Financial Reporting & Analysis Flashcards
7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Reporting & Analysis flashcards as text
A company's gross profit margin decreased while its net profit margin increased. This is most likely explained by:
Answer: A decrease in operating expenses and/or lower taxes
If gross margin fell but net margin rose, the improvement must have come from lower operating expenses, interest, or tax expenses below the gross profit line.
Which of the following best describes the neutrality characteristic under the IASB/FASB conceptual framework?
Answer: Information should be unbiased and not slanted to favor any particular outcome
Neutrality means financial information is presented without bias, not manipulated to influence users toward a predetermined conclusion.
Under US GAAP, a contingent liability is recognized on the balance sheet when it is:
Answer: Probable and can be reasonably estimated
US GAAP requires recognition of a contingent liability when a loss is probable (likely to occur) and the amount can be reasonably estimated.
In vertical (common-size) analysis of the balance sheet, each item is expressed as a percentage of:
Answer: Total assets
For a common-size balance sheet, total assets serve as the base (100%), allowing comparison of asset and liability structure across companies.
Which of the following would be classified as an operating activity under US GAAP but as either operating or financing under IFRS?
Answer: Interest paid
Under US GAAP, interest paid must be classified as operating; under IFRS, companies may classify it as operating or financing.
When translating a foreign subsidiary's financial statements using the current rate method, which items are translated at the historical rate?
Answer: Common stock and retained earnings
Under the current rate method, common stock and paid-in capital are translated at historical rates; assets and liabilities use the current rate.
A firm has operating income of $800,000 and interest expense of $200,000. Its interest coverage ratio is:
Answer: 4.0x
Interest coverage ratio = EBIT / Interest Expense = $800,000 / $200,000 = 4.0x.