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Financial Reporting And Analysis - Financial Reporting And Analysis Section 1

Avatto > > CFA Level 1 > > PRACTICE QUESTIONS > > Financial Reporting And Analysis > > Financial Reporting And Analysis Section 1

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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17. Angels Corporation incurs two types of depreciation expenses. Depreciation is charged on the factory machinery used for production purposes and for office equipment. The accountant of the firm presents both these expenses under a single heading, depreciation expense, in the income statement. This is most likely to be:

  • Option : B
  • Explanation : This is an example of grouping by nature.
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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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Financial Reporting And Analysis Section 1