CFA Program — Financial Reporting

Question 1

Which financial statement reports a company's financial position (assets, liabilities, and equity) at a specific point in time?

• A) Income statement
• B) Balance sheet
• C) Statement of cash flows
• D) Statement of retained earnings

Question 2

The current ratio is calculated as:

• A) Current Assets / Current Liabilities
• B) Current Liabilities / Current Assets
• C) (Current Assets - Inventory) / Current Liabilities
• D) Total Assets / Total Liabilities

Question 3

Under accrual accounting, revenue is recognized when:

• A) Cash is received from the customer
• B) The performance obligation is satisfied, regardless of when cash is received
• C) The invoice is issued to the customer
• D) The fiscal year ends

Question 4

A company uses FIFO (first-in, first-out) inventory accounting during a period of rising prices. Compared to LIFO, FIFO will generally result in:

• A) Lower reported net income and lower ending inventory value
• B) Higher reported net income and higher ending inventory value
• C) Higher reported net income and lower ending inventory value
• D) No difference from LIFO in any reported figures

Question 5

A company's return on equity (ROE) can be decomposed using the DuPont analysis into which three components?

• A) Net profit margin, asset turnover, and financial leverage
• B) Gross margin, operating margin, and net margin
• C) Current ratio, quick ratio, and cash ratio
• D) Revenue growth, expense growth, and tax rate

Question 6

A company reports operating cash flow of $500,000, capital expenditures of $150,000, and dividends paid of $50,000. What is the company's free cash flow to the firm (FCFF), using operating cash flow minus capital expenditures as an approximation?

• A) $300,000
• B) $350,000
• C) $400,000
• D) $450,000

Question 7

A company's balance sheet reports "goodwill" as an asset. Goodwill most commonly arises from:

• A) Internally generated brand value that a company has built up over time.
• B) The total value of a company's physical property and equipment.
• C) A liability owed to a company's suppliers.
• D) The excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.

Question 8

A company reports revenue of $800,000, cost of goods sold of $500,000, operating expenses of $150,000, and interest expense of $20,000. The tax rate is 25%. Net income is closest to:

• A) $130,000
• B) $150,000
• C) $97,500
• D) $100,000

Question 9

Under which inventory cost method does the most recently purchased inventory get expensed first as cost of goods sold, leaving older, potentially lower-cost inventory on the balance sheet during a period of rising prices?

• A) Specific identification only
• B) Last-in, first-out (LIFO)
• C) First-in, first-out (FIFO)
• D) Weighted average cost

Question 10

A company's statement of cash flows shows cash flow from operations, investing, and financing activities. Which of the following would typically be classified under investing activities?

• A) The purchase of new manufacturing equipment.
• B) Cash received from customers for goods sold.
• C) Cash paid for employee salaries.
• D) Cash received from issuing new common stock.

Question 11

A company reports "accrued liabilities" on its balance sheet. These most commonly represent:

• A) Cash received in advance for goods not yet delivered.
• B) The total value of a company's outstanding shares.
• C) Assets expected to be converted into cash within one year.
• D) Expenses that have been incurred but not yet paid in cash.

Question 12

A company has current assets of $320,000, including $80,000 of inventory, and current liabilities of $150,000. The quick ratio is closest to:

• A) 1.80
• B) 2.50
• C) 1.60
• D) 2.13

Question 13

Which of the following would be classified as a financing activity on the statement of cash flows?

• A) Cash received from selling a piece of equipment.
• B) Cash paid for employee wages.
• C) Proceeds from issuing new long-term debt.
• D) Cash paid to purchase inventory.

Question 14

A company's balance sheet reports "treasury stock" as a contra-equity account. Treasury stock represents:

• A) Shares issued to the company's treasury department employees.
• B) Government bonds held by the company as an investment.
• C) A type of preferred stock with a fixed dividend.
• D) Shares of the company's own stock that it has repurchased and not yet retired or reissued.

Question 15

A company has total debt of $450,000 and total equity of $600,000. The debt-to-equity ratio is closest to:

• A) 1.33
• B) 0.90
• C) 0.75
• D) 0.60

Question 16

Which of the following best describes the "matching principle" in accrual accounting?

• A) All expenses must be recognized in the period cash is paid, regardless of when revenue is earned.
• B) Revenue and expenses should never appear in the same financial statement.
• C) Only cash transactions may be recorded under the matching principle.
• D) Expenses should be recognized in the same period as the revenues they helped generate.

Question 17

Under which circumstance would a company most likely recognize a deferred tax asset on its balance sheet?

• A) When taxable income (per tax rules) is temporarily higher than pretax financial income (per accounting rules), implying lower future tax payments once the difference reverses.
• B) When the company has permanently avoided all future tax liability.
• C) When the company has overpaid its suppliers.
• D) When the company's revenue has decreased for two consecutive years.

Question 18

A company has cost of goods sold of $420,000 and average inventory of $70,000. Inventory turnover is closest to:

• A) 4.5x
• B) 6.0x
• C) 5.0x
• D) 8.0x

Question 19

Under IFRS, which inventory cost method is prohibited?

• A) Weighted average cost
• B) First-in, first-out (FIFO)
• C) Last-in, first-out (LIFO)
• D) Specific identification

Question 20

A company uses the straight-line depreciation method for financial reporting but accelerated depreciation for tax purposes. This creates a:

• A) Deferred tax asset
• B) Deferred tax liability
• C) Current tax liability only
• D) Permanent tax difference

Question 21

On the cash flow statement under IFRS, interest paid may be classified as:

• A) Operating activities only
• B) Financing activities only
• C) Either operating or financing activities
• D) Either investing or financing activities

Question 22

A firm issues $1,000 face value bonds at a discount of $50. Over time, as the discount is amortized, the carrying value of the bond will:

• A) Decrease toward zero
• B) Remain constant at $950
• C) Increase toward $1,000
• D) Increase above $1,000

Question 23

Which of the following would most likely improve a company's current ratio without affecting net income?

• A) Paying off current liabilities with cash
• B) Selling inventory at cost
• C) Collecting accounts receivable
• D) Issuing long-term debt to repay current liabilities

Question 24

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

• A) Only when cash is received
• B) At contract completion
• C) Proportionally based on work completed each period
• D) Equally over the life of the contract

Question 25

A company has current assets of $240,000 and current liabilities of $160,000. The current ratio is closest to:

• A) 1.50
• B) 1.25
• C) 0.67
• D) 2.00

Question 26

Under the indirect method of preparing the statement of cash flows, an increase in accounts receivable during the period is treated as:

• A) An addition (source of cash) in calculating cash flow from operations.
• B) An item that appears only in cash flow from financing activities.
• C) An item with no effect anywhere on the statement of cash flows.
• D) A deduction (use of cash) in calculating cash flow from operations.

Question 27

Under IFRS, which inventory cost flow assumption is prohibited?

• A) First-in, first-out (FIFO)
• B) Weighted average cost
• C) Specific identification
• D) Last-in, first-out (LIFO)

Question 28

A company reports revenue of $500,000, cost of goods sold of $320,000, and operating expenses of $90,000. The gross profit margin is closest to:

• A) 18.0%
• B) 38.0%
• C) 36.0%
• D) 64.0%

Question 29

A company using the straight-line depreciation method versus an accelerated depreciation method (such as double-declining balance) will, in the earlier years of an asset's life, report:

• A) No depreciation expense at all under straight-line.
• B) Higher net income under straight-line, since accelerated methods front-load depreciation expense.
• C) Lower net income under straight-line in every year of the asset's life.
• D) Identical net income under both methods in every year.

Question 30

A company capitalizes a cost rather than expensing it immediately. What is the most direct effect of capitalization, compared to expensing, in the period the cost is incurred?

• A) No effect on either the income statement or the balance sheet.
• B) Immediate full recognition of the entire cost as an expense.
• C) Higher net income and higher reported assets in that period, with the cost instead recognized gradually over time through depreciation or amortization.
• D) Lower net income in that period only, with no effect on the balance sheet.

Question 31

A company reports revenue of $950,000 and cost of goods sold of $570,000. The company's gross profit margin is closest to:

• A) 60.0%
• B) 40.0%
• C) 35.0%
• D) 45.0%

Question 32

A company using LIFO reports inventory of $180,000 on its balance sheet and discloses a LIFO reserve of $25,000 in the footnotes. The inventory value the company would have reported had it used FIFO instead is closest to:

• A) $155,000
• B) $180,000
• C) $205,000
• D) $225,000

Question 33

A company chooses to expense a cost immediately rather than capitalize it as an asset, even though capitalization would also be acceptable under the applicable accounting framework. All else equal, in the year the cost is incurred, expensing (relative to capitalizing) will most likely result in:

• A) Higher net income and higher total assets in the year incurred.
• B) Lower net income and lower total assets in the year incurred, since expensing recognizes the full cost immediately rather than spreading it over the asset's useful life through depreciation or amortization.
• C) No difference in net income or total assets under either treatment.
• D) Higher total assets but lower net income in the year incurred.

Question 34

A company reports net income of $300,000, depreciation and amortization of $45,000, an increase in accounts receivable of $20,000, an increase in inventory of $15,000, and an increase in accounts payable of $10,000 during the year. Using the indirect method, cash flow from operations is closest to:

• A) $320,000
• B) $370,000
• C) $280,000
• D) $300,000

Question 35

A company reports net income of $500,000 and has 200,000 weighted average common shares outstanding (basic EPS of $2.50). The company also has outstanding convertible bonds with a $2,000,000 face value, a 6% coupon, convertible into 40,000 common shares, and a 25% tax rate. Using the if-converted method, diluted EPS is closest to:

• A) $2.50
• B) $2.08
• C) $2.71
• D) $2.46

Question 36

A company reports revenue of $1,200,000 and net income of $96,000. The company's net profit margin is closest to:

• A) 10.0%
• B) 12.0%
• C) 8.0%
• D) 6.0%