CFA LEVEL 1 MOCK TEST PAPER

Financial Reporting and Analysis

Question 1
Which of the following financial statements is the analyst most likely to review to assess changes in a
company’s financial position?
A. Balance sheet
B. Income statement
C. Statement of changes in owners’ equity

Question 2
Which of the following statements regarding a company’s internal controls is most accurate?
A. Under U.S. GAAP, an independent auditor is responsible for the effectiveness of a company’s
internal controls system.
B. The internal controls system seeks to ensure the reliability of the company’s process for
analyzing financial statements.
C. Under U.S. GAAP, an auditor is also required to express an opinion on the company’s internal
controls system.

Question 3
Deferred revenue is most likely classified as:
A. A liability.
B. An asset.
C. Owners’ equity.

Question 4
Which of the following financial statement elements is part of the U.S. GAAP reporting
framework, but not the IFRS framework?
A. Expenses.
B. Equity.
C. Gains.

Question 5
Which of the following is not a critical assumption underlying financial statements?
A. Historical cost.
B. Going concern.
C. Accrual accounting.

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Question 6
When a company has recognized revenue in the financial statements but has not billed the customer
or received payment from the customer, this gives rise to:
Revenue Asset/Liability
A. Accrued revenue Asset
B. Deferred revenue Asset
C. Deferred revenue Liability
A. Row A
B. Row B
C. Row C

Question 7
Which of the following is least likely an investing activity?
A. Interest received on a bond investment by a clothing manufacturer
B. Purchase of computer chips for a computer manufacturer
C. Purchase of cars for the company’s directors

Question 8
The International Accounting Standards Board (IASB) was established in order to:
A. Harmonize accounting standards worldwide.
B. Review disclosure standards for publicly owned companies.
C. Provide an alternative set of accounting standards to U.S. GAAP.

Question 9
Prepaid expenses arise when a company makes cash payment:
A. At the same time of recognizing an expense.
B. After recognizing an expense.
C. Prior to recognizing an expense.

Question 10
JB Associates paid $30,000 wages in advance for 6 months. This transaction is most likely to result in:
A. An increase in net assets.
B. A decrease in net assets.
C. No change in net assets.

Question 11
Which of the following is most likely an accurate representation of the accounting equation?
A. Assets + Liabilities = Contributed capital + Beginning retained earnings + Revenue –
Expenses – Dividends
B. Assets – Contributed capital – Beginning retained earnings – Revenue + Expenses +

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 Dividends declared = Liabilities
C. Assets – Liabilities = Contributed capital – Beginning retained earnings + Revenue –
Expenses – Dividends declared

Question 12
Owners’ equity is best described as:
A. Liabilities in excess of the company’s assets.
B. Owners’ residual interest in the assets of an entity after deducting its liabilities.
C. A company’s noncurrent assets less its noncurrent liabilities.

Question 13
The balance sheet is least likely to be used for information on a firm's:
A. Liquidity.
B. Profitability.
C. Owners' equity.

Question 14
Which of the following statements is least accurate regarding U.S. GAAP?
A. The target is to replace U.S. GAAP with IFRS by 2016.
B. U.S. GAAP has a hierarchical structure with standards issued by the FASB holding the
highest position.
C. U.S. GAAP includes standards established by a number of different organizations.

Question 15
The statement of cash flow that begins with net income from the income statement is known as the:
A. direct format.
B. indirect format.
C. operating format.

Question 16
Jelena borrowed $45,000 from a bank to start her own business. This transaction is least likely to:
A. Increase assets by $45,000.
B. Increase owners’ equity by $45,000.
C. Increase liabilities by $45,000.

Question 17
The International Organization of Securities Commissions (IOSCO) most likely has regulatory
authority over:
A. nothing, as it is a membership organization.
B. capital markets domiciled in European Union countries.

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C. financial reporting requirements for companies domiciled in European Union countries.

Question 18
Which of the following financial statements shows the resources that a company controls?
A. Statement of comprehensive income.
B. Statement of financial position.
C. Cash flow statement.

Question 19
An auditor to a company is least likely to be responsible for:
A. Preparing the financial statements.
B. Examining a company's internal control systems.
C. Ensuring that the financial statements conform to generally accepted accounting principles
(GAAP).

Question 20
If an auditor believes that the financial statements materially depart from accounting standards
and are not presented fairly, she is most likely to issue a(n):
A. Qualified opinion.
B. Adverse opinion.
C. Unqualified opinion.

Question 21
A firm's equity has increased during a period due to economic benefits being achieved. During this
same period there were no owner transactions. This change in equity most likely resulted from:
A. income being recognized.
B. a decrease in the firm's assets.
C. an increase in the firm's liabilities.

Question 22
Equity valuation is usually part of which step in the financial analysis framework?
A. Follow‐up.
B. Processing the data.
C. Analysis of the processed data.

Question 23
Which of the following is least likely to be classified as an operating activity for a car manufacturer?
A. Payment of taxes on income
B. Purchase of equipment for manufacturing cars
C. Sale of cars to customers

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Question 24
On 30 April 2012, Niagara Newspapers received a cash payment of $60,000 as a deposit on
production of a custom printer to be delivered in August 2012. This transaction would most
likely result in which of the following on 30 April 2012:
A. No effect on liabilities.
B. A decrease in assets of $60,000.
C. An increase in liabilities of $60,000.

Question 25
Which of the following is a standard‐setting approach likely to be adopted by a standard‐setting
body?
A. Rules‐based approach.
B. Asset/liability approach.
C. Revenue/expense approach.

Question 26
Which of the following is not an item found in the annual report that an analyst can identify the
type of accrual and valuation entries used in an entity's financial statements?
A. Management discussion and analysis (MD&A).
B. Related party transactions footnote.
C. Significant accounting policies footnote.

Question 27
The production manager of Chovita Inc. decides to dispose of the drilling machine that has been in
use for the past three years. Which of the following values will most likely be used to record the
value of the machine on disposal?
A. Present value.
B. Realizable value.
C. Intrinsic value.

Question 28
Company ABC purchases 100,000 units of inventory at a total cost of $500,000. It pays a deposit of
10% of the cost; the remainder of the cost will be paid in 20 days' time. As a result of this
transaction, assets will increase by:
A. $50,000.
B. $450,000.
C. $500,000.

Question 29
Ahead of a major expansion program, a firm raises an additional $600 million from an issue of new
common stock. It also raises $500 million from the issue of long‐term bonds. The profit made by the

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company in the same year was $20 million, and it paid out dividends of $8 million. This will lead to
an overall increase in stockholders' equity over the year of:
A. $612 million.
B. $620 million.
C. $1,112 million.

Question 30
The market value of securities held for trading decreased by $10,000. The transaction is recorded as:
A. a reduction to assets on the balance sheet and a loss reported on the income statement.
B. no change to the balance sheet or income statement.
C. both a reduction in assets and a loss shown on the balance sheet.

Question 31
A financial reporting framework has principles universal enough to guide preparers dealing with
new and existing transactions. This framework is most likely exhibiting which characteristic
commonly found in a coherent framework?
A. Consistency.
B. Transparency.
C. Comprehensiveness.

Question 32
Which of the following is a requirement of presentation under International Financial Reporting
Standards (IFRS)?
A. Assets and liabilities for related items should be offset against each other.
B. Current and noncurrent assets should normally be combined unless IFRS requires otherwise.
C. The previous year's data should normally be provided for items in the financial statements.

Question 33
Which of the following is least likely a desirable qualitative characteristic of financial statements?
A. Faithful representation
B. Relevance
C. Conciseness

Question 34
International financial reporting standards (IFRS) and U.S. generally accepted accounting standards
(U.S. GAAP) are most likelydeveloped by the:
A. IFRS Foundation and the Financial Accounting Foundation (FAF), respectively.
B. International Accounting Standards Board (IASB) and Financial Accounting Standards
Board (FASB), respectively.
C. International Organization of Securities Commissions (IOSCO) and the Securities and

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 Exchange Commission (SEC), respectively.

Question 35
Which of the following statements regarding elements of the financial statements is least likely?
The IFRS framework describes:
A. Equity as being equal to capital contributed by the owner.
B. Assets as the resources the entity controls from which it expects to derive future economic
benefits.
C. Liabilities as obligations that will result in an outflow of economic benefits in the future.

Question 36
Previously, a manufacturer of high-quality industrial electrical generators only sold its units to
customers, but it has just introduced a leasing program. The generators have expected useful lives
of about 25 years, and the company anticipates that the leases will have a term of 20 years or more.
The company reports under International Financial Reporting Standards. Which of the following
statements about the first year of the new leasing program is most accurate?
A. If the lease is classified as an operating lease, the company's profits should be higher for a given
leased asset than they would be under a finance lease.
B. Regardless of how the company classifies the lease, its total cash flow
C. If the lease is classified as a finance lease, it will decrease the company's liquidity position
compared with when the company was only selling its generators.

Question 37
In early January 2015, an analyst sees a news release that a company he follows (which reports
under US GAAP) will be forced to reduce output from one of its major product lines at its highly
specialized ceramics plant in response to a new technology introduced by its major competitor. The
table summarizes information and estimates that the analyst has gathered from various sources
about the plant and its future prospects.

If the above information and estimates prove accurate, the depreciation expense that should be
reported for 2015 related to the plant will be closest to:
A. $213 thousand.

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B. $306 thousand.
C. $256 thousand.

Question 38
The following is selected balance sheet data for a company along with information about its
financial and operating lease obligations.

If the company were to capitalize its long-term leases, its adjusted long-term debt-to-assets ratio as
of the end of December 2014 would be closest to:
A. 9.9%.
B. 10.2%.
C. 10.4%

Question 39
Which of the following is least likely to be a general feature underlying the preparation of financial
statements within the International Financial Reporting Standards (IFRS) Conceptual Framework?
A. Matching
B. Materiality
C. Accrual basis

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Question 40
At the beginning of the year, a company purchased a fixed asset for $500,000 with no expected
residual value. The company depreciates similar assets on a straight line basis over 10 years,
whereas the tax authorities allow declining balance depreciation at the rate of 15% per year. In both
cases, the company takes a full year's depreciation in the first year and the tax rate is 40%. Which of
the following statements concerning this asset at the end of the year is most accurate?
A. The deferred tax asset is $10,000.
B. The temporary difference is $25,000.
C. The tax base is $500,000.

Question 41
At the start of the year, a company acquired new equipment at a cost of €50,000, estimated to have a
three-year life and a residual value of €5,000. If the company depreciates the asset using the double
declining balance method, the depreciation expense that the company will report for the third year
is closest to:
A. €3,328.
B. €3,705.
C. €555.

Question 42
In 2015, a company undertook the following two transactions:

With respect to required disclosures in the company's financial statements, which of the following is
most accurate? If the company reports under:
A. International Financial Reporting Standards (IFRS), neither transaction must be disclosed.
B. US GAAP, only the pledged borrowing must be disclosed.
C. US GAAP, neither transaction must be disclosed.

Question 43
For which of the following assets is it most appropriate to test for impairment at least annually?
A. A trademark with an indefinite expected life
B. A patent with a legal life of 20 years
C. Land

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Question 44
The following excerpt was taken from the notes of a company's financial statements that were
prepared in accordance with International Financial Reporting Standards. All figures are in
thousands of Australian dollars.

The note leads an analyst to believe that the rapid reversal of the impairment loss related to the
broadcast licenses arose as an attempt by management to manage earnings.
If the analyst's belief is correct, her analysis of the original 2013 financial statements would most
likely have shown that, compared with the economic reality in 2013, the company had:
A. understated ROA.
B. understated fixed asset turnover.
C. overstated net profit margin.

Question 45
If a company capitalizes an expenditure related to capital assets instead of expensing it, ignoring
taxes, the company will most likely report:
A. the same free cash flow to the firm (FCFF) in that period.
B. a lower cash flow per share in that period.
C. a higher earnings per share in future periods.

Question 46
Net revenue most likely refers to revenue minus:
A. volume discounts and estimated returns.
B. revenues attributable to non-controlling interests.
C. estimates of warranty expense.

Question 47
Under IFRS it is most appropriate to include which of the following pension costs of a defined
benefit plan in other comprehensive income?
A. Actuarial gains or losses
B. Employees service cost
C. Net interest expense accrued on the beginning net pension liability

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Question 48
The following relates to a company's common equity over the course of the year:

If the company's net income for the year is $5,000,000, its diluted EPS is closest to:
A. $2.22.
B. $2.20.
C. $2.17.

Question 49

Based on the presented information about a company's trade receivables, the bad debt expense (in £
millions) for 2014 is closest to:
A. 84
B. 120
C. 36

Question 50
A company acquires some new depreciable assets. It uses straight-line deprecation for all of its
assets. Which of the following combinations of estimated residual values and useful lives is most
likely to produce the highest net profit margin? Estimated residual values should be:
A. high with long average lives.
B. high with short average lives.
C. low with long average lives.

Question 51
Which of the following is least likely to be disclosed in the financial statements of a bond issuer?
A. The amount of debt that matures in each of the next five years.
B. Collateral pledged as security in the event of default.
C. The market rate of interest on the balance sheet date.

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Question 52
The difference between the fair value of a defined benefit pension plan's assets and its estimated
benefit obligation is recognized :
A. on the balance sheet as a net pension asset or liability.
B. as an actuarial adjustment in other comprehensive income.
C. on the income statement as pension expense.

Question 53
If a lessee enters into a finance lease rather than an operating lease, it can expect to have a :
A. higher debt-to-equity ratio.
B. lower debt-to-equity ratio.
C. higher return on assets.

Question 54
Which of the following statements that classify a lease as a finance lease under U.S. GAAP is least
accurate ?
A. A bargain purchase option exists.
B. Title is transferred at the end of the lease period.
C. The present value of the lease payments is at least 80% of the fair market value of the asset.

Question 55
An analyst compares two companies that are identical except that Company X uses finance leases
and Company Y uses operating leases. The analyst would expect Company X's debt-to-equity ratio,
relative to Company Y's, to be :
A. higher.
B. lower.
C. the same.

Question 56
MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the revaluation
model for its property, plant, and equipment. One of MARU’s machines was purchased for
2,500,000 Mexican pesos (MXN) at the beginning of the fiscal year ended 31 March 2010. As of 31
March 2010, the machine has a fair value of MXN 3,000,000. Should MARU show a profit for the
revaluation of the machine?
A. Yes.
B. No, because this revaluation is recorded directly in equity.
C. No, because value increases resulting from revaluation can never be recognized as a profit.

Question 57
Entergy, Inc. reports under U.S. GAAP. Entergy has begun a long-term project to develop inventory
control software. On its financial statements, Entergy should:
A. expense all costs of this project in the periods incurred
B. capitalize all costs of this project
C. expense all costs of this project until technological feasibility has been established

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Question 58
A company is switching from straight-line depreciation to an accelerated method of depreciation.
Assuming all other revenue and expenses are at the same levels for the next period, switching to an
accelerated method will most likely increase the company's:
A. total assets on the balance sheet.
B. fixed asset turnover ratio
C. net income/sales ratio

Question 59
Component depreciation is required under:
A. both IFRS and U.S. GAAP
B. U.S. GAAP, but not IFRS
C. IFRS, but not U.S. GAAP

Question 60
Which set of accounting standards requires firms to disclose estimated amortization expense for the
next five years on intangible assets?
A. IFRS
B. Both IFRS and U.S. GAAP
C. U.S. GAAP

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