CFA Level 1 - Financial Reporting and Analysis Session 8 - Reading 24 (Notes, Practice Questions, Sample Questions) 1. Which of the following statements about financial statements and reporting standards is leastaccurate? A)Financial statements could potentially take anyform if reporting standards didn’t exist.B)The objective of financial statements is toprovide economic decision makers with usefulinformation. C) Reporting standards focus mostly on format and presentation and allow management wide latitude inassumptions . [Explanation: Given the variety and complexity of possible transactions, and theestimates and assumptions a firm must make whenpresenting its performance, financial statementscould potentially take any form if reportingstandards didn’t exist. Reporting standards ensurethat the information is “useful to a wide range ofusers,” including security analysts, by makingfinancial statements comparable to one another andnarrowing the range within which management’sestimates can be seen as reasonable. Reportingstandards limit the range of assumptions managementcan make]
2. Which description of the objective of financial statements is most accurate? The objective offinancial statements is: A) to provide economic decision makers with useful information about a firm’s financial performance andchanges in financial position. [Explanation: The objective of financial statements is to provideeconomic decision makers with useful informationabout a firm’s financial performance and changes infinancial position. Assessing its prospects is theresponsibility of analysts. Financial statements fallunder the purview of the FASB in the US, not theIASB. The SEC does not set the objectives offinancial statements, it is a regulatory authority] B)to provide securities analysts with objective dataabout a firm’s financial prospects.C)to provide a wide range of users with informationabout a firm’s financial prospects 3. Which of the following statements about financial reporting standards is least accurate? Reportingstandards: A) are disclosed on Form 8K by publicly traded firms in the United States. [Explanation: Reporting standards ensure that the information is “useful to awide range of users,” including security analysts, bymaking financial statements comparable to one anotherand narrowing the range within which management’sestimates can be seen as reasonable. Securities &Exchange Commission Form 8K addresses acquisitions,divestitures, etc. and not reporting standards] B)narrow the range within which management estimatescan be seen as reasonable.C)ensure that the information is “useful to a widerange of users.”
4. Which of the following is least likely to be considered a stated goal of the InternationalAccounting Standards Board (IASB)? A) Remain neutral in the debate on the use of global accounting standards to avoid appearance of aconflict of interest. [Explanation: The IASB has four stated goals:1. Develop global accounting standards requiringtransparency, comparability, and high quality infinancial statements.2. Promote the use of global accounting standards.3. Account for the needs of emerging markets andsmall firms when implementing global accountingstandards.4. Achieve convergence between various nationalaccounting standards and global accounting standards] B)Develop global accounting standards requiringtransparency, comparability, and high quality infinancial statements.C)Account for the needs of emerging markets andsmall firms when implementing global accountingstandards. 5. When a publicly traded U.S. company prepares a proxy statement for its shareholders prior to theannual meeting or other shareholder vote, it alsofiles the statement with the SEC as Form: A) DEF-14A. [Explanation: Form DEF-14A: When a company prepares a proxy statement for its shareholders priorto the annual meeting or other shareholder vote, italso files the statement with the SEC as FormDEF-14A.
Form 8-K: Companies must file this form to disclosematerial events including significant assetacquisitions and disposals, changes in management orcorporate governance, or matters related to itsaccountants, financial statements, or the markets onwhich its securities trade.Form 144: A company can issue securities to certainqualified buyers without registering the securitieswith the SEC, but must notify the SEC that it intendsto do so] B)8-K.C)144. 6. Professional organizations of accountants and auditors that establish financial reportingstandards are called: A)Regulatory authorities.B)International organizations of securitiescommissions. C) Standard setting bodies. [Explanation: Standard-setting bodies are professionalorganizations of accountants and auditors thatestablish financial reporting standards. Regulatoryauthorities are government agencies that have thelegal authority to enforce compliance with financialreporting standards. Regulatory authorities, such asthe Securities and Exchange Commission (SEC) in theU.S. and the Financial Services Authority (FSA) inthe United Kingdom, are established by nationalgovernments. Most national authorities belong to theInternational Organization of Securities Commissions(IOSCO)] 7. An analyst can find a company’s significant accounting methods and estimates in:
A) both the footnotes to the financial statements and Management’s Discussion and Analysis. [Explanation: Companies that prepare financial statements underIFRS or U.S. GAAP must disclose their accountingpolicies and estimates in the footnotes and addressthose policies and estimates where significantjudgment was required in Management’s Discussion andAnalysis. The auditor’s opinion discusses whetherpolicies have been applied appropriately, but doesnot include the estimates and policies themselves] B)only the footnotes.C)both the footnotes and in the auditor’s opinion 8. An analyst is least likely to use disclosures of accounting policies and estimates to evaluate: A) what policies are likely to be modified in future periods. [Explanation: Companies that prepare financial statements under IFRS or U.S. GAAP mustdisclose their accounting policies and estimates inthe footnotes and Management’s Discussion andAnalysis. An analyst should use these disclosures toevaluate what policies are discussed, whether theycover all the relevant data in the financialstatements, which policies required management tomake estimates, and whether the disclosures havechanged since the prior period] B)whether the disclosures have changed since theprior period.C)what policies are discussed.