CFA Level I Financial Statement Analysis

Which is the basic accounting equation?

Everything a company owns is financed by creditors or owners.

Under IFRS 15 and ASC 606, when is revenue recognised?

The five-step model ends with recognising revenue as obligations are satisfied.

Prices are rising and inventory is stable. Compared with LIFO, FIFO gives:

FIFO expenses the older, cheaper units.

Where is the LIFO inventory method allowed?

IFRS allows FIFO, weighted average and specific identification.

Under IFRS, can an earlier inventory write-down be reversed?

US GAAP generally prohibits the reversal.

A machine costs $100,000, has a $10,000 salvage value and a 5-year life. What is annual straight-line depreciation?

(100,000 − 10,000) / 5.

Using double-declining balance, what is the first-year depreciation on a $100,000 asset with a 5-year life?

Rate = 2 / 5 = 40%, applied to book value; salvage is ignored until the end.

A company capitalises a cost instead of expensing it. In the first year, compared with expensing, it reports:

The outflow moves to investing cash flow and is spread out as depreciation.

Under US GAAP, interest paid is classified as a cash flow from:

IFRS lets companies choose operating or financing.

Under US GAAP, dividends paid are cash flows from:

Under IFRS they may be operating or financing.

The indirect method of cash flow from operations starts from:

The direct method lists cash receipts and payments.

Accounts receivable rise during the year. In the indirect method, the increase is:

Revenue was booked but the cash has not come in.

Current assets are 300 and current liabilities are 200. What is the current ratio?

Current assets / current liabilities.

The quick ratio differs from the current ratio because it leaves out:

Inventory is the least liquid current asset.

Net margin is 5%, asset turnover is 1.2 and the equity multiplier is 2. What is ROE?

DuPont: 5% × 1.2 × 2 = 12%.

Cost of goods sold is 600 and average inventory is 150. About how many days of inventory does the company hold?

Turnover = 600 / 150 = 4, and 365 / 4 ≈ 91 days.

The interest coverage ratio is:

It shows how easily operating profit covers interest.

A deferred tax liability usually arises when:

Taxable income is lower than accounting profit today, so more tax is paid later.

Under IFRS 16, a lessee generally records:

Short-term and low-value leases are exempt.

How is goodwill treated after an acquisition?

US private companies may elect to amortise it, but the standard rule is impairment testing.

Net income is 1,000, preferred dividends are 200 and there are 400 weighted average shares. What is basic EPS?

(1,000 − 200) / 400.

Which item goes through other comprehensive income instead of net income?

OCI also includes some pension and currency translation effects.

An unmodified (unqualified) audit opinion means the auditor believes:

Audits give reasonable, not absolute, assurance.

Which is a warning sign of low earnings quality?

Profits not turning into cash can signal aggressive revenue recognition.

Revenue is 500 and cost of goods sold is 300. What is the gross margin?

(500 − 300) / 500.

Which model for property, plant and equipment is allowed under IFRS but not US GAAP?

Under US GAAP, PP&E stays at historical cost less depreciation.