Financial Reporting & Analysis (FRA) is one of the most important sections of the CFA Level I exam, carrying significant weight. Mastering FRA requires strong conceptual clarity and practice with exam-style questions. Below are 50 carefully designed CFA FRA MCQs with answers and explanations to strengthen your preparation.
CFA FRA MCQs (Part 1: Q1–50)
Q1. Which of the following statements is correct regarding the role of financial reporting?
A) It eliminates the need for auditing.
B) It provides information useful for decision-making.
C) It guarantees future profitability of a company.
D) It ensures compliance with tax laws only.
✅ Answer: B
Explanation: The primary role of financial reporting is to provide relevant and reliable information to investors, creditors, and stakeholders for decision-making. It does not guarantee profitability nor replace auditing.
Q2. Under IFRS, which qualitative characteristic enhances the usefulness of financial information?
A) Timeliness
B) Reliability only
C) Comparability only
D) None of the above
✅ Answer: A
Explanation: IFRS identifies fundamental characteristics (relevance, faithful representation) and enhancing characteristics (comparability, verifiability, timeliness, understandability).
Q3. Which accounting standard allows LIFO (Last In, First Out) inventory method?
A) IFRS only
B) GAAP only
C) Both IFRS and GAAP
D) Neither
✅ Answer: B
Explanation: U.S. GAAP allows LIFO, but IFRS prohibits it.
Q4. Which financial statement best reflects a company’s profitability over time?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Notes to Accounts
✅ Answer: B
Explanation: The income statement reports revenues, expenses, and net profit over a specific period, showing profitability.
Q5. Which of the following is classified as a financing activity in the cash flow statement?
A) Purchase of inventory
B) Dividend payment
C) Sale of fixed assets
D) Interest received
✅ Answer: B
Explanation: Dividend payments and debt repayments are financing activities. Purchase of inventory is operating, sale of assets is investing, and interest received is operating under IFRS (financing under GAAP optional).
Q6. Which ratio is used to measure a company’s solvency?
A) Gross Profit Margin
B) Current Ratio
C) Debt-to-Equity Ratio
D) Quick Ratio
✅ Answer: C
Explanation: Solvency refers to long-term financial stability, measured by leverage ratios like Debt-to-Equity.
Q7. Which IFRS standard governs the presentation of financial statements?
A) IAS 1
B) IAS 2
C) IAS 7
D) IAS 8
✅ Answer: A
Explanation: IAS 1 defines overall requirements for financial statement presentation. IAS 2 deals with inventories, IAS 7 with cash flow statements, and IAS 8 with accounting policies and errors.
Q8. Which component is not part of Other Comprehensive Income (OCI)?
A) Foreign currency translation adjustments
B) Unrealized gains on available-for-sale securities
C) Pension remeasurements
D) Revenue from product sales
✅ Answer: D
Explanation: OCI includes unrealized gains/losses and adjustments, but not regular revenue, which is part of the income statement.
Q9. Under IFRS, which model can be used for subsequent measurement of Property, Plant & Equipment (PPE)?
A) Cost Model only
B) Revaluation Model only
C) Both Cost and Revaluation
D) Fair Value Model only
✅ Answer: C
Explanation: IFRS allows both cost and revaluation models, while GAAP permits only the cost model.
Q10. Which of the following best describes accrual accounting?
A) Recognizing revenue when cash is received.
B) Recording expenses only when cash is paid.
C) Recognizing revenues and expenses when earned/incurred.
D) Recognizing only non-cash items.
✅ Answer: C
Explanation: Accrual accounting records revenues when earned and expenses when incurred, not when cash is exchanged.
Q11. Which section of the cash flow statement shows purchase of new machinery?
A) Operating Activities
B) Financing Activities
C) Investing Activities
D) None
✅ Answer: C
Explanation: Purchase and sale of long-term assets fall under investing activities.
Q12. Deferred tax liabilities usually arise when:
A) Taxable income is higher than accounting income.
B) Accounting income is higher than taxable income.
C) Cash flows are delayed.
D) Companies change auditors.
✅ Answer: B
Explanation: When accounting income > taxable income (due to temporary differences), companies recognize deferred tax liabilities.
Q13. Under IFRS, development costs can be capitalized if:
A) They are incurred after feasibility is demonstrated.
B) They occur in the research phase.
C) They are advertising expenses.
D) They are incurred before technical feasibility.
✅ Answer: A
Explanation: Research costs must be expensed, but development costs after feasibility can be capitalized.
Q14. Which measure indicates profitability from core operations, excluding financing and tax effects?
A) Net Income
B) Operating Income (EBIT)
C) EBITDA
D) Gross Profit
✅ Answer: B
Explanation: EBIT (Earnings Before Interest and Taxes) isolates operating performance, excluding financing and tax effects.
Q15. Which is a limitation of the balance sheet?
A) It reflects assets at current fair value.
B) It includes all intangible assets.
C) It may not reflect true market value of assets.
D) It shows profitability directly.
✅ Answer: C
Explanation: Balance sheets often use historical cost, not current market values, which can limit accuracy.
Q16. Which accounting assumption requires businesses to continue operations indefinitely?
A) Periodicity
B) Going Concern
C) Monetary Unit
D) Full Disclosure
✅ Answer: B
Explanation: The going concern assumption presumes that a business will operate in the foreseeable future.
Q17. Which financial metric evaluates efficiency in using assets to generate sales?
A) Gross Margin
B) Asset Turnover
C) Debt Ratio
D) P/E Ratio
✅ Answer: B
Explanation: Asset Turnover = Sales ÷ Average Total Assets, measuring efficiency in using assets.
Q18. Which is an example of a contingent liability?
A) Accounts payable
B) Lease liability
C) Lawsuit settlement (pending)
D) Bonds payable
✅ Answer: C
Explanation: A lawsuit with uncertain outcome is a contingent liability, disclosed or recognized depending on probability.
Q19. Which standard deals with cash flow statements under IFRS?
A) IAS 2
B) IAS 7
C) IAS 16
D) IAS 37
✅ Answer: B
Explanation: IAS 7 governs the presentation of cash flow statements.
Q20. Which inventory method results in higher COGS during inflation under GAAP?
A) FIFO
B) LIFO
C) Weighted Average
D) Specific Identification
✅ Answer: B
Explanation: Under inflation, LIFO assigns latest higher costs to COGS, lowering net income.
Q21. Which ratio indicates liquidity?
A) Debt-to-Equity
B) Current Ratio
C) Return on Assets
D) Payout Ratio
✅ Answer: B
Explanation: The current ratio = Current Assets ÷ Current Liabilities, measuring short-term liquidity.
Q22. Which of the following is a limitation of ratio analysis?
A) Allows comparisons across firms
B) Ignores qualitative factors
C) Helps identify strengths and weaknesses
D) Highlights trends over time
✅ Answer: B
Explanation: Ratios are useful but ignore qualitative factors like management quality or brand strength.
Q23. Under GAAP, how are R&D costs treated?
A) All capitalized
B) All expensed
C) Research expensed, development capitalized
D) Amortized only when generating income
✅ Answer: B
Explanation: GAAP requires expensing all R&D costs, unlike IFRS which allows capitalization of development costs under conditions.
Q24. Which of the following would increase return on equity (ROE)?
A) Increase in equity base
B) Higher leverage
C) Decline in net income
D) Increase in expenses
✅ Answer: B
Explanation: Higher leverage (using debt financing) can boost ROE if returns exceed the cost of debt.
Q25. Which item is considered a non-current liability?
A) Accounts payable
B) Salaries payable
C) Bonds payable (10-year maturity)
D) Unearned revenue
✅ Answer: C
Explanation: Bonds payable with long-term maturity are classified as non-current liabilities.
Q26. Which of the following is an example of an intangible asset with an indefinite life?
A) Patent
B) Copyright
C) Trademark
D) Software
✅ Answer: C
Explanation: Trademarks often have indefinite lives, while patents and copyrights have finite legal lives. Software is finite and amortized.
Q27. Which of the following is classified as a current liability?
A) Lease liability (10 years)
B) Unearned revenue (12 months)
C) Bonds payable (20 years)
D) Pension obligation
✅ Answer: B
Explanation: Unearned revenue within one year is current liability. Long-term leases, bonds, and pensions are non-current.
Q28. Under IFRS, impairment loss is recognized when:
A) Carrying amount > Recoverable amount
B) Market value > Carrying amount
C) Historical cost > Carrying amount
D) Assets are revalued upward
✅ Answer: A
Explanation: Impairment occurs when carrying amount exceeds recoverable amount (higher of fair value less costs to sell, or value in use).
Q29. Which ratio reflects profitability relative to shareholders’ equity?
A) Return on Assets (ROA)
B) Return on Equity (ROE)
C) Gross Profit Margin
D) Quick Ratio
✅ Answer: B
Explanation: ROE = Net Income ÷ Average Shareholders’ Equity.
Q30. Which of the following is not a cash equivalent?
A) Treasury bills
B) Commercial paper
C) Long-term bonds
D) Money market funds
✅ Answer: C
Explanation: Long-term bonds are not cash equivalents since they are not highly liquid or short-term.
Q31. Which concept explains why financial statements should disclose all relevant information?
A) Prudence
B) Full Disclosure Principle
C) Matching Principle
D) Conservatism
✅ Answer: B
Explanation: Full disclosure ensures all relevant information is provided to users of financial statements.
Q32. Which of the following is an investing activity?
A) Paying interest
B) Issuing bonds
C) Selling a building
D) Paying dividends
✅ Answer: C
Explanation: Selling fixed assets = investing activity. Issuing bonds and paying dividends = financing. Interest = operating.
Q33. Which standard deals with revenue recognition under IFRS?
A) IFRS 7
B) IFRS 9
C) IFRS 15
D) IAS 16
✅ Answer: C
Explanation: IFRS 15 governs revenue recognition (5-step model).
Q34. Which is an example of aggressive accounting practice?
A) Immediate expensing of R&D
B) Overstating revenue early
C) Conservatively writing down assets
D) Recognizing losses earlier
✅ Answer: B
Explanation: Aggressive accounting inflates earnings, e.g., overstating revenues.
Q35. The DuPont Analysis breaks ROE into:
A) Profitability, leverage, liquidity
B) Profitability, efficiency, leverage
C) Efficiency, solvency, liquidity
D) Solvency, profitability, valuation
✅ Answer: B
Explanation: ROE = Net Profit Margin × Asset Turnover × Equity Multiplier (profitability, efficiency, leverage).
Q36. Which of the following is part of comprehensive income?
A) Net income only
B) Dividends paid
C) OCI items + Net income
D) Retained earnings
✅ Answer: C
Explanation: Comprehensive income = Net Income + Other Comprehensive Income.
Q37. Which accounting policy choice impacts depreciation expense?
A) LIFO vs FIFO
B) Straight-line vs Declining Balance
C) Cash vs Accrual
D) Capital vs Revenue Expenditure
✅ Answer: B
Explanation: Different depreciation methods alter reported expense and net income.
Q38. Which statement is correct about common-size income statements?
A) They express items as % of total assets.
B) They express items as % of sales.
C) They are only prepared under IFRS.
D) They eliminate ratio analysis.
✅ Answer: B
Explanation: Common-size income statements show each item as a percentage of sales, useful for comparability.
Q39. What is the primary purpose of the audit opinion?
A) Guarantee future earnings
B) Ensure compliance with tax law
C) Provide assurance on fairness of financial statements
D) Detect all fraud
✅ Answer: C
Explanation: Auditors provide reasonable assurance that financial statements are free from material misstatements.
Q40. Which metric is most useful in assessing liquidity?
A) Current ratio
B) Net profit margin
C) Debt-to-equity ratio
D) Asset turnover
✅ Answer: A
Explanation: Current ratio = Current Assets ÷ Current Liabilities.
Q41. Which of the following affects both income statement and balance sheet?
A) Depreciation expense
B) Dividends declared
C) Cash inflows from financing
D) Unrealized gains (OCI)
✅ Answer: A
Explanation: Depreciation reduces income (income statement) and asset book value (balance sheet).
Q42. Which measure excludes interest and tax to analyze operating profitability?
A) Net income
B) EBIT
C) EBITDA
D) Gross profit
✅ Answer: B
Explanation: EBIT focuses purely on operating profitability.
Q43. Which accounting principle matches revenues with related expenses?
A) Matching principle
B) Going concern
C) Full disclosure
D) Prudence
✅ Answer: A
Explanation: The matching principle aligns expenses with associated revenues.
Q44. Which of the following items is amortized?
A) Land
B) Goodwill
C) Building
D) Patent
✅ Answer: D
Explanation: Patents and finite-life intangibles are amortized; land is not depreciated. Goodwill is not amortized but tested for impairment.
Q45. Which statement is true about accounting policies under IAS 8?
A) Changes are not allowed
B) Voluntary changes must improve relevance/reliability
C) Prior periods are never restated
D) Errors are ignored
✅ Answer: B
Explanation: Voluntary changes are allowed if they improve relevance and reliability, and retrospective restatement is usually required.
Q46. Which item is considered a financing activity under cash flows?
A) Interest paid
B) Issuing shares
C) Purchase of PPE
D) Dividends received
✅ Answer: B
Explanation: Issuing shares = financing. PPE = investing. Dividends received = operating. Interest paid = operating under IFRS.
Q47. Which accounting treatment applies to goodwill under IFRS?
A) Amortized
B) Expensed immediately
C) Tested annually for impairment
D) Depreciated over 10 years
✅ Answer: C
Explanation: Goodwill is not amortized; it must be tested for impairment annually.
Q48. Which ratio indicates how efficiently a firm manages receivables?
A) Current ratio
B) Quick ratio
C) Accounts receivable turnover
D) Asset turnover
✅ Answer: C
Explanation: Receivable turnover = Sales ÷ Average Receivables.
Q49. Which is an example of a conservative accounting practice?
A) Early revenue recognition
B) Immediate expensing of doubtful costs
C) Inflating assets
D) Delaying loss recognition
✅ Answer: B
Explanation: Conservatism requires recognizing expenses/losses sooner and delaying revenue recognition until certain.
Q50. Which measure shows the percentage of earnings distributed to shareholders?
A) Dividend payout ratio
B) Retention ratio
C) ROE
D) EPS
✅ Answer: A
Explanation: Dividend payout ratio = Dividends ÷ Net Income.
You’ve now completed CFA FRA MCQs Part 1 (Q1–50). Continue your practice with the next batch:
👉 CFA FRA Part 2 (MCQs 51–100)
For full CFA Level I prep, don’t miss:
Consistent practice across all topics (Ethics, Quant, FRA, Corporate Finance, Economics, and more) will maximize your chances of passing the CFA exam on your first attempt.