CA Financial Reporting & Analysis 3 — Questions and Answers
Question 1: A parent acquires 80% of a subsidiary for $400,000 when the subsidiary's net identifiable assets are $450,000 at fair value. What is goodwill under the full goodwill method?
- $50,000
- $40,000
- $62,500 (Correct answer)
- $90,000
Correct answer: $62,500
Under the full goodwill method, implied fair value of 100% = $400,000/0.80 = $500,000; Goodwill = $500,000 – $450,000 = $50,000… wait, full goodwill = $500,000 – $450,000 = $50,000; NCI = 20% × $500,000 = $100,000; total goodwill = $50,000 — actually $62,500 uses proportionate: $400,000 – 80% × $450,000 = $400,000 – $360,000 = $40,000. Let's use full goodwill: total implied = $500,000, goodwill = $500,000 – $450,000 = $50,000.
Question 2: Which inventory valuation method typically results in the lowest net income during a period of rising prices?
- FIFO (First-In, First-Out)
- Weighted average cost
- LIFO (Last-In, First-Out) (Correct answer)
- Specific identification
Correct answer: LIFO (Last-In, First-Out)
LIFO matches the most recent (highest) costs against revenue during inflation, resulting in higher COGS and lower net income.
Question 3: Under IAS 21, how are foreign currency monetary items translated at the reporting date?
- At the historical exchange rate when the transaction occurred
- At the closing (spot) rate at the reporting date (Correct answer)
- At the average rate for the reporting period
- At the rate agreed in any forward contract
Correct answer: At the closing (spot) rate at the reporting date
IAS 21 requires monetary items (e.g., receivables, payables) to be retranslated at the closing rate, with exchange differences recognized in profit or loss.
Question 4: The DuPont analysis decomposes return on equity (ROE) into which three components?
- Gross margin, asset turnover, and equity multiplier
- Net profit margin, asset turnover, and equity multiplier (Correct answer)
- Operating margin, current ratio, and debt ratio
- EBITDA margin, revenue growth, and dividend yield
Correct answer: Net profit margin, asset turnover, and equity multiplier
The classic DuPont formula is ROE = Net Profit Margin × Asset Turnover × Equity Multiplier (financial leverage).
Question 5: Under IFRS 9, how are financial assets classified?
- Held-to-maturity, available-for-sale, or trading
- Amortized cost, fair value through OCI, or fair value through profit or loss (Correct answer)
- Cost model or revaluation model
- Current or non-current based on maturity
Correct answer: Amortized cost, fair value through OCI, or fair value through profit or loss
IFRS 9 classifies financial assets into amortized cost, FVOCI, or FVTPL based on the business model and contractual cash flow characteristics.
Question 6: A company's days sales outstanding (DSO) increased from 30 to 50 days. What does this most likely indicate?
- Improved collection efficiency
- Slower collection of receivables or looser credit terms (Correct answer)
- Faster inventory turnover
- Lower revenue growth
Correct answer: Slower collection of receivables or looser credit terms
A rising DSO means the company is taking longer to collect receivables, indicating potential collection issues or more lenient credit policies.
Question 7: Under IAS 37, a provision should be recognized when:
- A possible obligation exists that may need to be confirmed by future events
- A present obligation exists, an outflow of resources is probable, and a reliable estimate can be made (Correct answer)
- Management decides it is prudent to set aside funds for contingencies
- A legal claim has been filed against the entity
Correct answer: A present obligation exists, an outflow of resources is probable, and a reliable estimate can be made
IAS 37 requires all three criteria: a present obligation, probable outflow of economic benefits, and a reliable estimate of the amount.
CA Financial Reporting & Analysis 3
A parent acquires 80% of a subsidiary for $400,000 when the subsidiary's net identifiable assets are $450,000 at fair value.
What is goodwill under the full goodwill method?