Preparing for the CFA Level I exam requires deep understanding of Financial Reporting & Analysis (FRA), which is one of the heaviest weighted topics. This section covers MCQs 51–100, focusing on IFRS vs. GAAP, income statements, cash flow statements, inventory valuation, and ratio analysis. Each question includes a clear answer and explanation to strengthen your conceptual clarity.
If you missed earlier sets, check out:
👉 CFA FRA Part 1 (MCQs 1–50)
CFA FRA MCQs (Part 2: Q51–100)
Q51. Which inventory method is permitted under IFRS but not under U.S. GAAP?
A) FIFO
B) Weighted Average
C) LIFO
D) Specific Identification
✅ Answer: C
Explanation: IFRS prohibits LIFO, while U.S. GAAP permits it.
Q52. Which of the following is considered a non-current asset?
A) Prepaid expenses
B) Accounts receivable
C) Machinery
D) Inventory
✅ Answer: C
Explanation: Machinery is long-term. Prepaids, receivables, and inventory are current.
Q53. Which impairment test is required for intangible assets with indefinite life?
A) Annual impairment test
B) Amortization test
C) Useful life review only
D) Depreciation test
✅ Answer: A
Explanation: Indefinite-life intangibles like goodwill require annual impairment testing.
Q54. Which type of lease is capitalized under IFRS?
A) Only finance lease
B) Only operating lease
C) Both operating and finance leases
D) Neither
✅ Answer: C
Explanation: Under IFRS 16, all leases (except short-term/low-value) are capitalized.
Q55. Which ratio indicates solvency?
A) Current ratio
B) Quick ratio
C) Debt-to-equity ratio
D) Inventory turnover
✅ Answer: C
Explanation: Solvency measures long-term financial stability, e.g., debt-to-equity.
Q56. Under U.S. GAAP, research and development costs are:
A) Capitalized fully
B) Expensed as incurred (with limited exceptions)
C) Treated as intangible assets
D) Deferred indefinitely
✅ Answer: B
Explanation: R&D is generally expensed under GAAP, except for certain software development costs.
Q57. Which of the following is an example of a contra-asset account?
A) Accounts payable
B) Retained earnings
C) Accumulated depreciation
D) Cash equivalents
✅ Answer: C
Explanation: Contra-assets reduce asset balances, e.g., accumulated depreciation.
Q58. Which item would be included in other comprehensive income (OCI)?
A) Revenue
B) Foreign currency translation adjustments
C) Interest income
D) Depreciation
✅ Answer: B
Explanation: OCI includes items bypassing net income, like translation adjustments, pensions, unrealized securities gains/losses.
Q59. Which financial statement provides information about cash inflows and outflows?
A) Balance sheet
B) Cash flow statement
C) Income statement
D) Statement of changes in equity
✅ Answer: B
Explanation: The cash flow statement explains liquidity changes.
Q60. Which revenue recognition approach is allowed under IFRS 15?
A) Completed contract method
B) Installment method
C) Percentage of completion method
D) Matching principle
✅ Answer: C
Explanation: IFRS 15 uses a 5-step model; percentage of completion is allowed for contracts with performance obligations.
Q61. Under the revaluation model of IAS 16, increases in asset value are:
A) Expensed
B) Recognized in OCI
C) Added directly to net income
D) Deferred
✅ Answer: B
Explanation: Upward revaluation is recorded in OCI (revaluation surplus).
Q62. Which type of analysis compares a company’s financials to industry peers?
A) Vertical analysis
B) Horizontal analysis
C) Cross-sectional analysis
D) Time series analysis
✅ Answer: C
Explanation: Cross-sectional = peer comparison at a point in time.
Q63. Which of the following is a limitation of ratio analysis?
A) Ratios are easy to compute
B) Ratios are widely comparable
C) Ratios depend on accounting policies
D) Ratios provide insights into liquidity
✅ Answer: C
Explanation: Different accounting policies across firms limit comparability.
Q64. Which cash flow measure includes net income + noncash items + changes in working capital?
A) Free cash flow
B) Operating cash flow (indirect method)
C) Investing cash flow
D) Financing cash flow
✅ Answer: B
Explanation: Indirect OCF = NI + noncash adj. + working capital changes.
Q65. Which is not a qualitative characteristic of financial reporting under IFRS?
A) Relevance
B) Faithful representation
C) Consistency
D) Predictability
✅ Answer: D
Explanation: Relevance and faithful representation are fundamental; comparability, timeliness, understandability are enhancing. Predictability is not.
Q66. Deferred tax assets arise when:
A) Taxable income > accounting income
B) Taxable income < accounting income
C) Income tax payable = income tax expense
D) Carryforward losses do not exist
✅ Answer: B
Explanation: DTA = future tax benefits from deductible temporary differences (taxable < accounting income now).
Q67. Which ratio evaluates efficiency of inventory management?
A) Current ratio
B) Gross margin
C) Inventory turnover
D) ROE
✅ Answer: C
Explanation: Inventory turnover = COGS ÷ Avg Inventory.
Q68. Under IFRS, biological assets are measured at:
A) Historical cost
B) Amortized cost
C) Fair value less selling costs
D) Replacement cost
✅ Answer: C
Explanation: IAS 41 requires fair value less selling costs.
Q69. Which of the following is a red flag for earnings manipulation?
A) High-quality cash flow
B) Rapid revenue growth without matching cash inflow
C) Conservative depreciation policies
D) Consistent dividend payout
✅ Answer: B
Explanation: Large revenue increases without cash flow may signal aggressive recognition.
Q70. Which financial ratio assesses financial leverage?
A) Debt-to-assets ratio
B) Current ratio
C) Gross profit margin
D) Asset turnover
✅ Answer: A
Explanation: Debt-to-assets = total debt ÷ total assets.
Q71. Which is an example of an extraordinary item under IFRS?
A) Flood loss
B) Earthquake damage
C) None (extraordinary items are prohibited)
D) Fire insurance recovery
✅ Answer: C
Explanation: IFRS does not allow extraordinary items to be presented separately.
Q72. Which approach is used for revenue recognition in long-term construction contracts under IFRS?
A) Installment method
B) Percentage of completion
C) Completed contract method
D) Realization principle
✅ Answer: B
Explanation: IFRS requires percentage of completion if outcome can be estimated reliably.
Q73. Which type of analysis eliminates the impact of size differences in financial statements?
A) Ratio analysis
B) Horizontal analysis
C) Vertical/common-size analysis
D) Cross-sectional analysis
✅ Answer: C
Explanation: Common-size expresses items as % of sales or total assets.
Q74. Which inventory system records purchases and sales continuously?
A) Periodic
B) Perpetual
C) Weighted average
D) FIFO
✅ Answer: B
Explanation: Perpetual updates inventory balances continuously.
Q75. Which statement is true about deferred tax liabilities (DTLs)?
A) They represent future tax payments
B) They reduce future tax
C) They always reverse within one year
D) They increase retained earnings
✅ Answer: A
Explanation: DTLs = expected future tax outflows from temporary differences.
Q76. Which ratio assesses profitability independent of financing structure?
A) Net profit margin
B) ROA
C) ROE
D) Current ratio
✅ Answer: B
Explanation: ROA reflects profitability relative to assets regardless of leverage.
Q77. Which financial statement shows retained earnings changes?
A) Balance sheet
B) Cash flow statement
C) Statement of changes in equity
D) Income statement
✅ Answer: C
Explanation: Retained earnings movements are reported in equity statement.
Q78. Which ratio indicates ability to cover interest payments?
A) Debt ratio
B) Times interest earned (TIE)
C) Current ratio
D) Asset turnover
✅ Answer: B
Explanation: TIE = EBIT ÷ Interest expense.
Q79. Which of the following results in deferred tax asset creation?
A) Accelerated depreciation for tax
B) Revenue recognized later for tax purposes
C) Warranty expense deductible later
D) All of the above
✅ Answer: D
Explanation: Temporary timing differences can create DTAs.
Q80. Which financial statement element represents residual interest in assets after liabilities?
A) Equity
B) Revenue
C) Expense
D) Asset
✅ Answer: A
Explanation: Equity = Assets – Liabilities.
Q81. Which inventory valuation method generally results in the lowest ending inventory during periods of rising prices?
A) FIFO
B) LIFO
C) Weighted Average
D) Specific Identification
✅ Answer: B
Explanation: LIFO allocates higher recent costs to COGS, leaving lower historical costs in inventory.
Q82. Which qualitative characteristic ensures that financial statements are useful for decision-making?
A) Comparability
B) Materiality
C) Faithful representation
D) Relevance
✅ Answer: D
Explanation: Relevance means the information influences economic decisions.
Q83. Which impairment loss reversal is permitted under IFRS but not U.S. GAAP?
A) Goodwill
B) Intangibles with indefinite life
C) Property, plant, and equipment (PPE)
D) Investments in associates
✅ Answer: C
Explanation: IFRS allows reversal of PPE impairments; GAAP does not. Goodwill reversals are not allowed under both.
Q84. Which method is used to account for associates (20–50% ownership)?
A) Cost method
B) Equity method
C) Consolidation
D) Fair value method
✅ Answer: B
Explanation: Equity method is used for significant influence (20–50%).
Q85. Which financial statement provides liquidity and solvency insights?
A) Balance sheet
B) Cash flow statement
C) Income statement
D) Notes to accounts
✅ Answer: A
Explanation: Balance sheet shows assets, liabilities, and equity = solvency and liquidity positions.
Q86. Which of the following is a financing cash flow?
A) Dividends paid
B) Purchase of equipment
C) Dividends received (under GAAP)
D) Interest expense
✅ Answer: A
Explanation: Dividends paid are financing CF under both IFRS and GAAP.
Q87. Which inventory cost flow assumption results in the highest net income in inflationary times?
A) FIFO
B) LIFO
C) Weighted Average
D) Specific Identification
✅ Answer: A
Explanation: FIFO matches older, lower costs against revenue, leading to higher income.
Q88. Which accounting concept underlies the assumption that the business will continue operating?
A) Matching
B) Going concern
C) Accrual
D) Conservatism
✅ Answer: B
Explanation: Going concern assumes continuity of operations for the foreseeable future.
Q89. Which analysis examines financial data over multiple years?
A) Horizontal analysis
B) Vertical analysis
C) Cross-sectional analysis
D) Common-size analysis
✅ Answer: A
Explanation: Horizontal analysis = time-series/trend analysis.
Q90. Which ratio evaluates efficiency of credit and collection policies?
A) Inventory turnover
B) Receivables turnover
C) Payables turnover
D) Debt ratio
✅ Answer: B
Explanation: Receivables turnover = Net credit sales ÷ Avg receivables.
Q91. Under IFRS, development costs are:
A) Expensed always
B) Capitalized if criteria are met
C) Recognized as OCI
D) Deferred as goodwill
✅ Answer: B
Explanation: IFRS allows capitalization if feasibility and benefits can be demonstrated.
Q92. Which cash flow classification differs between IFRS and GAAP?
A) Operating
B) Investing
C) Interest and dividends
D) Financing
✅ Answer: C
Explanation: IFRS allows flexibility: interest/dividends received = operating/investing, dividends paid = operating/financing. GAAP fixes them.
Q93. Which is not an enhancing qualitative characteristic of financial reporting?
A) Comparability
B) Timeliness
C) Faithful representation
D) Understandability
✅ Answer: C
Explanation: Faithful representation is a fundamental, not an enhancing, characteristic.
Q94. Which ratio indicates profitability relative to shareholder investment?
A) ROE
B) ROA
C) Gross margin
D) Current ratio
✅ Answer: A
Explanation: Return on equity (ROE) = Net income ÷ Shareholders’ equity.
Q95. Which standard governs leases under IFRS?
A) IAS 36
B) IAS 38
C) IFRS 16
D) IAS 17
✅ Answer: C
Explanation: IFRS 16 governs leases (since 2019).
Q96. Which item would not appear in cash flow from investing activities?
A) Purchase of equipment
B) Sale of securities
C) Dividends received
D) Acquisition of subsidiary
✅ Answer: C
Explanation: Dividends received = operating (GAAP) or operating/investing (IFRS).
Q97. Which ratio evaluates asset efficiency in generating revenue?
A) Asset turnover
B) ROE
C) Gross profit margin
D) Debt ratio
✅ Answer: A
Explanation: Asset turnover = Revenue ÷ Avg total assets.
Q98. Which is a common liquidity ratio?
A) ROA
B) Quick ratio
C) Debt ratio
D) Gross margin
✅ Answer: B
Explanation: Quick ratio (acid-test) = (Cash + Marketable securities + Receivables) ÷ Current liabilities.
Q99. Which measure is least affected by accounting choices?
A) Earnings per share
B) Operating cash flow
C) Net income
D) Gross profit margin
✅ Answer: B
Explanation: OCF reflects actual cash transactions and is less subject to manipulation.
Q100. Which accounting principle requires expenses to be recorded in the same period as related revenues?
A) Matching principle
B) Conservatism
C) Going concern
D) Accrual
✅ Answer: A
Explanation: The matching principle ensures expenses are matched with revenues they generate.
You’ve now completed CFA FRA MCQs Part 2 (Q51–100). Continue your practice with the next batch:
👉 CFA FRA Part 3 (MCQs 101–150)
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.