CFA Financial Reporting and Analysis 2

Question 1

Under the percentage-of-completion method for long-term contracts, revenue is recognized:

Accepted Answer

Based on the proportion of costs incurred to total estimated costs

Answer

The percentage-of-completion method recognizes revenue proportionally based on the stage of completion, often measured as costs incurred to date divided by total estimated costs.

Question 2

A firm's current ratio is 2.5 and its quick ratio is 1.0. This difference most likely indicates that the firm has a large amount of:

Accepted Answer

Inventory relative to current liabilities

Answer

The quick ratio excludes inventory from the numerator; a large gap between the current ratio and quick ratio indicates significant inventory in current assets.

Question 3

Which of the following would cause a decrease in a company's days sales outstanding (DSO)?

Accepted Answer

Faster collection of receivables from customers

Answer

DSO measures the average number of days to collect receivables; faster collection directly reduces DSO.

Question 4

Under IFRS, investment property is most likely carried at:

Accepted Answer

Either historical cost or fair value, at the company's election

Answer

IFRS permits companies to choose between the cost model and the fair value model for investment property (IAS 40), and must apply the chosen policy consistently.

Question 5

An analyst is comparing two companies: one uses operating leases and the other uses finance leases for identical assets. In the early years, the company using finance leases will report:

Accepted Answer

Higher operating income and lower net income

Answer

Finance leases front-load interest expense (below operating income) but remove lease payments from operating expenses, so operating income is higher while total expense (and net income) is lower in early years.

CFA Practice Test

CFA Practice Test

CFA Financial Reporting and Analysis 2