FSA LEVEL 1 EXAM QUESTIONS WITH
COMPLETE SOLUTIONS
What is sustainability - Correct Answers -ensuring that developments meet the needs of
the present without compromising the ability of future generations to meet their own
needs
What do investors use sustainability information for? - Correct Answers -1. improve their
ability to achieve above market returns
2. reduce risk and volatility and protect against diminished returns
3. improve environmental and social investment outcomes, with financial returns as an
equivalent or secondary consideration
Sustainability information can be a strong signal for ___________. Some research
suggests that this indicator is better insight than traditional measures such as return on
equity. - Correct Answers -price volatility
T or F? Equity and fixed income investors rely on sustainability information to support
risk analysis, identify signals of future volatility and value declines and protect portfolio
value. - Correct Answers –True
Index fund - Correct Answers -A mutual fund constructed to match the performance
components of a market index such as S&P Global 1200
ESG tilt - Correct Answers -applied to index construction where assets are weighted
according to ESG performance characteristics, such as high carbon emissions, or
"toward" desirable characteristics
T or F? ESG indices require index managers to actively set ESG benchmarks and to
consider risk appetite and volatility limits related to sustainability factors - Correct
Answers -True
T or F? Private equity investors do not recognize ESG investing as a means to improve
portfolio performance, mitigate risk and generate alpha. - Correct Answers -False
T or F? ESG performance can also impact cost of capital for companies. - Correct
Answers -True
What consequences resulted from the September 1929 London Stock Exchange crash
after prominent fraud claims came to light? What an important lesson learned from this
catastrophe? - Correct Answers -The New York Stock Exchange crashed --> declines in
,consumer demand --> misguided economic policy --> GREAT DEPRESSION (bank
failures, record unemployment rates, declining income, GDP fell)
Lesson: how lack of transparency can lead to disastrous consequences and erode
investor confidence
What is the mission of the US SEC - Correct Answers -protect investors; maintain fair,
orderly and efficient markets and facilitate capital formation
1. protect investors
2. influence corporate behavior
What is the concept of materiality? - Correct Answers -provides a framework through
which companies can differentiate information that should be disclosed from that which
is not necessary to disclose
also helps regulators determine whether enforcement actions are appropriate for false,
misleading, or incomplete disclosures and helps courts make final decisions in cases of
disclosure-based litigation
What is the total-mix concept? (Related to materiality) - Correct Answers -Suggests that
material information is not defined by whether or not it would have changed an investors
decision. Rather, information is deemed to be material if it is significantly likely to be
considered by a reasonable investor in investment decisions - a higher threshold than if
it "might" be considered - by such an investor.
What is the probability and magnitude test? (Related to materiality) - Correct Answers -
the determination of materiality should also consider the probability that an event will
happen and the magnitude of the occurrence of the event.
What is the goal of generally accepted accounting principles (GAAP)? - Correct
Answers -aimed at improving the consistency and comparability of financial reporting
procedures.
What is historical cost accounting? - Correct Answers -measures an assets value as the
actual cost paid for the asset at the time of purchase
*the original nominal value is reported on the balance sheet even if the value of the
asset changes over time
T or F? In the 1940's the American institute of accountants' committee (CAP) on
accounting procedure, which first established GAAP, began permitting the use of
multiple accounting methods and allowing exceptions to historical cost accounting. -
Correct Answers -True.
,Why was the Accounting Principles Board created? - Correct Answers -to reduce
tensions about which accounting methods should be used, reduce variation in
accounting practices, and establish one standardized practice.
What is the goal of the International Accounting Standards Board(IASB)? - Correct
Answers -develop a single set of high quality, understandable, enforceable and globally
accepted financial reporting standards based upon clearly articulated principles.
Why are FS not sufficient when telling the entire story of a company? - Correct Answers
-regulatory and societal expectations change
Companies can manipulate FS to portray a certain standing
(*A company's declining ratio of net assets to enterprise value, in managerial myopia
(defined as an action that boosts current earnings at the expense of long-term value)
and short-term focus )
What is an example of an non-GAAP financial disclose? What kind of metrics are non-
GAAP measures? - Correct Answers -Earnings before interest, taxes, depreciation and
amortization (EBITA) (provides an alternative measure of a company's profitability or
cash flow not subject to standardized financial accounting practices)
non-GAAP measures are financial metrics
What are examples of non-financial value drivers company's have increasingly
recognized? - Correct Answers -non-financial value drivers: externalities, other
performance measures taht influence enterprise value creation
Intangible assets - Correct Answers -Rights, privileges, and competitive advantages that
result from the ownership of long-lived assets that do not possess physical substance.
T or F? Intangible assets are particularly sensitive to impairment (the diminishing in
quality, strength amount, or value of an asset) - Correct Answers -True
In response to concerns about the relevance and usefulness of business reporting the
AICPA formed _____________________
Clue: The committee's key concussions and recommendations called for improved
business reporting that in addition to financial statements, included valuable non-
financial information (but not information that would be indicative of future core earnings
like management's plans and the company's opportunities and risks) - Correct Answers
-Special Committee on Financial Reporting (also known as Jenkins Committee
What makes non-financial disclosures useful and relevant according to the Business
Reporting Research Project (formed by the FASB)? - Correct Answers -The most useful
and relevant disclosures included the factors that influence a company's success, its
, strategy for managing those factors, and the metrics for evaluating the company's
management of those success factors.
What purpose does the Management Commentary and Management's Discussion, and
Analysis portion of financial disclosures serve with regards to non-financial information?
- Correct Answers -Theses sections promote the disclosure of non-financial information
What are two key principles addressed under Management Commentary - Correct
Answers -1. Provide management's view of the entity's performance, position and
progress (looking forward info)
2. Supplement and complement information presented in FS
The International Financial Reporting Standards (IFRS) conceptual framework indicates
7 fundamental characteristics of qualitative information: - Correct Answers -Relevance,
Materiality and Faithful representation
Comparability, verifiability, timeliness and understandability
The IFRS defines Management Commentary according to 5 reporting elements: -
Correct Answers -Historical financials, other subject matter disclosures (including
climate disclosure), business description, management information and market data,
and management information and market data, and management perspectives
The US SEC emphasizes 4 parts regarding the focus and content of Mangement's
Discussion and Analysis: - Correct Answers -1. Focus on material information
2. Include key performance indicators
(Discuss indicators that management uses to manage the business that would be
material to investors such as non-financial metrics)
3. Disclose known trends and uncertainties that are reasonably likely
4. Analyze the information that is disclosed
Examples of measurement and management of environmental factors - Correct
Answers -product life cycle analysis (LCA), greenhouse gas accounting
What is the goal of Environmental cost accounting (ECA) and Environmental profit and
loss statements (EP&L) - Correct Answers -ECA: aims to analyze cause and effect
relationships to identify the source of and measure environmental impacts
EP&L: seeks to assign a monetary value to environmental costs associated with certain
business activities.
What is negative screening? What is it's relation to investor use of sustainability
information? - Correct Answers -Negative screening is the avoidance of investments
found to be objectionable by members of society (ex 1960s students protested and
called for divestment from companies profiting from the Vietnam War)
COMPLETE SOLUTIONS
What is sustainability - Correct Answers -ensuring that developments meet the needs of
the present without compromising the ability of future generations to meet their own
needs
What do investors use sustainability information for? - Correct Answers -1. improve their
ability to achieve above market returns
2. reduce risk and volatility and protect against diminished returns
3. improve environmental and social investment outcomes, with financial returns as an
equivalent or secondary consideration
Sustainability information can be a strong signal for ___________. Some research
suggests that this indicator is better insight than traditional measures such as return on
equity. - Correct Answers -price volatility
T or F? Equity and fixed income investors rely on sustainability information to support
risk analysis, identify signals of future volatility and value declines and protect portfolio
value. - Correct Answers –True
Index fund - Correct Answers -A mutual fund constructed to match the performance
components of a market index such as S&P Global 1200
ESG tilt - Correct Answers -applied to index construction where assets are weighted
according to ESG performance characteristics, such as high carbon emissions, or
"toward" desirable characteristics
T or F? ESG indices require index managers to actively set ESG benchmarks and to
consider risk appetite and volatility limits related to sustainability factors - Correct
Answers -True
T or F? Private equity investors do not recognize ESG investing as a means to improve
portfolio performance, mitigate risk and generate alpha. - Correct Answers -False
T or F? ESG performance can also impact cost of capital for companies. - Correct
Answers -True
What consequences resulted from the September 1929 London Stock Exchange crash
after prominent fraud claims came to light? What an important lesson learned from this
catastrophe? - Correct Answers -The New York Stock Exchange crashed --> declines in
,consumer demand --> misguided economic policy --> GREAT DEPRESSION (bank
failures, record unemployment rates, declining income, GDP fell)
Lesson: how lack of transparency can lead to disastrous consequences and erode
investor confidence
What is the mission of the US SEC - Correct Answers -protect investors; maintain fair,
orderly and efficient markets and facilitate capital formation
1. protect investors
2. influence corporate behavior
What is the concept of materiality? - Correct Answers -provides a framework through
which companies can differentiate information that should be disclosed from that which
is not necessary to disclose
also helps regulators determine whether enforcement actions are appropriate for false,
misleading, or incomplete disclosures and helps courts make final decisions in cases of
disclosure-based litigation
What is the total-mix concept? (Related to materiality) - Correct Answers -Suggests that
material information is not defined by whether or not it would have changed an investors
decision. Rather, information is deemed to be material if it is significantly likely to be
considered by a reasonable investor in investment decisions - a higher threshold than if
it "might" be considered - by such an investor.
What is the probability and magnitude test? (Related to materiality) - Correct Answers -
the determination of materiality should also consider the probability that an event will
happen and the magnitude of the occurrence of the event.
What is the goal of generally accepted accounting principles (GAAP)? - Correct
Answers -aimed at improving the consistency and comparability of financial reporting
procedures.
What is historical cost accounting? - Correct Answers -measures an assets value as the
actual cost paid for the asset at the time of purchase
*the original nominal value is reported on the balance sheet even if the value of the
asset changes over time
T or F? In the 1940's the American institute of accountants' committee (CAP) on
accounting procedure, which first established GAAP, began permitting the use of
multiple accounting methods and allowing exceptions to historical cost accounting. -
Correct Answers -True.
,Why was the Accounting Principles Board created? - Correct Answers -to reduce
tensions about which accounting methods should be used, reduce variation in
accounting practices, and establish one standardized practice.
What is the goal of the International Accounting Standards Board(IASB)? - Correct
Answers -develop a single set of high quality, understandable, enforceable and globally
accepted financial reporting standards based upon clearly articulated principles.
Why are FS not sufficient when telling the entire story of a company? - Correct Answers
-regulatory and societal expectations change
Companies can manipulate FS to portray a certain standing
(*A company's declining ratio of net assets to enterprise value, in managerial myopia
(defined as an action that boosts current earnings at the expense of long-term value)
and short-term focus )
What is an example of an non-GAAP financial disclose? What kind of metrics are non-
GAAP measures? - Correct Answers -Earnings before interest, taxes, depreciation and
amortization (EBITA) (provides an alternative measure of a company's profitability or
cash flow not subject to standardized financial accounting practices)
non-GAAP measures are financial metrics
What are examples of non-financial value drivers company's have increasingly
recognized? - Correct Answers -non-financial value drivers: externalities, other
performance measures taht influence enterprise value creation
Intangible assets - Correct Answers -Rights, privileges, and competitive advantages that
result from the ownership of long-lived assets that do not possess physical substance.
T or F? Intangible assets are particularly sensitive to impairment (the diminishing in
quality, strength amount, or value of an asset) - Correct Answers -True
In response to concerns about the relevance and usefulness of business reporting the
AICPA formed _____________________
Clue: The committee's key concussions and recommendations called for improved
business reporting that in addition to financial statements, included valuable non-
financial information (but not information that would be indicative of future core earnings
like management's plans and the company's opportunities and risks) - Correct Answers
-Special Committee on Financial Reporting (also known as Jenkins Committee
What makes non-financial disclosures useful and relevant according to the Business
Reporting Research Project (formed by the FASB)? - Correct Answers -The most useful
and relevant disclosures included the factors that influence a company's success, its
, strategy for managing those factors, and the metrics for evaluating the company's
management of those success factors.
What purpose does the Management Commentary and Management's Discussion, and
Analysis portion of financial disclosures serve with regards to non-financial information?
- Correct Answers -Theses sections promote the disclosure of non-financial information
What are two key principles addressed under Management Commentary - Correct
Answers -1. Provide management's view of the entity's performance, position and
progress (looking forward info)
2. Supplement and complement information presented in FS
The International Financial Reporting Standards (IFRS) conceptual framework indicates
7 fundamental characteristics of qualitative information: - Correct Answers -Relevance,
Materiality and Faithful representation
Comparability, verifiability, timeliness and understandability
The IFRS defines Management Commentary according to 5 reporting elements: -
Correct Answers -Historical financials, other subject matter disclosures (including
climate disclosure), business description, management information and market data,
and management information and market data, and management perspectives
The US SEC emphasizes 4 parts regarding the focus and content of Mangement's
Discussion and Analysis: - Correct Answers -1. Focus on material information
2. Include key performance indicators
(Discuss indicators that management uses to manage the business that would be
material to investors such as non-financial metrics)
3. Disclose known trends and uncertainties that are reasonably likely
4. Analyze the information that is disclosed
Examples of measurement and management of environmental factors - Correct
Answers -product life cycle analysis (LCA), greenhouse gas accounting
What is the goal of Environmental cost accounting (ECA) and Environmental profit and
loss statements (EP&L) - Correct Answers -ECA: aims to analyze cause and effect
relationships to identify the source of and measure environmental impacts
EP&L: seeks to assign a monetary value to environmental costs associated with certain
business activities.
What is negative screening? What is it's relation to investor use of sustainability
information? - Correct Answers -Negative screening is the avoidance of investments
found to be objectionable by members of society (ex 1960s students protested and
called for divestment from companies profiting from the Vietnam War)
