CFA LEVEL 1 Exam 2023 Questions with correct Answers

Financial Statement Analysis Framework - Answer- provides an overview of the methodology used by analysts to consistently analyze financial statements 1. articulate the purpose and context of analysis 2. collecting data 3. process the data 4. analyzing and interpreting the processed data 5. develop/communicate conclusions and recommendations 6. follow up Scope of Financial Statement Analysis - Answer- - analysis is based on financial statements is performed by equity investors interested in valuation, lenders interested in liquidity, suppliers interested in future business, and analysts working to recommend security purchases, mergers, credit and lending, debt ratings, and forecasting Balance Sheet - Assets - Answer- - assets are items owned by a company that will benefit the company in the future - found on balance sheet; include current/noncurrent - required to be listed separately under IFRS - typically shown on balance sheet at historical cost Income Statement - Introduction - Answer- - reports revenues, expenses, and profit or loss for a company on a consolidated basis over a short period of time - revenues are matched with expenses incurred to earn the revenue, and the net result is a profit or a loss for the period - when the company reports on a consolidated basis, they include all companies they own in one income statement Statement of Changes in Equity (1) - Answer- - reconciles the balance in equity from the beginning of a period to the end of a period - equity is composed of paid-in capital, retained earnings, other comprehensive income, and minority interests - statement of changes in equity reconciles the beginning equity balance with the period-ending equity balance by analyzing the changes in the four components of equity Beginning equity +/- increase/decrease in paid-in capital + net income (or minus net loss) - dividends paid +/- changes in other comprehensive income +/- changes in minority interest Balance Sheet - Liabilities - Answer- - future obligations of a company, which may be monetary or non-monetary - include current/non-current liabilities - required to be listed separately under IFRS as a means of helping analysts in identifying threats to liquidity Financial Notes (footnotes) and Supplementary Schedules - Answer- - required part of the financial reports and contain essential information about the company's accounting policies, methods, and estimates, many of which are essential for analysis Statement of Comprehensive Income - Answer- - requirement under IFRS - comprised of both profit and loss for the period and other items affecting equity - presented as one or two statements, with one being the income statement - includes the traditional statement of operations and a second component presenting items that affect owners' equity but are not share transactions - component is called Other Comprehensive Income (OCI) - OCI reports certain gains and losses that bypass the income statement and end up as adjustments to owner's equity - OCI includes fair value changes, items reclassified to profit and loss, and other non-owner changes in equity - AOCI is included as a separate line item in the equity section * US GAAP allows corporations to present OCI as part of the statement of changes in equity as opposed to being part of the comprehensive income statements Management Discussion and Analysis - Answer- - provides readers with information needed to understand a company's financial condition, changes in financial condition, and results of operations 5 Elements 1. nature of the business 2. management's objectives and strategies 3. company's significant resources, risks, relationships 4. results of operations 5. critical performance measures Auditor's Reports - Answer- - performed by qualified, independent auditors - opinion is based on the audit procedures performed that are designed to provide reasonable assurance the statements fairly present the results of operations and financial condition of the company in accordance with applicable accounting standards - opinions may be unqualified, qualified, adverse, or disclaimed Introductory Paragraph - sets forth the statements to be audited and the responsibilities of both management to prepare the statements and auditors to audit the statement Scope Paragraph - describes the nature of the audit process and procedures that serve as a basis for the auditor's opinion Opinion Paragraph - states the auditor's opinion concerning if the statements fairly present the company's financial position and result of operations free of material misstatements in conformity with applicable accounting standards Auditor's Opinions - Answer- Unqualified Opinion - (most common) auditor found no material misstatement and believes the statements fairly reflect the results of operations and financial condition of the company, in compliance with applicable accounting standards Qualified Opinion - auditor found something material that does not comply with the applicable accounting standards; this exception doesn't invalidate the statement as a whole, though, and the auditor will explain the qualification in the audit report Adverse Opinion - the auditor found material misstatements of such an extent that the statements taken as a whole do not fairly represent the results of operations and financial condition in compliance with applicable accounting standards (really rare) Disclaimer of Opinion - auditor cannot complete the audit, not issuing an opinion; also rare *required under U.S. GAAP to express opinion on company's internal control system (not required under IFRS) Cash Flow Statement - Introduction - Answer- - reports the cash generated and expanded during a fiscal period - statement of cash flow differs from an income statement in that it converts all the transactions into cash changes within a time period - cash flows are important as it shows a company's ability to pay its short-term obligations (liquidity) and ability to pay its long-term obligations (solvency) - made up of operating activities, investing activities, financing activities, and supplemental activities - Indirect Method: starts with income statement and adjusts it to cash flow - Direct Method: (FASB preferred) provides information about cash flows from operations directly; sum of all cash flows then equal net cash increase or decrease from normal operations of the company Mechanics of Financial Reporting - Introduction - Answer- - financial statements are developed from the records within an accounting system that have recorded all transactions for a business over a period of time - they provide information to end users that will be used for decision making; they follow rules of balancing debits and credits, as well as ensuring that assets is equal to liabilities + equity; and then they often require adjusting entries to ensure the matching of revenues and associated expenses Chart of Accounts/Common Accounts - Answer- Chart of Accounts - large list of every account that will be needed for operation of the business, absorbing the details of every transaction during the accounting period, and in summation of those transactions Common Asset Accounts - cash/cash equivalents, accounts receivable, prepaid expenses, inventory, PPE, intangible assets Common Liability Accounts - accounts payable, unearned revenue, notes payable, bonds payable Common Equity Accounts - general capital, additional paid-in capital, retained earnings Contra Accounts - accounts in place to offset more common things (i.e. accumulated depreciation) Common Income Accounts - revenue/sales, gains, investment income Common Expense Accounts - COGS, selling expenses, administrative expenses, depreciation expense, interest expense, tax expense, losses Accounting Equations - Answer- Assets = Liabilities + Owner's Equity Revenue - Expenses = Net Income Statement of Retained Earnings - reports how net income or loss and the payment of dividends impact retained earnings, illustrating the relationships between the income statement and the balance sheet Beginning Retained Earnings + Net Income (- Net Loss) - Dividends Paid = Ending Retained Earnings Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Net Income - Dividends * equity as components such as retained earnings (cumulative net income) and paid-in capital; double-entry accounting ensures that the accounting equation holds Classification of Business Activities - Answer- Operating Activities - those arising from day-to-day operations Investing Activities - arise from buying and selling long-lived assets or purchasing investments in other companies Financing Activities - arise from raising and repaying capital The Accounting Process - Answer- Accounting System - used to record the transactions of the business and aid in the preparation of financial statements The Accounting Records - Answer- - process of entering transactions into an accounting system creates financial records for the company - the accounting equation can be used to evaluate business transactions for entering into the accounting system to create financial records Adjusting Entries - Answer- - are used to record transactions that do not necessarily involve cash but are an economic event for the company - often involve accruing expenses but not yet paid, revenues earnings but not yet received, interest earnings but not yet received, or interest due bt not yet paid - recording depreciation and the expiration of prepaid expenses are also adjusting entries Accruals and Valuation Adjustments - Answer- - accruals are vital to ensure the matching principle - changes in the value of trading securities must be reflected so that the financial statements represent a true value of the company's financial position, including what it owns Prepaids and Accruals - Answer- - unearned revenue or deferred revenue: liability when a customer pays for products or services in advanced - accrued revenue: revenue the company has earned, but not yet received payment for - prepaid expenses: assets when a bill is paid in advance of the service - accrued expenses: expenses that have not yet been paid Preparing Financial Statements from a Series of Entries - Answer- - accounting system will record transactions into accounts that relate to financial statement elements - proper recording throughout the year will ensure a balanced accounting equation - these accounts can then be totaled to provide information needed to prepare the financial statements Financial Statements - Answer- - income statement, balance sheet, statement of cash flows, statement of owners' equity, statement of retained earnings Inter-relationships among Financial Statements - Answer- - financial statements contain many interrelationships - an error in one statement will often impact some or all of the financial statements Accounting Systems - Answer- - the method which transforms the daily activity in the business into financial statements that provide an overall view of the business' financial status General Ledger and T-Accounts - Answer- - General Ledger: collection of individual T-accounts - T-accounts - each shows all the transactions affecting that one account, with the additions to the account listed on one side of the T-account and subtractions from the account listed on the other side of the T-account Objective of Financial Reporting - Answer- - to provide useful financial information about the entity to the users of the reports Standard-Setting Bodies and Regulatory Authorities - Answer- Standard-Setting Bodies: FASB, IASB Regulatory Authorities: SEC - accounting standards are created by private, standard-setting bodies with no legal authority to enforce those standards - regulatory agencies with enforcement powers generally recognize and enforce those standards - in case of disagreement between the standard-setting body and the regulatory agency, the regulatory agency rules Securities and Exchange Commission (SEC) - Answer- - responsible for capital markets of US; member of IOSCO, sets financial reporting standards to the FASB 3 major securities regulation acts: - 1933: details the financial and other information that must be shared with investors when securities are sold and public issuance's registered, specifically outlaws misrepresentation - 1934: gave SEC authority over securities industry and allowed them to require company financial reporting - 2002: regulates the audit industry, holds CEOs and CFOs personally responsible for the financial reporting, and highlights the importance of internal controls