CFA Level 1 - FRA - Introduction to FRA

Common-size financial statements are most likely a component of which step in the financial analysis framework?

• Collect data

• Analyze/interpret data

• Process data

Answer explanation

Ratios are an input into which step in the financial statement analysis framework?

• Process data

• 1. Collect input data

• Analyze/interpret the processed data

Answer explanation

C is correct. Ratios are an output of the process information step but are an input into the analyze/interpret data step.

Providing information about the performance of a company, its financial position, and changes in financial position that is useful to a wide range of users is most accurately described as the role of:

• financial reporting

• 1. the audit report

• financial statement analysis

Answer explanation

Which phase in the financial statement analysis framework is most likely to involve producing updated reports and recommendations?

• Follow-up

• Analyze/interpret the processed data

• Develop and communicate conclusions and recommendations

Answer explanation

A is correct. The follow-up phase involves gathering information and repeating the analysis to determine whether it is necessary to update reports and recommendations.

Which of the following statements is most accurate about the responsibilities of an auditor for a publicly traded firm in the United States? The auditor must:

• 1. state that the financial statements are prepared according to generally accepted accounting principles.

• ensure that the financial statements are free from error, fraud, or illegal acts.

• express an opinion about the effectiveness of the company’s internal control systems.

Answer explanation

1. A. Incorrect. The statements are those prepared by management, not the auditor. The auditor is expressing an opinion as to whether the statements are fairly presented and free from material error.

2. B. Incorrect. The auditor only provides reasonable assurance that the statements are free from material error.

3. C. Correct. For a publicly traded firm in the United States, the auditor must express an opinion as to whether the company’s internal control system is in accordance with the Public Accounting Oversight Board, under the Sarbanes–Oxley Act. The opinion is given either in a final paragraph in the auditor’s report or as a separate opinion.A.

Which of the following best describes the role of financial statement analysis?

• To provide information about a company’s performance

• 1. To provide information about a company’s changes in financial position

• To form expectations about a company’s future performance and financial position

Answer explanation

C is correct. In general, analysts seek to examine the past and current performance and financial position of a company to form expectations about its future performance and financial position.

Which of the following reports is least likely to be filed with the US SEC?

• Annual report

• Form 10-K

• 1. Proxy statement

Answer explanation

1. A. Correct because the annual report is not a requirement of the US SEC.

2. B. Incorrect because the 10-K is required by the US SEC.

3. C. Incorrect because a proxy statement is required by the US SEC.

The primary role of financial statement analysis is best described as:

• providing information useful for making investment decisions.

• evaluating a company for the purpose of making economic decisions.

• using financial reports prepared by analysts to make economic decisions.

Answer explanation

B is correct. The primary role of financial statement analysis is to use financial reports prepared by companies to evaluate their past, current, and potential performance and financial position for the purpose of making investment, credit, and other economic decisions.

International Financial Reporting Standards are currently developed by which entity?

• 1. IFRS Foundation

• 1. International Accounting Standards Board

• International Organization of Securities Commissions

Answer explanation

B is correct. The International Accounting Standards Board (IASB) is currently charged with developing International Financial Reporting Standards.

Notes to financial statements most likely include:

• an auditor’s opinion as to the fair presentation of the financial statements.

• 1. supplementary information about accounting policies, methods, and estimates.

• 1. a discussion of significant trends, events, and uncertainties that affect the operating results.

Answer explanation