CFA Financial Reporting & Analysis 2 — Questions and Answers
Question 1: Under IFRS, which inventory cost flow assumption is prohibited?
- FIFO
- Weighted average cost
- LIFO (Correct answer)
- Specific identification
Correct answer: LIFO
IFRS prohibits the use of LIFO (Last-In, First-Out) for inventory valuation, while US GAAP permits it.
Question 2: A company reports net income of $500,000 and has average total assets of $5,000,000. What is its Return on Assets (ROA)?
- 5%
- 10% (Correct answer)
- 15%
- 20%
Correct answer: 10%
ROA = Net Income / Average Total Assets = $500,000 / $5,000,000 = 10%.
Question 3: Which financial statement best reflects a company's ability to meet short-term obligations?
- Income statement
- Statement of cash flows
- Balance sheet (Correct answer)
- Statement of changes in equity
Correct answer: Balance sheet
The balance sheet shows current assets and current liabilities, which are used to assess short-term liquidity.
Question 4: When a company switches from the straight-line to the double-declining balance depreciation method, this is a change in:
- Accounting estimate
- Accounting principle (Correct answer)
- Reporting entity
- Error correction
Correct answer: Accounting principle
Changing the depreciation method is a change in accounting principle, requiring retrospective application under US GAAP.
Question 5: Deferred tax liabilities arise when:
- Tax expense exceeds taxes payable (Correct answer)
- Taxes payable exceed tax expense
- Revenues are recognized later for tax purposes
- Expenses are recognized earlier for tax purposes
Correct answer: Tax expense exceeds taxes payable
A deferred tax liability occurs when taxable income is lower than accounting income, so taxes payable now are less than tax expense recognized.
Question 6: The cash conversion cycle (CCC) is calculated as:
- DSO + DIO + DPO
- DSO + DIO - DPO (Correct answer)
- DIO - DSO + DPO
- DPO - DSO - DIO
Correct answer: DSO + DIO - DPO
CCC = Days Sales Outstanding + Days Inventory Outstanding - Days Payable Outstanding, measuring how long cash is tied up in operations.
Question 7: Under US GAAP, research costs are:
- Capitalized as intangible assets
- Expensed as incurred (Correct answer)
- Capitalized then amortized over 5 years
- Treated identically to development costs
Correct answer: Expensed as incurred
US GAAP requires both research and development costs to be expensed as incurred, unlike IFRS which capitalizes qualifying development costs.
CFA Financial Reporting & Analysis 2
Under IFRS, which inventory cost flow assumption is prohibited?