CFA Financial Reporting and Analysis 1 — Questions and Answers
Question 1: Under IFRS, which of the following is NOT a required component of a complete set of financial statements?
- Statement of financial position
- Statement of cash flows
- Statement of retained earnings (Correct answer)
- Statement of changes in equity
Correct answer: Statement of retained earnings
IFRS requires a statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes — a standalone statement of retained earnings is not required.
Question 2: A company uses the LIFO inventory method. During a period of rising prices, compared to FIFO, LIFO will result in:
- Higher net income and higher inventory on the balance sheet
- Lower net income and lower inventory on the balance sheet (Correct answer)
- Higher net income and lower inventory on the balance sheet
- Lower net income and higher inventory on the balance sheet
Correct answer: Lower net income and lower inventory on the balance sheet
Under rising prices, LIFO assigns higher-cost inventory to COGS, reducing net income, and retains older, lower-cost inventory on the balance sheet.
Question 3: Which depreciation method results in the highest depreciation expense in the early years of an asset's life?
- Straight-line
- Double-declining balance (Correct answer)
- Units-of-production
- Sum-of-the-years'-digits (when equal to straight-line)
Correct answer: Double-declining balance
The double-declining balance method applies a fixed rate to the declining book value, generating the highest depreciation charge in the earliest years.
Question 4: Under the accrual basis of accounting, revenue is recognized when:
- Cash is received from the customer
- A purchase order is received
- The performance obligation is satisfied (Correct answer)
- The invoice is issued to the customer
Correct answer: The performance obligation is satisfied
Under IFRS 15 and ASC 606, revenue is recognized when (or as) the entity satisfies a performance obligation by transferring control of a promised good or service.
Question 5: An analyst notices that a company's receivables turnover ratio has declined significantly over the past year. This most likely indicates:
- Improved efficiency in collecting receivables
- Customers are taking longer to pay their invoices (Correct answer)
- The company has reduced its credit sales
- The company has become more conservative in recognizing revenue
Correct answer: Customers are taking longer to pay their invoices
A declining receivables turnover ratio means accounts receivable are growing relative to sales, suggesting customers are taking longer to pay.
Question 6: Which of the following is classified as a financing activity in the statement of cash flows under U.S. GAAP?
- Purchase of equipment
- Payment of dividends to shareholders (Correct answer)
- Collection of interest on loans made
- Payment of income taxes
Correct answer: Payment of dividends to shareholders
Under U.S. GAAP, dividends paid to shareholders are classified as financing activities because they represent returns to capital providers.
Question 7: A company reports a lower effective tax rate than its statutory tax rate. This difference is most likely caused by:
- Permanent differences that increase taxable income
- Temporary differences that increase deferred tax liabilities
- Tax credits or tax-exempt income reducing the tax burden (Correct answer)
- Higher depreciation for financial reporting than for tax purposes
Correct answer: Tax credits or tax-exempt income reducing the tax burden
Tax credits and tax-exempt income permanently reduce taxes owed below the statutory rate, lowering the effective tax rate without creating deferred tax items.
CFA Financial Reporting and Analysis 1
Under IFRS, which of the following is NOT a required component of a complete set of financial statements?