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CFA Level 1 - Financial Reporting & Analysis Questions and Answers
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CFA Level 1 - Financial Reporting &Analysis
Auditor/Audit Opinion - answer1) Unqualified opinion (good); 2) Qualified opinion
(followed GAAP except for...); 3) Adverse opinion (bad)
FASB - answer US
1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims, useful,
relevant, reliable, consistent and comparable; 4) SEC deems FASB standard
authoritative
FASB - Harmonization - answer1) Increase comparability; 2) Reduce expense of
overseas capital; 3) Reduce the expense of producing consolidated accounts
IOSCO - answer EU & US
1) Int'l Org. of Securities Commission; 2) Goal: uniform regulation; 3) Core objectives:
Protecting investor, Fair, transparent, efficient markets, Reduction of systematic risk
IASB - answerEU
1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards
(IFRS); 3) Addopted by EU in 2005
IASB - Goals - answer1) Development of high quality, transparent and enforceable
global standards; 2) Promote application of standards; 3) Take into account special
needs (small & med entities & emerging markets); 4) Convergence of nat'l and int'l
standards
Roles of financial reporting & analysis include: - answer1) Evaluating equity investments
for a portfolio;
2) Evaluating potential M&A;
3) Evaluating a subsidiary of a parent company;
4) Deciding on private equity/ venture cap investment
5) Determine creditworthiness - borrowing;
6) Extending credit to customers;
7) Examining compliance with covenants/contracts;
8) Assigning a debt rating;
9) Valuing a security - Equity research/reports;
10) Forecasting future earnings/cash flows;
Balance Sheet - answershows the financial position of a firm AT A SINGLE POINT in
time A = L + E.
,Income Statement - answerShows the performance of the company over a reporting
period.
Sarbanes-Oxley Management Report: - answer1) Responsibility to establish and
maintain adequate internal controls
2) Mgmt's framework for evaluating internal controls
3) Assessment of the effectiveness of internal controls over the last operating period
4) Statement of auditor's attestment
5) Certify that f/s are fairly presented
MD&A contains: - answer1) Results of operations and discussions of trend;
2) Capital resources, liquidity, and cash flow trends;
3) General business overview based on known trends;
4) Effects of trends, events, and uncertainties;
5) Discontinued operations, extraordinary items, unusual items;
6) Disclosure in interim f/s;
7) Segment cash flow
Funded status of the pension plan (under US GAAP & IFRS) is reported where? -
answerUS Gaap: Balance Sheet
IFRS:Disclosed in Footnotes
May be mentioned in MD&A if mgnt considers it significant
Steps of F/S Analysis - answer1) Purpose and context
2) Data Collection
3) Data Processing
4) Analysis/Interpretation of data
5) Develop conclusions and recommendations
6) Follow-up
The objective of f/s is to - answerensure that information in f/s is useful to a wide range
of users.
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10 - answer1) fair
presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
IFRS: Required F/S - answer1) Balance Sheet; 2) Comprehensive Income; 3) Change
in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
IFRS: Presentation Requirements - answer1) Aggregation where appropriate; 2) No
offsetting assets against liabilities or income against exp.; 3) Classifed B/S; 4) Minimum
Info on face; 5) Minimum disclosure; 6) Comparative info.
The 4 Qualitative Characteristics of IFRS - answer1) understandability; 2) relevance; 3)
reliability; and 4)comparability
, No hierarchy
Trade-Offs Qualitative Characteristics of IFRS - answer1) Relevance vs. reliability; 2)
Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
The 4 Qualitative Characteristics of FASB: - answerPrimary) Relevance & Reliability
Secondary) Comparability
Lastly) Understandability - user specific
IFRS/US GAAP Frameworks: purpose of framework - answerBoth: purpose is to assist
development & revision of accting stds.
IASB: Firms must consider framework if no std exists
FASB: No express requirement to consider framework
IFRS/US GAAP Frameworks: objective of F/S - answerBoth: General agreement on
objectives; focus on wide range of users.
IASB: One objective for all users
FASB: Separate objectives for business entities and non-business entities.
IFRS/US GAAP Frameworks: underlying assumptions: - answerBoth: Recognize going
concern & accrual assumptions
IASB: Going concern & accruals given more prominence in framework
FASB: Going concern assumption not well developed in framework.
IFRS/US GAAP Frameworks: F/S elements: - answerFASB: Asset is a future economic
benefit
IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
IFRS/US GAAP Frameworks: Recognition of Elements: - answerFASB: No discussion
of "probables"
IASB: Asset, liabilities, are probable flows
IFRS/US GAAP Frameworks: Measurement of Elements: - answerBoth: Broadly
consistent, lack fully developed concepts
FASB: Assets revaluations prohibited (except some financial instruments)
Characteristics of an effective framework - answer1) Transparency; 2)
Comprehensiveness; 3) Consistency
Barriers to a single framework: - answer1) Valuation; 2) Standard setting; 3)
Measurement
IFRS Revenue Recognition - answer1) Risk & Reward transferred; 2) No continued
control; 3) Reliable measurement; 4) Probable flow of benefits; 5) Cost verifiable
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