UPDATED CFA LEVEL 1 FINANCIAL
STATEMENT ANALYSIS 31 QUESTIONS
AND ANSWERS: (Analyzing Income
Statements )
The following data is from Delta's common-size financial statement:
Earnings after taxes 18%
Equity 40%
Current assets 60%
Current liabilities 30%
Sales$ 300
Total assets$1,400
What is Delta's total-liabilities-to-equity ratio? - CORRECT ANSWER- If equity =
40% of assets, total liabilities = 60% of assets, thus = 1.5.
Goodwill is most likely to be - CORRECT ANSWER- Goodwill is not amortized;
instead, it is tested for impairment at least annually, and more frequently when there is
an indication that it may be impaired. An intangible asset with a finite useful life is
amortized over its estimated useful life. Analogously, depreciation is the process of
allocating a tangible asset's cost over the course of its useful life.
Intangible assets - CORRECT ANSWER- May only be recognized if they can be
measured reliably
- Generally excluded internally generate intangibles (subjectivity)
Typical intangibles - CORRECT ANSWER- - Purchased Patents and Copyrights
(included in b/s)
- Purchased Brands and Trademarks
- Direct Response advertising
- Purchased Franchises and License Costs
- Goodwill (NOT included in b/s)
- Computer software and Development Costs
Identifiable Intangible assets - CORRECT ANSWER- can be acquired singularly,
linked to rights and privileges with finite benefit periods (rights or privileges like patents,
trademarks, etc...)
-- Amortized (depreciation for an intangible) over estimated useful life
Unidentifiable Intangible assets - CORRECT ANSWER- cannot be acquired
singularly and may have an indefinite benefit period (ex. goodwill)
-- Not amortized; annual impairment review
, Expensed Items (always expensed) - CORRECT ANSWER- - Internally generated
brands, mastheads, publishing titles, customer lists, etc.
- Start-up costs
- Training costs
- Admin and general overhead
- Advertising and promotion
- Relocation and reorganization costs
- Redundancy and termination costs
- R&D (Development may be capitalized IFRS)
** Goes through Income Statement
R&D - CORRECT ANSWER- IFRS says to capitalize if (needs to be in the
development stage):
- Project is technically feasible
- Resources exist to complete the project
- Market exists for the product
- Company has the intention to complete and sell a product
USA GAAP says always expensed
Goodwill - CORRECT ANSWER- The difference b/w the acquisition price and the
FMV of the acquired firm's net assets (assets - liabilities)
- Additional amount paid represents the amount paid for assets not recorded on the
balance sheet
- Fair value involves management discretion
- "assets" not being recorded on balance sheet
- Negative value = acquisition price < FMV
-- Gain on bargain purchase = gain on the income statement (not sitting as intangible on
balance sheet)
** Goodwill is NOT Amortized
Goodwill Analysis - CORRECT ANSWER- Impairment indicates that goodwill often
results from overpayment to acquire entity
- Remove the impact of goodwill from ratios:
-- Remove goodwill from assets
-- Remove any impairment from the income statement
-- Evaluate business acquisitions considering purchase price, net assets, earnings
prospects
** If Goodwill is impaired it is a sign that too much was paid for the acquisition
** generally accepted to remove goodwill
Financial Instruments - CORRECT ANSWER- - Stocks
- Bonds
- Receivables
- Notes receivables
STATEMENT ANALYSIS 31 QUESTIONS
AND ANSWERS: (Analyzing Income
Statements )
The following data is from Delta's common-size financial statement:
Earnings after taxes 18%
Equity 40%
Current assets 60%
Current liabilities 30%
Sales$ 300
Total assets$1,400
What is Delta's total-liabilities-to-equity ratio? - CORRECT ANSWER- If equity =
40% of assets, total liabilities = 60% of assets, thus = 1.5.
Goodwill is most likely to be - CORRECT ANSWER- Goodwill is not amortized;
instead, it is tested for impairment at least annually, and more frequently when there is
an indication that it may be impaired. An intangible asset with a finite useful life is
amortized over its estimated useful life. Analogously, depreciation is the process of
allocating a tangible asset's cost over the course of its useful life.
Intangible assets - CORRECT ANSWER- May only be recognized if they can be
measured reliably
- Generally excluded internally generate intangibles (subjectivity)
Typical intangibles - CORRECT ANSWER- - Purchased Patents and Copyrights
(included in b/s)
- Purchased Brands and Trademarks
- Direct Response advertising
- Purchased Franchises and License Costs
- Goodwill (NOT included in b/s)
- Computer software and Development Costs
Identifiable Intangible assets - CORRECT ANSWER- can be acquired singularly,
linked to rights and privileges with finite benefit periods (rights or privileges like patents,
trademarks, etc...)
-- Amortized (depreciation for an intangible) over estimated useful life
Unidentifiable Intangible assets - CORRECT ANSWER- cannot be acquired
singularly and may have an indefinite benefit period (ex. goodwill)
-- Not amortized; annual impairment review
, Expensed Items (always expensed) - CORRECT ANSWER- - Internally generated
brands, mastheads, publishing titles, customer lists, etc.
- Start-up costs
- Training costs
- Admin and general overhead
- Advertising and promotion
- Relocation and reorganization costs
- Redundancy and termination costs
- R&D (Development may be capitalized IFRS)
** Goes through Income Statement
R&D - CORRECT ANSWER- IFRS says to capitalize if (needs to be in the
development stage):
- Project is technically feasible
- Resources exist to complete the project
- Market exists for the product
- Company has the intention to complete and sell a product
USA GAAP says always expensed
Goodwill - CORRECT ANSWER- The difference b/w the acquisition price and the
FMV of the acquired firm's net assets (assets - liabilities)
- Additional amount paid represents the amount paid for assets not recorded on the
balance sheet
- Fair value involves management discretion
- "assets" not being recorded on balance sheet
- Negative value = acquisition price < FMV
-- Gain on bargain purchase = gain on the income statement (not sitting as intangible on
balance sheet)
** Goodwill is NOT Amortized
Goodwill Analysis - CORRECT ANSWER- Impairment indicates that goodwill often
results from overpayment to acquire entity
- Remove the impact of goodwill from ratios:
-- Remove goodwill from assets
-- Remove any impairment from the income statement
-- Evaluate business acquisitions considering purchase price, net assets, earnings
prospects
** If Goodwill is impaired it is a sign that too much was paid for the acquisition
** generally accepted to remove goodwill
Financial Instruments - CORRECT ANSWER- - Stocks
- Bonds
- Receivables
- Notes receivables
