CFA - FRA
A classified balance sheet shows assets separately classified as either: current or non-current.
A classified balance sheet is one with separately classified current and non-current assets and liabilities.
The analytical tool that would be most appropriate for an analyst to use to identify the percentage of a company's assets that are liquid is the: common-size balance sheet.
A common-size balance sheet expresses all balance sheet accounts as a percentage of total assets and would provide insight into what portion of a company's assets is liquid.
Resources controlled by a company from which future economic benefits are expected to flow to the entity are best described as: assets.
Assets are resources controlled by a company as a result of past events and from which future economic benefits are expected to flow to the entity.
Compared with its net income, a mature company's operating cash flow is most likely: higher.
For a mature company, because net income includes non-cash expenses (depreciation and amortization), operating cash flow typically exceeds net income.
The customer list is the only identifiable intangible asset, and it should be amortized on a straight-line basis over its expected future life
Identifiable intangible asset
All else being equal, a decrease in which of the following financial metrics would most likely result in a lower return on equity (ROE)? Leverage
Leverage is a component of the return on equity equation under the DuPont Analysis. If leverage decreases, so will return on equity. ROE = Tax burden × Interest burden × Earnings before interest and taxes margin × Total asset turnover × Leverage
An income statement in a single-step format presents a subtotal for:
Single-step income statements present a subtotal for operating income.
An increase in which of the following items would most likely result in an increase in a company's quick ratio, all else being held equal? Receivables
inventories are excluded from the quick ratio, holding all other variables constant, an increase in cash, marketable securities, or receivables will increase a company's quick ratio. In addition, holding all other variables constant, an increase in current liabilities will decrease a company's quick ratio.
sensitivity analysis
sensitivity analysis, also known as "what if" analysis, shows the range of possible outcomes as specific assumptions are changed.
simulation
simulation is a computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes.
A liquid asset can be easily converted into cash in a short amount of time at: a price close to fair market value.
A liquid asset is one that can be easily converted into cash in a short period of time at a price close to fair market value.
Under US GAAP, a company's comprehensive income is reported as: the change in equity during a period from transactions and other events and circumstances from non-owner sources.
Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, which means comprehensive income is the sum of all transactions and other events and circumstances from non-owners.
A payment received for a subscription service at the beginning of the period will most likely be： deferred income.
Deferred income (also called deferred revenue and unearned revenue) arises when a company receives payment in advance of delivery of the goods and services associated with the payment.
Which of the following items is an example of deferred income? A payment received for contracted goods and services prior to their delivery
Deferred income arises when a company receives payment in advance of delivery of the goods and services associated with the payment.
Under IFRS, the statement of shareholders' equity presents information about the: effects of any accounting changes retrospectively applied to previous periods.
IFRS requires that the statement of shareholders' equity present information about the effects of any accounting changes that have been retrospectively applied to previous periods.
current/non-current presentation is a type of classified balance sheet presentation that groups assets and liabilities into subcategories.
a classified balance sheet is organized to group together various assets and liabilities into subcategories such as current and non-current.
Under US GAAP, internally created identifiable intangible assets most likely: are expensed and not reported on the balance sheet.
under both IFRS and US GAAP, internally created identifiable intangible assets are immediately expensed and not amortized.
A company has recorded an expense for interest costs that have not yet been paid as of the balance sheet date. On the balance sheet, they are best reported as: accrued expenses.
Accrued expenses, also known as accrued liabilities, have been recognized on a company's income statement but have not been paid as of the balance sheet date. Unpaid interest costs are an example of an accrued expense.
When forecasting earnings, an analyst's best approach is to: utilize the results of financial analysis and professional judgment.
Forecasts are not limited to a single point estimate but should involve a range of possibilities. The results of financial analysis are integral to this process, along with judgment of the analysts.
In contrast to US GAAP, cash flow statements prepared under IFRS: allow interest receipts to be classified as either operating or investing cash flows.
IFRS allows interest receipts to be classified as either operating or investing activities; in contrast, US GAAP requires interest receipts to be classified only as operating cash flows.
Which of the following suggestions is best aligned with CFA Institute advocacy for financial reporting that reflects economic reality? Cash flow statements prepared using the direct format for cash flow from operations (CFO)
The CFA Institute position paper "A Comprehensive Business Reporting Model: Financial Reporting for Investors" (2007) advocated for financial reporting that reflects economic reality. It specifically identified a preference for using the direct format for CFO in cash flow statements.
A company with a tax rate of 40% sold a capital asset with a net book value of $500,000 for $570,000 during the year. Which of the following amounts related to the asset sale will most likely be reported as a line item on its income statement for the year? $70,000
The disposition of a capital asset is reported as a net gain or loss ($570,000 − $500,000 = $70,000) on the income statement before tax effects.
Which of the following is most likely a benefit of the direct method for reporting cash flow from operating activities? Compared with the indirect method, the direct method: provides details on the specific sources of operating receipts and payments.
The primary benefit of the direct method is that it provides information on the specific sources of operating cash receipts and payments.
the position paper advocated for neutrality in financial reporting.
the position paper advocated for information regarding the current fair value of assets and liabilities, not cost information.
trade payables
trade payables are amounts that a company owes its vendors for purchases of goods and services. In other words, these represent the unpaid amount as of the balance sheet date of the company's purchases on credit.
In applying the principles of expense recognition, companies should: exclude costs of intangible assets with indefinite useful lives.
The two main types of long-lived assets whose costs are not allocated over time are land and those intangible assets with indefinite useful lives.
If a company repurchases its own shares and can reissue them at a later time, these shares are best described as: treasury stock.
When a company repurchases its own shares and does not cancel them, they are referred to as treasury shares (or treasury stock).
common stock dividends are distributions to owners and, as such, they result in a change in equity and therefore are not a subtraction in determining comprehensive income.
comprehensive income is the combination of net income and other comprehensive income.
For a company paying preferred dividends, the components needed to compute basic EPS are net income: preferred dividends, and the weighted average number of common shares outstanding.
Basic EPS is calculated by subtracting preferred dividends from net income and then dividing the result by the weighted average number of shares outstanding.
Operating segments are most likely reportable if they constitute 10% or more of the total for all operating segments of which financial metrics? -- Assets, profit/loss, or revenue
A company must disclose separate information about any operating segment that constitutes 10% or more of the combined operating segments' revenue, assets, or operating profit/loss.
Under US GAAP, revenue is recognized when: earned.
A fundamental principle of accrual accounting is that revenue is recognized (reported on the income statement) when it is earned. US GAAP specify that revenue should be recognized when it is realized or realizable and earned.
A firm with convertible securities initially calculates that its diluted EPS is greater than its basic EPS. The firm will: report basic EPS that is equal to reported diluted EPS.
A higher diluted EPS indicates that the company's convertible securities are antidilutive (i.e., their inclusion in the computation would result in an EPS higher than the company's basic EPS), and the company is required to report a basic EPS that equals diluted EPS. This occurs because, by definition, diluted EPS has to be equal to or lower than basic EPS. a company is required to report both basic and diluted EPS if it has any convertible securities. a higher diluted EPS indicates that the company's convertible securities are antidilutive, and IFRS and US GAAP do not include antidilutive securities in the calculation of dilutive EPS. Therefore, the company's calculated and reported basic EPS and diluted EPS will be equal.
If all of the assets and liabilities are listed on the balance sheet broadly in order of how easily they can be converted into cash, the presentation format is best described as: liquidity based.
A liquidity-based presentation format presents all of the assets and liabilities on the balance sheet broadly in order of liquidity. With respect to a particular asset or liability, liquidity refers to its "nearness to cash."
the tax burden is one of the components of ROE in the 5-factor model: Tax burden = Net income/EBT = (EBT − Tax)/EBT = 1 − Tax/EBT = 1 − Effective tax rate
A lower tax rate means the company keeps more of its pre-tax profits (and has a higher tax burden). A lower tax rate increases net income and increases ROE: an increase in any of the 5 components increases ROE.
Accounting goodwill is created when an acquisition's purchase price: exceeds the value of acquired net identifiable assets.
Accounting goodwill arising from an acquisition is the excess of the cost to purchase a target company over the acquired net identifiable assets (fair value of identifiable assets minus fair value of the liabilities and contingent liabilities).
. Company A owns 60% of Company B. Company A's consolidated income statement most likely includes 100% of Company A's revenues and expenses and what portion of Company B's? 100%
Because Company A owns more than 50% of the shares in Company B it must present consolidated financial statements, which will include 100% of Company B's revenues and expenses. all subsidiaries, even those that are partially owned, are included in a consolidated statement.
The best description of a classified statement of financial position is one that: distinguishes between current and non-current assets and liabilities.
Classified statements of financial position distinguish between current and non-current assets and liabilities. Classified statements are required under International Financial Reporting Standards unless a liquidity-based presentation provides more relevant and reliable information.
Deferred tax liabilities result when: taxable income in a period is less than reported financial statement income before taxes.
Deferred tax liabilities result when, for a given period, taxable income and the associated income tax payable are less than the reported financial statement income before taxes and the associated income tax expense.
Which of the following best describes a component of the income statement? Outflows or depletions of assets in the course of a business's activities
Expenses are a component of the income statement and are defined as outflows, asset depletions, and liabilities incurred in the course of a business's activities.
By themselves, financial ratios are least likely to be sufficient in determining a company's: creditworthiness.
Financial ratios alone are not sufficient to determine the creditworthiness of a company. Other factors must also be considered, such as examining the entire operation of the company, meeting with management, touring company facilities, and so forth.
Which of the following items is treated as other comprehensive income under both IFRS and US GAAP? Foreign currency translation adjustment from consolidating financials of foreign subsidiaries
Foreign currency translation adjustments resulting from consolidating foreign subsidiaries are included in other comprehensive income.
An increase in assets and a decrease in liabilities that occur simultaneously and in equivalent magnitude are consistent with which of the following changes in equity? An increase
Given the accounting equation Assets - Liabilities = Equity, an increase in assets and a decrease in liabilities will result in a larger equity balance.
the direct and indirect methods for formatting cash flow statements are acceptable under both US GAAP and IFRS.
IFRS are more flexible than US GAAP requirements. Under IFRS, dividends paid may be classified as either an operating or a financing activity; under US GAAP, dividends paid may only be classified a financing activity. Under IFRS, dividends received may be classified as either an operating or an investing activity; under US GAAP, dividends received may only be classified an operating activity.
Interest payable decreased during a company's fiscal year. Compared with the amount of cash interest payments made, interest expense is most likely: lower.
If the interest payable decreases during the year, then the interest expense on an accrual basis will be lower than the amount of cash interest payments. The cash paid would be the full amount of the expense plus the amounts paid to reduce the interest payable. For example, Interest expense 100 Plus decrease in interest payable +12 Cash paid for interest 112
In comparing the financial performance of multiple companies, it is most essential for a financial analyst to determine: differences in their revenue recognition policies.
In order to compare one company's financial statements with those of another company, it is helpful to understand any differences in their revenue recognition policies. The following aspects of a company's revenue recognition policy are particularly relevant to financial analysis: the extent to which a company's revenue recognition policy results in the recognition of revenue sooner rather than later, and to what extent a policy requires the company to make estimates of revenue.
. The industries most likely to be affected by the converged revenue recognition standard issued in May 2014 by the International Accounting Standards Board and Financial Accounting Standards Board are those: with bundled sales, such as the telecommunications services industry. (( to recognize revenue when it has transferred a good or service to customers))
Industries in which bundled services are common are expected to be significantly affected by the converged standard.
Inventory values under IFRS are recorded at the lower of cost or: net realizable value.
Inventories are measured at the lower of cost or net realizable value under IFRS.
Balance sheet items presented on a current value basis are measured at the: end of the reporting period.
Items measured at current value reflect the value that was current at the end of the reporting period. The values of those items can change after the balance sheet is prepared.
Non-operating items reported on the income statement: include interest expense and interest revenue for non-financial service firms.
Non-financial service companies disclose interest received, dividends, or profits from the sale of securities held as investments as non-operating items. Interest expense is also disclosed as a non-operating item.
An artists' cooperative sells its artwork on a consignment basis through a local art gallery. The cooperative should most likely recognize revenue when the art gallery: sells the artwork.
Revenue is recognized by the cooperative when the art gallery sells the artwork because that is the point at which the risks and rewards transfer from the cooperative to a third party and the amount of revenue is measurable. However, receives the artwork would be the usual revenue recognition timing for the sale of goods to a third party directly. And, remits payment for the artwork would be appropriate only if there was a significant collectability concern.
An analysis used to forecast earnings that shows the changes in key financial quantities that result from alternative sets of economic events best describes which of the following techniques? Scenario analysis
Scenario analysis shows the changes in key financial quantities that result from given economic events, such as the loss of customers or a catastrophic event.
If a company issues shares in exchange for a capital asset, the transaction is most likely reported as: supplementary information to the cash flow statement.
Significant non-cash investing and financing transactions, such as purchasing a capital asset by issuing shares, are required to be disclosed, either in a separate note or a supplementary schedule to the cash flow statement.
When a company issues common stock as part of the conversion of a convertible bond, the cash flow statement will most likely: omit the transaction but disclose it in a separate note or supplementary statement.
Significant non-cash transactions, such as the exchange of non-monetary assets or issuance of stock as part of a stock dividend or conversion are not incorporated in the cash flow statement. They are required to be disclosed, however, in either a separate note or a supplementary schedule to the cash flow statement.
Which of the following ratios will most likely result in an increase in a company's sustainable growth rate? Higher tax burden
Sustainable growth rate = Retention ratio × ROE The higher a company's return on equity (ROE) and its ability to finance itself from internally generated funds (a higher retention ratio), the greater its sustainable growth rate. In the five-factor ROE, any factor that increases ROE will increase sustainable growth: ROE = Tax burden × Interest burden × Earnings before interest and taxes margin × Asset turnover × Leverage A higher tax burden ratio (Net income/Earnings before tax) implies that the company can keep a higher percentage of pre-tax profits; this result implies a lower tax rate and a higher ROE. higher retention (lower payout) increases sustainable growth. lower interest burden means that the company has high borrowing costs, reducing pre-tax income relative to EBIT and reducing ROE and sustainable growth.
According to International Financial Reporting Standards, which of the following is a condition that must be met for revenue recognition to occur? Costs can be reliably measured.
The IFRS conditions that must be met include that the costs incurred can be reliably measured, the seller knows what it expects to collect and is reasonably certain of collection, and the significant risks and rewards of ownership have been transferred, which is normally (but not always) when the goods have been delivered. actual delivery is not required, but the transfer of significant risks and rewards of ownership to the customer is a requirement. it only needs to be probable that the economic benefits associated with the transaction will flow to the entity.
"Other current assets" typically include: items deemed too small to be individually listed on the balance sheet.
The amounts shown in "other current assets" reflect items that are individually not material enough to require separate line items on the balance sheet and so are aggregated into a single category.
Which of the following best describes a limitation of the balance sheet in determining a company's intrinsic value? A company's balance sheet: records some values using different measurement methods.
The balance sheet provides important information about a company's financial condition, but it is limited in its ability to provide all the detail necessary to determine a company's market or intrinsic value. One limitation is that under current accounting standards, some assets and liabilities are measured at historical cost but others are measured on a current value basis.
If a company purchases, at a premium, bonds that it expects to hold until maturity, they are most likely measured on the balance sheet at: amortized cost.
The bonds would be classified as a held-to-maturity investment, a type of financial asset that is measured at amortized cost.
The converged revenue recognition standards (issued by the International Accounting Standards Board and the Financial Accounting Standards Board in May 2014) are best described as differing from current US GAAP in that they: provide a principles-based approach applicable to many types of revenue-generating activities.
The converged standards aim to take a principles-based approach that avoids the provision of specific rules and requirements characteristic of current US GAAP revenue recognition standards.
Which revenue recognition method is appropriate under US GAAP when there is doubt about a real estate buyer's ability and commitment to complete all payments? Installment
The installment method is appropriate when there is doubt about the buyer's ability to complete payments.
Which of the following best describes the link between the cash flow statement and the balance sheet? The cash flow statement reconciles the beginning and ending balances of cash reported on the balance sheet.
The statement of cash flows ultimately shows the change in cash during an accounting period. The company's balance sheet shows the beginning and ending cash balances for the previous and current years, and the bottom of the cash flow statement reconciles beginning cash with ending cash. Non-cash changes in accounts may appear on the balance sheet; therefore, not all changes in the balance sheet are reconciled on the cash flow statement.
Trade receivables are most commonly reported at: net realizable value.
Trade receivables are amounts owed to a company by its customers for products and services already delivered. They are typically reported at net realizable value, an approximation of fair value based on estimates of collectability.
Trade receivables are: based on the company's estimate of amounts that ultimately will be collectible.
Trade receivables are typically reported at net realizable value, based on estimates of collectability trade receivables are reported net of an allowance for doubtful accounts or at their net realizable value. trade receivables are amounts owed to a company by its customers for products and services already delivered
Shares that have been repurchased and not cancelled by the company that issued them are referred to as: treasury stock.
Treasury shares or treasury stock are shares in the company that have been repurchased by the company and not cancelled.
When a firm can choose where in the cash flow statement to classify interest received, which of the following choices is the most appropriate? As a operating activity under IFRS
Under IFRS, interest received may be classified as either an operating activity or as an investing activity, but under US GAAP, it can be classified only as an operating activity.
Under International Financial Reporting Standards (IFRS), which of the following items is most likely to be shown separately on the face of an income statement? Loss from discontinued operations
Under IFRS, losses on discontinued operations are shown separately on the income statement.
Under US GAAP, for reporting periods after 15 December 2015, unusual or infrequent items are shown on the income statement separately: as part of continuing operations.
Under US GAAP, material items that are unusual or infrequent and that are both as of reporting periods beginning after 15 December 2015 are shown as part of a company's continuing operations but are presented separately. under US GAAP, unusual or infrequent items are not shown below continuing operations; rather, they are shown as part of a company's continuing operations but are presented separately.
Under US GAAP, property, plant, and equipment is reported on the balance sheet based on: a cost model only.
Under US GAAP, only the cost model is permitted for reporting property, plant, and equipment (PPE). Under the cost model, PPE is carried at amortized cost (historical cost less any accumulated depreciation or accumulated depletion and less any impairment losses).
Under US GAAP, which of the following would most likely be reported as an operating item on a manufacturing company's income statement? An impairment loss on obsolete inventory
Under US GAAP, operating activities generally involve producing and delivering goods and providing services. Hence, an impairment loss on inventory that has become obsolete would be considered an operating item on the income statement.
An area of difference regarding recognition between IFRS and US GAAP within the converged IASB and FASB accounting standards is the: threshold for probable collectability under a contract.
Under both IFRS and US GAAP accounting standards, a contract establishes each party's obligations and rights, including payment terms, and a contract exists only if collectability is probable. However, the threshold for probable collectability differs. Under IFRS, probable means more likely than not, and under US GAAP it means likely to occur. As a result, economically similar contracts may be treated differently under IFRS and US GAAP.
Under the converged FASB and IASB revenue recognition accounting standards, companies are required to disclose: performance obligations and transaction price allocated to those obligations.
Under the converged FASB and IASB revenue recognition accounting standards, companies are required at year end to disclose remaining performance obligations and transaction prices allocated to those obligations. under the converged FASB and IASB revenue recognition accounting standards, companies are required at year end to disclose balances of any contract-related assets and liabilities and significant changes to those balances, not simply general descriptions of them under the converged FASB and IASB revenue recognition accounting standards, companies are required at year end to disclose information about contracts with customers disaggregated into different categories of contracts.
A company sells a product with a three-year warranty included in the price. According to IFRS, which of the following is the most appropriate accounting treatment for the warranty? Fully recognizing the revenue and estimated warranty expense at the time of the sale and updating the expense as indicated by experience over the life of the warranty.
Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties and to update the expense as indicated by experience over the life of the warranty. Waiting until actual costs are incurred will not match the expense with the associated revenue.
Unrealized gains and losses on securities categorized as available-for-sale: affect shareholders' equity through other comprehensive income.
Unrealized gains and losses on available-for-sale securities are treated as other comprehensive income under both IFRS and US GAAP. They bypass the income statement and go directly to shareholders' equity through other comprehensive income.
classification of income or expense items as extraordinary is prohibited under IFRS.
classification of income or expense items as extraordinary is reported separately in the income statement under GAAP
Common-size income statements facilitate comparison across time periods (time-series analysis) because the standardization of each line item removes the effect of size. They would be particularly useful in neutralizing the size effect for a company experiencing rapid growth. For example, efficiencies gained from increased volume may be more readily apparent. Common-size income statements would be less useful for similarly sized companies from different industries because the size effect is less important in the comparison.
common-size income statements eliminate the effect of size, so they would be less useful in a comparison of similarly-sized companies.
contributed capital
contributed capital is the amount contributed to the company by owners and is evidenced through the issuance of common shares
the characterization of certain non-operating items on the income statement is not necessarily consistent with their classification on the statement of cash flows. Some items will be shown as either investing or financing activities, but others may be classified as operating.
non-operating items such as investing or financing activities (e.g., interest expense and interest income) may be reported on a net basis with the components disclosed separately in the notes.
notes payable
notes payable are financial liabilities owed by a company to creditors, including trade creditors and banks, through a formal loan agreement.
preferred shares
preferred shares are a separate class of equity or financial liability based upon their characteristics and rights that take precedence over the rights of common shareholders.