IAR Financial Analysis & Reporting 4

Question 1

A company reports a large deferred tax liability on its balance sheet. This most commonly arises because:

Accepted Answer

The company depreciates assets faster for tax purposes than for financial reporting

Answer

Accelerated depreciation for tax purposes reduces taxable income now but creates a deferred tax liability because higher book income will be taxed later.

Question 2

Which of the following events would increase a company's reported earnings per share (EPS) without changing net income?

Accepted Answer

A share repurchase that reduces the weighted-average shares outstanding

Answer

Buying back shares reduces the share count denominator in the EPS calculation, mathematically increasing EPS even if net income is unchanged.

Question 3

Which accounting treatment is required when a company determines that a held-to-maturity bond investment has experienced a credit loss under CECL?

Accepted Answer

Record an allowance for credit losses against the amortized cost basis

Answer

Under CECL (Current Expected Credit Loss), even held-to-maturity securities require an allowance for expected credit losses recorded against their amortized cost.

Question 4

When analyzing a firm's leverage, which ratio most directly measures the ability to service debt from operating earnings?

Accepted Answer

Interest coverage ratio (EBIT / Interest expense)

Answer

The interest coverage ratio shows how many times EBIT covers interest charges, directly measuring the company's capacity to service debt from operations.

Question 5

An adviser is comparing two firms using price-to-book (P/B) ratios. Which situation would make P/B least meaningful as a valuation metric?

Accepted Answer

A technology firm with large intangible assets that are not capitalized on its balance sheet

Answer

P/B is least meaningful for firms whose primary value drivers (internally developed software, brand, human capital) are expensed and absent from the balance sheet.

IAR Practice Test

IAR Practice Test

IAR Financial Analysis & Reporting 4