Financial Reporting And Analysis - Financial Reporting And Analysis Section 1

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16. A security analyst is comparing a company which prepares its financial statements according to IFRS to a company that follows the U.S. GAAP. The analyst is most likely to make an adjustment to:

  • Option : C
  • Explanation : IFRS makes a distinction between unrealized gains and losses on available-for-sale debt securities that arise as a result of exchange rate movements and requires these changes in value to be recognized in the income statement, whereas U.S. GAAP does not make this distinction.
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18. The accountant at Demons Ltd. presents the subtotals for gross profit and operating profit in the income statement. The format adopted here is most likely:

  • Option : A
  • Explanation : When subtotals are presented, the income statement follows a multi-step format.
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19. The income statement least likely includes which of the following elements?

  • Option : B
  • Explanation : It is an element of the balance sheet.
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20. A company entered into a three-year construction project with a total contract price of $11.2 million and an expected total cost of $8.7 million.The following table provides cash flow information relating to the contract:

All figures in millions Year 1Year 2Year 3
Costs incurred and paid   $2.2$3.5$3
Amounts billed and payments received  $3.5$4.1$3.6

  • Option : A
  • Explanation : The revenue reported is equal to the percentage of the contract that is completed in that period, where percentage completion is based on costs.
    In Year 2: (3.5 / 8.7) * 11.2 = 4.5.
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