CFA Level 1 - Financial Reporting and Analysis Session 8 - Reading 24

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 least accurate? A)Financial statements could potentially take any form if reporting standards didn’t exist. B)The objective of financial statements is to provide economic decision makers with useful information. C)Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions. [Explanation: Given the variety and complexity of possible transactions, and the estimates and assumptions a firm must make when presenting its performance, financial statements could potentially take any form if reporting standards didn’t exist. Reporting standards ensure that the information is “useful to a wide range of users,” including security analysts, by making financial statements comparable to one another and narrowing the range within which management’s estimates can be seen as reasonable. Reporting standards limit the range of assumptions management can make] 2. Which description of the objective of financial statements is most accurate? The objective of financial statements is: A)to provide economic decision makers with useful information about a firm’s financial performance and changes in financial position. [Explanation: The objective of financial statements is to provide economic decision makers with useful information about a firm’s financial performance and changes in financial position. Assessing its prospects is the responsibility of analysts. Financial statements fall under the purview of the FASB in the US, not the IASB. The SEC does not set the objectives of financial statements, it is a regulatory authority] B)to provide securities analysts with objective data about a firm’s financial prospects. C)to provide a wide range of users with information about a firm’s financial prospects 3. Which of the following statements about financial reporting standards is least accurate? Reporting standards: A)are disclosed on Form 8K by publicly traded firms in the United States. [Explanation: Reporting standards ensure that the information is “useful to a wide range of users,” including security analysts, by making financial statements comparable to one another and narrowing the range within which management’s estimates 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 estimates can be seen as reasonable. C)ensure that the information is “useful to a wide range of users.” 4. Which of the following is least likely to be considered a stated goal of the International Accounting Standards Board (IASB)? A)Remain neutral in the debate on the use of global accounting standards to avoid appearance of a conflict of interest. [Explanation: The IASB has four stated goals: 1. Develop global accounting standards requiring transparency, comparability, and high quality in financial statements. 2. Promote the use of global accounting standards. 3. Account for the needs of emerging markets and small firms when implementing global accounting standards. 4. Achieve convergence between various national accounting standards and global accounting standards] B)Develop global accounting standards requiring transparency, comparability, and high quality in financial statements. C)Account for the needs of emerging markets and small firms when implementing global accounting standards. 5. When a publicly traded U.S. company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form: A)DEF-14A. [Explanation: Form DEF-14A: When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form DEF-14A. Form 8-K: Companies must file this form to disclose material events including significant asset acquisitions and disposals, changes in management or corporate governance, or matters related to its accountants, financial statements, or the markets on which its securities trade. Form 144: A company can issue securities to certain qualified buyers without registering the securities with the SEC, but must notify the SEC that it intends to do so] B)8-K. C)144. 6. Professional organizations of accountants and auditors that establish financial reporting standards are called: A)Regulatory authorities. B)International organizations of securities commissions. C)Standard setting bodies. [Explanation: Standard-setting bodies are professional organizations of accountants and auditors that establish financial reporting standards. Regulatory authorities are government agencies that have the legal authority to enforce compliance with financial reporting standards. Regulatory authorities, such as the Securities and Exchange Commission (SEC) in the U.S. and the Financial Services Authority (FSA) in the United Kingdom, are established by national governments. Most national authorities belong to the International 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 under IFRS or U.S. GAAP must disclose their accounting policies and estimates in the footnotes and address those policies and estimates where significant judgment was required in Management’s Discussion and Analysis. The auditor’s opinion discusses whether policies have been applied appropriately, but does not 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 must disclose their accounting policies and estimates in the footnotes and Management’s Discussion and Analysis. An analyst should use these disclosures to evaluate what policies are discussed, whether they cover all the relevant data in the financial statements, which policies required management to make estimates, and whether the disclosures have changed since the prior period] B)whether the disclosures have changed since the prior period. C)what policies are discussed.