IFRS Financial Analysis and Reporting 3 — Questions and Answers
Question 1: Under IAS 2, which cost formula is prohibited for measuring inventory under IFRS?
- FIFO (First-In, First-Out)
- Weighted average cost
- LIFO (Last-In, First-Out) (Correct answer)
- Specific identification
Correct answer: LIFO (Last-In, First-Out)
IAS 2 explicitly prohibits the use of LIFO because it often results in older, less relevant costs being reported on the statement of financial position.
Question 2: Which financial statement provides information about changes in an entity's equity during a reporting period?
- Statement of financial position
- Statement of cash flows
- Statement of changes in equity (Correct answer)
- Statement of comprehensive income
Correct answer: Statement of changes in equity
The statement of changes in equity reconciles the opening and closing equity balances, showing transactions with owners and total comprehensive income.
Question 3: A firm has a debt-to-equity ratio of 1.5. What is its debt-to-assets ratio?
- 40%
- 60% (Correct answer)
- 67%
- 150%
Correct answer: 60%
If D/E = 1.5, then for every $1 of equity there is $1.50 of debt, so D/A = 1.5 / (1 + 1.5) = 1.5 / 2.5 = 60%.
Question 4: Under IAS 38, research costs should be:
- Capitalized and amortized over their useful life
- Expensed as incurred (Correct answer)
- Capitalized only if future economic benefits are probable
- Deferred until the related project is complete
Correct answer: Expensed as incurred
IAS 38 requires research costs to be expensed as incurred because it is not possible to demonstrate at the research stage that an intangible asset will generate probable future economic benefits.
Question 5: The interest coverage ratio is best described as:
- Net income divided by interest expense
- EBIT divided by interest expense (Correct answer)
- Operating cash flow divided by total debt
- EBITDA divided by total liabilities
Correct answer: EBIT divided by interest expense
The interest coverage ratio (EBIT / interest expense) measures how many times operating earnings can cover interest obligations.
Question 6: Under IAS 17 (superseded by IFRS 16), a lease was classified as a finance lease if it transferred substantially all risks and rewards. Under IFRS 16, how does a lessee account for most leases?
- Off-balance-sheet as operating leases
- On-balance-sheet with a right-of-use asset and lease liability (Correct answer)
- As an intangible asset only
- As contingent liabilities disclosed in notes
Correct answer: On-balance-sheet with a right-of-use asset and lease liability
IFRS 16 eliminated the finance/operating distinction for lessees, requiring recognition of a right-of-use asset and corresponding lease liability for virtually all leases.
Question 7: Horizontal analysis of financial statements involves:
- Expressing each line item as a percentage of a base amount within the same period
- Comparing financial data across multiple periods to identify trends (Correct answer)
- Benchmarking an entity's ratios against industry averages
- Adjusting reported figures for inflation over time
Correct answer: Comparing financial data across multiple periods to identify trends
Horizontal analysis compares financial data across reporting periods, calculating absolute and percentage changes to identify trends and growth patterns.
IFRS Financial Analysis and Reporting 3
Under IAS 2, which cost formula is prohibited for measuring inventory under IFRS?