and any anomalies that could impact the valuation. Furthermore, this extended timeframe helps to mitigate the impact of short-term volatility and provides a clearer picture of the business's operational efficiency and growth trajectory. It also allows the analyst to consider any significant changes in the market or industry that could have affected the company's performance over time. Using only one, two, or three years of income statements could lead to a skewed assessment, as those shorter periods may not capture the full scope of the company's financial health or the stability of its earnings. Thus, a five-year review is recognized as a best practice in valuation analysis.