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Question 1Ethics and Professional Standards

Under the CFA Institute Code of Ethics, which obligation applies to members when they discover that a colleague has presented fabricated performance data to a client?

  1. They must obtain written permission from the client before escalating the matter internally.
  2. They must confront the colleague privately and give the colleague a reasonable period to correct the record.
  3. They must defer to the firm's legal counsel and take no independent action.
  4. They must report the misconduct to the appropriate authority, which may include the colleague's supervisor or compliance department. Correct answer.

Explanation

The Code requires members to act with integrity and to report unethical conduct to the appropriate authority, which can mean the supervisor or compliance. Private correction is not an adequate substitute where clients have already relied on fabricated data. Deferring to counsel does not remove the member's own ethical duty.

Question 2Ethics and Professional Standards

A member holds a controlling interest in a private company that supplies software to the firm where she works as a research analyst. Under the Standards of Practice Handbook, what is the most appropriate action?

  1. Resign from the board of the supplier but keep the ownership interest undisclosed.
  2. Disclose the ownership to her employer and to clients in her research reports, or recuse herself from coverage affected by the relationship. Correct answer.
  3. Say nothing because private-company ownership is outside the scope of the conflict-of-interest provisions.
  4. Disclose the relationship only if a client specifically asks about potential conflicts.

Explanation

Conflicts of interest must be disclosed to employers and, where material to clients, in research reports; alternatively the member should avoid the conflict by recusal. Passive disclosure only on request does not satisfy the duty. Private ownership is still a reportable interest if it could bias recommendations.

Question 3Ethics and Professional Standards

Which statement best describes the standard for using client brokerage (soft dollars) under the CFA Institute Standards?

  1. Client brokerage may be directed to a broker in exchange for political or charitable contributions.
  2. Client brokerage may be directed to a broker only for research or execution services that benefit the client's account. Correct answer.
  3. Client brokerage may be used freely once the client signs a general consent to the firm's practices.
  4. Client brokerage may be used for any firm expense provided the amount is disclosed to clients annually.

Explanation

The Standards limit soft-dollar use to research and execution services that assist the member in the investment decision-making process and benefit clients. Firm overhead and unrelated benefits are not permissible uses. General client consent does not authorize misuse of brokerage.

Question 4Ethics and Professional Standards

An analyst is preparing a report on a company where her spouse owns a substantial block of shares. What does the Standards of Practice Handbook most directly require?

  1. The analyst must publish only a neutral hold recommendation until the shares are sold.
  2. The analyst must sell the spouse's shares before publishing any recommendation.
  3. The analyst should disclose the spousal ownership in the report and to her employer, or be removed from coverage of the issuer. Correct answer.
  4. The analyst may proceed without disclosure because the shares belong to the spouse, not to the member.

Explanation

Beneficial ownership by an immediate family member is treated as a conflict that must be disclosed to the employer and, where relevant, to clients. Recusal from coverage is an acceptable alternative to disclosure. The member's own interest is not required for the conflict to exist.

Question 5Ethics and Professional Standards

A member receives a material nonpublic tip about an impending tender offer from a friend who is an executive at the target company. Under Standard II(A), which course of action is permissible?

  1. The member may trade if the friend did not receive any benefit from sharing the tip.
  2. The member may trade if the member's own analysis independently suggests the target is undervalued.
  3. The member may trade in the target's shares if the trade is small and unlikely to move the market.
  4. The member may trade only after the tender offer is publicly announced and the market has absorbed the information. Correct answer.

Explanation

Trading on material nonpublic information is prohibited until the information becomes public and the market has had time to absorb it. Size of the trade and the absence of a benefit to the tipper do not cure the violation. Independent analysis does not legitimize trading while possessing the tip.

Question 6Ethics and Professional Standards

Under Standard III(B) Fair Dealing, when a member changes a recommendation from buy to sell, which action best complies with the Standard?

  1. Notify all clients simultaneously of the change before acting on it for any account, including the member's own. Correct answer.
  2. Inform only clients whose accounts hold the security at the time of the change.
  3. Inform the largest institutional clients first because they generate most of the firm's revenue.
  4. Inform clients in the order in which their accounts were opened.

Explanation

Fair Dealing requires that all clients be given an equal opportunity to act on a recommendation change. Simultaneous notification, before any account trades on the change, is the standard approach. Preferential treatment of large clients or selective notification breaches the duty.

Question 7Ethics and Professional Standards

A portfolio manager places a personal trade in a security immediately after placing a large client order in the same security but before the client order is executed. Which Standard is most directly implicated?

  1. Standard I(C) Misrepresentation
  2. Standard VI(A) Disclosure of Conflicts
  3. Standard IV(A) Loyalty, because the manager failed to notify the employer of a personal trade
  4. Standard III(B) Fair Dealing, because the personal trade may disadvantage clients Correct answer.

Explanation

Trading ahead of a client order is front-running and violates Fair Dealing, since the client order may be executed at less favorable prices. The primary harm is unequal treatment of the client's order. Loyalty and disclosure issues may also be present, but Fair Dealing is the most direct violation.

Question 8Ethics and Professional Standards

Which of the following best reflects the Standards' requirement on maintaining independence and objectivity when a member accepts paid travel from an issuer to visit its facilities?

  1. The member may accept the travel if it is disclosed to the employer and, where material, to clients, and if it does not compromise the recommendation. Correct answer.
  2. The member may accept the travel if the issuer is not currently covered by the member's firm.
  3. The member must decline all issuer-paid travel because any gift violates the Standards.
  4. The member may accept the travel only if the value is below the firm's annual bonus level.

Explanation

Modest, disclosed travel that does not compromise independence may be acceptable under the Standards. The key tests are whether the benefit could reasonably be expected to impair objectivity and whether it is disclosed. A blanket prohibition is not what the Standards impose.

Question 9Ethics and Professional Standards

A member who is a supervisor learns that a subordinate repeatedly failed to maintain required records. Under Standard IV(C) Responsibilities of Supervisors, what should the supervisor do?

  1. Take prompt steps to detect and prevent further violations, including implementing or strengthening compliance procedures. Correct answer.
  2. Wait for the compliance department to independently discover the failures before acting.
  3. Reassign the subordinate to a different desk without any further measures.
  4. Report the subordinate to the regulator and take no internal action.

Explanation

Supervisors must make reasonable efforts to detect and prevent violations by those under their supervision. That includes prompt action to strengthen procedures and prevent recurrence. Passive reliance on others or mere reassignment does not satisfy the duty.

Question 10Ethics and Professional Standards

A member cites a statistical study in a research report but omits the fact that the study was commissioned by the issuer being analyzed. Under Standard I(C) Misrepresentation, this omission is best characterized as:

  1. A misleading omission, because it conceals a factor that would affect how readers weigh the study. Correct answer.
  2. Acceptable, because the study's methodology was sound and the data were accurate.
  3. Acceptable, because the member did not author the study.
  4. A violation only if the issuer paid the member directly for the report.

Explanation

Misrepresentation includes omitting material facts necessary to make a statement not misleading. Concealing the study's sponsorship distorts how readers assess its credibility. The soundness of methodology does not cure the omission.

Question 11Ethics and Professional Standards

Which action is most consistent with Standard III(A) Loyalty, Prudence, and Care regarding the handling of client assets?

  1. Using client assets as collateral for a firm loan with a promise to repay before quarter-end.
  2. Investing client assets in the member's own venture when returns are expected to be high.
  3. Placing client assets with a custodian selected solely because it offers the lowest fee to the firm.
  4. Managing client assets with the care a prudent investor would exercise and in the client's best interest. Correct answer.

Explanation

Standard III(A) requires members to act with the care, skill, and diligence of a prudent investor and in the client's best interest. Custodian selection, use of assets as collateral, and self-dealing all raise loyalty concerns. The benchmark is the client's interest, not the firm's convenience.

Question 12Ethics and Professional Standards

A member is asked to write a favorable research report in exchange for the subject company directing investment banking business to the member's firm. What is the most appropriate response under the Standards?

  1. Write the report only if the compensation is disclosed to the regulator.
  2. Write the favorable report but include a footnote disclosing the investment banking relationship.
  3. Delegate the report to a junior analyst and avoid reviewing the draft.
  4. Decline to let the business relationship influence the recommendation and ensure the report reflects independent analysis. Correct answer.

Explanation

Independence and objectivity require that recommendations not be influenced by investment banking relationships. Disclosure of the relationship is necessary but does not permit a biased recommendation. Delegation does not insulate the member from responsibility.

Question 13Ethics and Professional Standards

Under Standard V(A) Diligence and Reasonable Basis, which factor is least relevant to determining whether a member has a reasonable basis for a recommendation?

  1. The quality of the sources used to support the analysis.
  2. The extent of the analysis performed relative to the complexity of the investment.
  3. Whether the member considered the appropriateness of the recommendation for the intended audience.
  4. The member's personal conviction that the recommendation will be profitable. Correct answer.

Explanation

A reasonable basis depends on the quality of sources, the depth of analysis relative to complexity, and consideration of the recommendation's suitability for its audience. Personal conviction about profitability is not a substitute for objective support. Confidence alone does not establish a reasonable basis.

Question 14Ethics and Professional Standards

A member changes employers and wants to use a client list and proprietary model developed at the previous firm. Under Standard IV(A) Loyalty to Employer, which statement is most accurate?

  1. The member must not take or use the previous employer's confidential client list or proprietary model without consent. Correct answer.
  2. The member may use the model but not the client list, because models are not proprietary.
  3. The member may take the client list and model if they were created during working hours.
  4. The member may take both if no written employment agreement exists.

Explanation

Loyalty to the employer prohibits taking or using confidential information and proprietary property without consent, regardless of when it was created. The absence of a written agreement does not create a right to remove firm property. Skills and general knowledge may be used, but specific proprietary materials may not.

Question 15Ethics and Professional Standards

Which of the following is the best example of a violation of Standard III(C) Suitability?

  1. Recommending a high-yield bond fund to a retiree whose stated objective is capital preservation and who has no other income. Correct answer.
  2. Reviewing a client's circumstances again after a significant life event.
  3. Declining to recommend an investment because it is too complex for the client to understand.
  4. Documenting the client's risk tolerance in the investment policy statement.

Explanation

Suitability requires that recommendations be consistent with the client's objectives, constraints, and circumstances. Recommending an aggressive income product to a preservation-focused retiree with no other income conflicts with that duty. The other options are consistent with good practice.

Question 16Ethics and Professional Standards

A member prepares a performance presentation that includes only the firm's best-performing composite and excludes terminated accounts. Under Standard III(D) Performance Presentation, this is:

  1. A violation only if a client actually relied on the presentation to invest.
  2. Acceptable if the excluded accounts were small relative to the composite.
  3. A violation, because the presentation is misleading about the firm's actual performance. Correct answer.
  4. Acceptable if the member discloses that the presentation is illustrative.

Explanation

Performance presentations must be fair, accurate, and complete; selectively excluding terminated accounts and weaker composites misleads clients. The duty is not contingent on proving actual reliance. Size of excluded accounts and labeling do not cure the misleading impression.

Question 17Ethics and Professional Standards

Which statement correctly describes the relationship between the CFA Institute Code of Ethics and the Standards of Practice?

  1. The Code applies only to charterholders, while the Standards apply to all members.
  2. Compliance with the Standards is voluntary, while compliance with the Code is mandatory.
  3. The Standards override the Code whenever the two conflict.
  4. The Code sets out broad principles, and the Standards provide more specific guidance for applying them. Correct answer.

Explanation

The Code of Ethics states overarching principles, and the Standards of Practice Handbook elaborates specific rules and guidance for applying them. Both are binding on members and candidates. Neither supersedes the other, and both apply regardless of charter status.

Question 18Ethics and Professional Standards

A member is a candidate in the CFA Program and posts detailed exam questions from a recent sitting on a public forum. Which statement best describes the consequence under the Standards?

  1. The conduct violates the confidentiality of the exam and can result in disciplinary action against the candidate. Correct answer.
  2. The conduct is a breach only if the candidate received a passing score.
  3. The conduct is permissible because the candidate is not yet a member.
  4. The conduct is permissible if the candidate does not identify the specific exam year.

Explanation

Candidates must not disclose or discuss exam content; doing so breaches the confidentiality rules and can lead to sanctions. The obligation applies to candidates as well as members. Omitting the exam year or the candidate's result does not make disclosure permissible.

Question 19Ethics and Professional Standards

A member serves on a government committee that is drafting regulations affecting the financial industry. Under the Standards, which action is most appropriate regarding gifts from industry participants?

  1. The member may accept gifts because public service is outside the scope of the Standards.
  2. The member should not accept gifts that could reasonably impair independence or objectivity, and should disclose any that are accepted. Correct answer.
  3. Accepting gifts is permissible if the member discloses them to the committee chair only.
  4. Accepting gifts is fine as long as they are not cash.

Explanation

Members in public or regulatory roles must avoid gifts that could compromise independence and objectivity and must disclose benefits that could raise such concerns. Non-cash gifts can still create conflicts. Serving in public office does not exempt a member from the Standards.

Question 20Ethics and Professional Standards

A member manages a pension fund and is offered an all-expenses-paid golf trip by a broker seeking the fund's trading business. The trip is not disclosed to the fund's trustees. Which conclusion is most consistent with the Standards?

  1. The trip is acceptable if the member directs no additional trades to the broker.
  2. The trip is acceptable because it is a customary business courtesy in the industry.
  3. The trip creates a conflict that should be disclosed and may violate the duty to the employer and clients if it could impair objectivity. Correct answer.
  4. The trip is acceptable because it was unsolicited and the member did not request it.

Explanation

Gifts from brokers seeking business create conflicts of interest that must be evaluated and disclosed. If the benefit could reasonably impair the member's objectivity, accepting it without disclosure breaches the duty to employer and clients. Industry custom and lack of solicitation do not neutralize the conflict.

Question 21Financial Reporting and Analysis

Under IFRS, a company that prepares its financial statements on a going-concern basis but has identified a material uncertainty related to going concern should do which of the following?

  1. Omit the going-concern disclosure because the basis of preparation is presumed
  2. Recognize all non-current assets as current and remeasure them at fair value
  3. Restate prior-period statements as if the entity had already liquidated
  4. Make the going-concern basis explicit and disclose the material uncertainty without reclassifying assets Correct answer.

Explanation

IAS 1 requires an entity to disclose material uncertainties related to events or conditions that cast significant doubt on the ability to continue as a going concern. The going-concern basis remains appropriate, so assets and liabilities are not reclassified or remeasured; the uncertainty is disclosed.

Question 22Financial Reporting and Analysis

An entity reports profit before tax of 500,000 and tax expense of 120,000. Its tax rate is 25%. What is the most likely explanation for the difference between the statutory tax charge and the reported tax expense?

  1. A deferred tax asset recognized on unused tax losses
  2. An error in the tax computation
  3. A change in the enacted tax rate applied to opening deferred tax
  4. A permanent difference such as non-deductible expenses Correct answer.

Explanation

The statutory charge would be 125,000 (25% of 500,000), but 120,000 was reported, a 5,000 difference. Permanent differences, such as non-deductible expenses or non-taxable income, change the effective rate without creating deferred tax.

Question 23Financial Reporting and Analysis

A company issues a bond at a discount. Under the effective-interest method, how does interest expense behave over the life of the bond compared with the cash coupon?

  1. Interest expense exceeds the cash coupon and increases each period as the carrying amount rises Correct answer.
  2. Interest expense is lower than the cash coupon and declines each period
  3. Interest expense equals the cash coupon each period because the coupon is fixed
  4. Interest expense is recognized only at maturity when the discount is amortized

Explanation

The effective-interest method applies a constant rate to a growing carrying amount, so interest expense starts above the cash coupon and increases as the discount is amortized. The difference is the amortization of the discount.

Question 24Financial Reporting and Analysis

Which item is classified as an operating cash flow under IAS 7 when using the direct method?

  1. Cash received from customers for goods sold Correct answer.
  2. Proceeds from issuing ordinary shares
  3. Cash paid to acquire property, plant and equipment
  4. Repayment of the principal of a bank loan

Explanation

IAS 7 classifies cash receipts from customers for goods and services as operating activities because they arise from the entity's principal revenue-producing activities. Purchases of PP&E are investing, and share issues and loan principal repayments are financing.

Question 25Financial Reporting and Analysis

A company uses the percentage-of-completion method for a long-term construction contract. During the year it incurred costs of 400,000, estimated total costs are 1,000,000, and the contract price is 1,400,000. What revenue should be recognized this year if this is the first year of the contract?

  1. 400,000
  2. 1,400,000
  3. 1,000,000
  4. 560,000 Correct answer.

Explanation

Under the cost-to-cost input method, progress is 400,000 / 1,000,000 = 40%. Revenue recognized is 40% of the 1,400,000 contract price, or 560,000.

Question 26Financial Reporting and Analysis

Under IFRS 15, a contract with a customer contains a right of return. How should the entity account for the expected returns?

  1. Defer all revenue until the return period expires
  2. Recognize full revenue and record a contingent asset until returns occur
  3. Recognize revenue only when the customer confirms acceptance in writing
  4. Recognize revenue net of expected returns and a refund liability plus a return asset for the expected returned goods Correct answer.

Explanation

IFRS 15 requires revenue to be recognized to the extent it is highly probable there will be no significant reversal, so expected returns reduce revenue. The entity recognizes a refund liability and a return asset for the right to recover the goods.

Question 27Financial Reporting and Analysis

An entity revalues a building upward for the first time under the revaluation model. Where is the increase recognized?

  1. As a deferred tax liability only
  2. In other comprehensive income and accumulated in equity as a revaluation surplus Correct answer.
  3. Directly in retained earnings as a prior-period adjustment
  4. In profit or loss as a gain on revaluation

Explanation

IAS 16 requires a first-time revaluation increase to be recognized in other comprehensive income and accumulated in equity under the heading revaluation surplus. It is not recognized in profit or loss unless it reverses a previous revaluation decrease.

Question 28Financial Reporting and Analysis

Which of the following best describes the objective of the statement of financial position?

  1. To explain the difference between tax expense and tax payable
  2. To show cash inflows and outflows over a period
  3. To present the entity's assets, liabilities and equity at a point in time Correct answer.
  4. To report changes in equity for the period

Explanation

The statement of financial position is a point-in-time statement showing assets, liabilities and equity. The other statements cover flows over a period.

Question 29Financial Reporting and Analysis

A company has 100,000 ordinary shares outstanding. It declares a 2-for-1 share split. What is the effect on earnings per share and share capital?

  1. EPS is halved and share capital doubles
  2. EPS doubles and share capital is halved
  3. EPS is unchanged and share capital doubles
  4. EPS is halved and share capital is unchanged in total Correct answer.

Explanation

A share split increases the number of shares without changing total equity, so the per-share amount is halved. Total share capital remains the same because no new resources are contributed.

Question 30Financial Reporting and Analysis

Which of the following is a key characteristic of a finance lease under IFRS 16?

  1. The lessor retains substantially all risks and rewards of ownership
  2. The lessee obtains the right to control the use of an identified asset for a period in exchange for consideration Correct answer.
  3. The lease term is always one year or less
  4. The lease payments are contingent on future sales only

Explanation

IFRS 16 defines a lease as a contract that conveys the right to control the use of an identified asset for a period in exchange for consideration. The concept of risks and rewards is secondary to the right-of-use control model.

Question 31Financial Reporting and Analysis

An entity has a defined benefit pension plan with a net defined benefit liability of 200,000 at year-end. During the year, the discount rate used to measure the obligation decreased. What is the effect of the decrease on the net defined benefit liability?

  1. The liability increases only if the plan assets earn above the discount rate
  2. The liability decreases because the discount rate is lower
  3. The liability increases because the present value of the obligation rises Correct answer.
  4. There is no effect because the discount rate is a non-financial assumption

Explanation

A lower discount rate increases the present value of the defined benefit obligation, which increases the net defined benefit liability. The remeasurement is recognized in other comprehensive income.

Question 32Financial Reporting and Analysis

Under IAS 36, when should an entity test goodwill for impairment?

  1. Only when the entity disposes of the cash-generating unit
  2. Only at the date of initial recognition
  3. Annually and whenever there is an indication of impairment Correct answer.
  4. Only when there is an indication of impairment

Explanation

IAS 36 requires goodwill and intangible assets with indefinite useful lives to be tested for impairment annually, and also whenever there is an indication of impairment. Other assets are tested only when indicators exist.

Question 33Financial Reporting and Analysis

A company reports a current ratio of 2.0 and a quick ratio of 0.8. Which conclusion is most consistent with these ratios?

  1. The company has no current liabilities
  2. A large portion of current assets is inventory Correct answer.
  3. The company is unable to pay its current liabilities
  4. The company has excessive cash relative to current liabilities

Explanation

The gap between the current ratio and the quick ratio indicates that inventory makes up a large share of current assets. The quick ratio excludes inventory, so the difference reflects inventory holdings.

Question 34Financial Reporting and Analysis

Which of the following is an example of a non-adjusting event after the reporting period under IAS 10?

  1. A major business combination announced after the reporting date Correct answer.
  2. Discovery of fraud that occurred before year-end
  3. A court judgment confirming a liability that existed at the reporting date
  4. Bankruptcy of a customer that confirms a receivable was impaired at year-end

Explanation

A business combination announced after the reporting period does not relate to conditions existing at the reporting date, so it is non-adjusting. Adjusting events provide evidence of conditions that existed at the reporting date.

Question 35Financial Reporting and Analysis

A company has a deferred tax asset of 50,000 arising from unused tax losses. Management concludes it is probable that only 60% of the losses will be utilized. What amount should be recognized?

  1. 30,000 Correct answer.
  2. 20,000
  3. 50,000
  4. 0

Explanation

A deferred tax asset is recognized only to the extent it is probable that taxable profit will be available against which the deductible temporary difference can be used. Applying 60% to 50,000 gives 30,000.

Question 36Financial Reporting and Analysis

Which of the following best describes the purpose of the statement of changes in equity?

  1. To report the entity's operating, investing and financing cash flows
  2. To reconcile the opening and closing balances of each component of equity Correct answer.
  3. To present the entity's assets and liabilities at a point in time
  4. To disclose the fair value of financial instruments

Explanation

The statement of changes in equity reconciles opening and closing balances of each component of equity, including comprehensive income, transactions with owners and other movements.

Question 37Financial Reporting and Analysis

An entity has an investment property measured under the fair value model. During the year, the fair value increases by 80,000. How is the increase recognized?

  1. In profit or loss as a gain Correct answer.
  2. As a deferred gain until the property is sold
  3. As an adjustment to retained earnings
  4. In other comprehensive income as a revaluation surplus

Explanation

Under IAS 40, an entity using the fair value model recognizes changes in fair value in profit or loss for the period. The revaluation surplus treatment applies to property, plant and equipment under IAS 16, not investment property under the fair value model.

Question 38Financial Reporting and Analysis

A company has a debt covenant requiring a maximum debt-to-equity ratio of 2.0. Its total liabilities are 800,000 and total equity is 350,000. What is the debt-to-equity ratio and does it comply?

  1. 2.29, so it complies
  2. 1.00, so it does not comply
  3. 2.29, so it does not comply Correct answer.
  4. 0.44, so it complies

Explanation

The debt-to-equity ratio is 800,000 / 350,000 = 2.29, which exceeds the 2.0 maximum, so the covenant is breached.

Question 39Financial Reporting and Analysis

Which of the following is an example of an accounting policy change that should be applied retrospectively?

  1. A change from the FIFO to the weighted-average cost method for inventory
  2. A change in the estimated warranty provision rate
  3. A change in the estimated useful life of equipment
  4. A change from the cost model to the revaluation model for a class of property Correct answer.

Explanation

A change from the cost model to the revaluation model is a change in accounting policy applied retrospectively, with prior periods restated where practicable. Changes in estimates are applied prospectively.

Question 40Financial Reporting and Analysis

An entity recognizes a provision for a restructuring plan. Which condition must be met before the provision is recognized?

  1. The entity has announced the plan only to its shareholders
  2. The restructuring is expected to generate future cost savings
  3. A present obligation exists because of a detailed formal plan and a valid expectation among those affected that the restructuring will be carried out Correct answer.
  4. The board has approved a preliminary budget for the restructuring

Explanation

IAS 37 requires a present obligation arising from a detailed formal plan communicated to those affected, creating a valid expectation that the restructuring will occur. Future cost savings do not create an obligation.

Question 41Financial Reporting and Analysis

A company has a bond payable with a carrying amount of 1,000,000 and a fair value of 950,000. It elects the fair value option for the bond. How is the 50,000 difference recognized?

  1. As a gain in profit or loss, unless it relates to changes in the entity's own credit risk, which goes to OCI Correct answer.
  2. As a prior-period adjustment to retained earnings
  3. As a deferred tax asset
  4. As a loss in profit or loss

Explanation

Under the fair value option for financial liabilities, the change in fair value is recognized in profit or loss, except the portion attributable to changes in the entity's own credit risk, which is presented in other comprehensive income.

Question 42Financial Reporting and Analysis

Which of the following is a characteristic of a perpetual inventory system compared with a periodic system?

  1. Inventory is counted only at the end of the period
  2. Cost of goods sold is updated continuously as sales occur Correct answer.
  3. Purchases are recorded in a purchases account rather than inventory
  4. Cost of goods sold is determined only at period-end

Explanation

A perpetual system maintains a continuous record of inventory and cost of goods sold as transactions occur. A periodic system determines cost of goods sold only at period-end through a physical count.

Question 43Financial Reporting and Analysis

A company uses LIFO during a period of rising prices. Compared with FIFO, which statement is true?

  1. LIFO reports higher ending inventory and lower cost of goods sold
  2. LIFO reports lower cost of goods sold and higher net income
  3. LIFO and FIFO report identical gross profit
  4. LIFO reports lower ending inventory and higher cost of goods sold Correct answer.

Explanation

In rising prices, LIFO assigns the most recent, higher costs to cost of goods sold, increasing COGS and leaving older, lower costs in ending inventory. FIFO produces the opposite effect.

Question 44Financial Reporting and Analysis

Which of the following is a required disclosure under IFRS 7 for financial instruments?

  1. The nature and extent of risks arising from financial instruments Correct answer.
  2. The market price of each competitor's shares
  3. The detailed salary of each key management person
  4. The entity's marketing strategy for the next year

Explanation

IFRS 7 requires disclosures about the significance of financial instruments and the nature and extent of risks arising from them, including credit, liquidity and market risk.

Question 45Financial Reporting and Analysis

An entity has a foreign operation whose functional currency is different from the parent's presentation currency. How are translation differences recognized?

  1. As an adjustment to goodwill only
  2. Immediately in profit or loss each period
  3. As a deferred tax liability with no OCI component
  4. In other comprehensive income and reclassified to profit or loss on disposal of the operation Correct answer.

Explanation

IAS 21 requires exchange differences arising on translation of a foreign operation to be recognized in other comprehensive income and accumulated in a separate component of equity. On disposal, the cumulative amount is reclassified to profit or loss.

Question 46Financial Reporting and Analysis

Under IAS 7, which of the following cash flows is classified as an investing activity?

  1. Cash received from the sale of property, plant and equipment Correct answer.
  2. Dividends paid to shareholders
  3. Cash received from the issue of ordinary shares
  4. Interest paid on a bank loan

Explanation

IAS 7 classifies cash flows by the nature of the activity generating them. Purchases and sales of long-term assets such as property, plant and equipment are investing activities because they relate to resources used to generate future income rather than to financing or day-to-day trading.

Question 47Financial Reporting and Analysis

An entity's inventory turnover ratio has fallen from 8.0 to 5.0 while its gross profit margin is unchanged. Which explanation is most consistent with these facts?

  1. The entity has increased its sales volume without changing inventory levels
  2. The entity has shortened its average inventory holding period
  3. The entity has written down inventory to net realizable value
  4. The entity has accumulated slow-moving inventory relative to its cost of sales Correct answer.

Explanation

Inventory turnover equals cost of sales divided by average inventory, so a falling ratio means inventory is growing faster than cost of sales, typically because goods are sitting unsold for longer. An unchanged gross margin suggests selling prices relative to cost have not shifted, pointing to a build-up of slow-moving stock rather than a pricing or write-down effect.

Question 48Financial Reporting and Analysis

An entity uses the cost model for a class of machinery. At the start of the year the carrying amount is 500,000 with a remaining useful life of 5 years and no residual value. At year-end an impairment indicator exists and the recoverable amount is 340,000. What impairment loss is recognized at year-end?

  1. 100,000
  2. 40,000
  3. 60,000
  4. 160,000 Correct answer.

Explanation

Depreciation of 100,000 (500,000 divided by 5) is charged first, leaving a carrying amount of 400,000. Under IAS 36 an impairment loss is the excess of carrying amount over recoverable amount, so 400,000 less 340,000 gives 160,000.

Question 49Financial Reporting and Analysis

An entity enters into a contract to sell goods for 1,000,000 with payment due in 12 months. The contract contains a significant financing component, and the appropriate discount rate is 6% per year. Which presentation is correct at the date of sale under IFRS 15?

  1. Revenue of 1,000,000 with a deferred tax liability of 56,604
  2. Revenue of 943,396 with the discount recognized as a reduction of equity
  3. Revenue of 1,000,000 with no separate interest effect
  4. Revenue of 943,396 with the discount unwound as interest expense over the year Correct answer.

Explanation

When a contract contains a significant financing component, IFRS 15 requires revenue to be measured at the cash price that would be paid on the date the goods transfer, which is the present value of the consideration. The difference between that present value and the nominal amount is recognized as interest expense over the financing period.

Question 50Financial Reporting and Analysis

Which of the following best describes the treatment of a change in an accounting estimate under IAS 8?

  1. It is applied by adjusting opening retained earnings
  2. It is applied only after approval by the financial statements' auditor
  3. It is applied prospectively from the date of change Correct answer.
  4. It is applied retrospectively by restating prior period comparatives

Explanation

IAS 8 requires the effect of a change in accounting estimate to be recognized prospectively by affecting the current period, or the current and future periods if it affects both. Prior periods are not restated because the new information was not available when those statements were prepared.