IFRS Financial Analysis and Reporting 2 — Questions and Answers
Question 1: Under IAS 7, which method of presenting operating cash flows is encouraged but not required?
- Indirect method
- Direct method (Correct answer)
- Accrual method
- Reconciliation method
Correct answer: Direct method
IAS 7 encourages the direct method because it provides information useful in estimating future cash flows, though the indirect method is widely used in practice.
Question 2: An entity reports EBITDA of $500,000 and depreciation of $80,000. What is EBIT?
- $580,000
- $420,000 (Correct answer)
- $500,000
- $560,000
Correct answer: $420,000
EBIT = EBITDA minus depreciation and amortization, so $500,000 - $80,000 = $420,000.
Question 3: Under IFRS, how is a change in accounting estimate treated?
- Retrospectively with restatement of prior periods
- Prospectively in current and future periods (Correct answer)
- As a prior period error adjustment
- Disclosed only, with no financial statement impact
Correct answer: Prospectively in current and future periods
IAS 8 requires changes in accounting estimates to be recognized prospectively, affecting the current period and future periods as applicable.
Question 4: Which ratio measures a company's ability to pay short-term obligations using only its most liquid assets?
- Current ratio
- Quick ratio
- Cash ratio (Correct answer)
- Operating ratio
Correct answer: Cash ratio
The cash ratio (cash and cash equivalents divided by current liabilities) uses only the most liquid assets, making it the most conservative liquidity measure.
Question 5: Under IAS 36, which of the following is NOT an external indicator of possible impairment?
- Significant decline in market value
- Adverse changes in technology
- Physical damage to an asset (Correct answer)
- Increase in market interest rates
Correct answer: Physical damage to an asset
Physical damage to an asset is an internal indicator of impairment, while market value decline, technology changes, and interest rate increases are external indicators.
Question 6: A company's return on equity (ROE) is 18% and its equity multiplier is 2.0. What is its return on assets (ROA)?
- 36%
- 16%
- 9% (Correct answer)
- 20%
Correct answer: 9%
Using the DuPont identity, ROA = ROE / Equity Multiplier = 18% / 2.0 = 9%.
Question 7: Under IFRS 15, the five-step revenue recognition model begins with which step?
- Determine the transaction price
- Identify performance obligations
- Identify the contract with a customer (Correct answer)
- Allocate the transaction price
Correct answer: Identify the contract with a customer
The first step in the IFRS 15 model is identifying the contract with a customer, which establishes the legal and commercial basis for recognizing revenue.
IFRS Financial Analysis and Reporting 2
Under IAS 7, which method of presenting operating cash flows is encouraged but not required?