CFA Financial Reporting & Analysis 2

Question 1

Under IFRS, which inventory cost flow assumption is prohibited?

Accepted Answer

LIFO

Answer

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)?

Accepted Answer

10%

Answer

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?

Accepted Answer

Balance sheet

Answer

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:

Accepted Answer

Accounting principle

Answer

Changing the depreciation method is a change in accounting principle, requiring retrospective application under US GAAP.

Question 5

Deferred tax liabilities arise when:

Accepted Answer

Tax expense exceeds taxes payable

Answer

A deferred tax liability occurs when taxable income is lower than accounting income, so taxes payable now are less than tax expense recognized.

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