Preparing for the CFA Level I exam requires mastering Financial Reporting & Analysis (FRA), one of the most heavily weighted topics. This section is crucial, as it tests your ability to interpret financial statements, apply accounting standards, and analyze reporting implications.
In this resource, we present 50 carefully designed FRA practice questions (151–200), complete with answers and detailed explanations. These questions replicate the style, structure, and difficulty of the real CFA exam to help you boost accuracy and confidence.
📘 CFA Level I FRA Practice Questions (151–200)
Q151. Under IFRS, what is the maximum useful life assigned to goodwill?
- A) 10 years
- B) 20 years
- C) Indefinite
- D) 40 years
Answer: C) Indefinite
Explanation: Goodwill under IFRS is considered to have an indefinite useful life. Instead of amortization, it is tested annually for impairment.
Q152. Which of the following is an example of an off-balance-sheet financing activity?
- A) Capital lease
- B) Operating lease (pre-IFRS 16)
- C) Issuing common shares
- D) Purchasing treasury stock
Answer: B) Operating lease (pre-IFRS 16)
Explanation: Before IFRS 16, operating leases were not recorded on the balance sheet, allowing companies to keep liabilities off the balance sheet.
Q153. Which accounting treatment is correct under U.S. GAAP for internally generated research costs?
- A) Expensed as incurred
- B) Capitalized as intangible assets
- C) Deferred until commercial viability
- D) Recorded as goodwill
Answer: A) Expensed as incurred
Explanation: Under U.S. GAAP, all research costs must be expensed. IFRS, however, allows capitalization of development costs under certain conditions.
Q154. An increase in accounts receivable turnover generally indicates:
- A) Improved credit policies
- B) Slower collections
- C) Deterioration in receivables quality
- D) Higher doubtful accounts
Answer: A) Improved credit policies
Explanation: A higher turnover ratio means the firm collects receivables more quickly, showing better liquidity and credit management.
Q155. Under IFRS, which cost is not included in inventory valuation?
- A) Purchase price
- B) Import duties
- C) Selling expenses
- D) Conversion costs
Answer: C) Selling expenses
Explanation: Inventories are valued at cost, which includes purchase price, transport, and conversion costs. Selling costs are excluded.
Q156. Which method is prohibited under IFRS but allowed under U.S. GAAP for inventory?
- A) FIFO
- B) Weighted average
- C) LIFO
- D) Specific identification
Answer: C) LIFO
Explanation: IFRS does not allow LIFO, while U.S. GAAP permits it.
Q157. A company records a revaluation surplus on land under IFRS. This will appear in:
- A) Income statement
- B) Retained earnings
- C) Other comprehensive income (OCI)
- D) Cash flow statement
Answer: C) Other comprehensive income (OCI)
Explanation: Upward revaluation of land is recognized in OCI and accumulated in equity under “Revaluation surplus.”
Q158. Which statement best describes the effect of impairment losses?
- A) Reduce income and assets
- B) Increase income and liabilities
- C) Reduce equity only
- D) Increase assets and equity
Answer: A) Reduce income and assets
Explanation: Impairment is recognized as a loss on the income statement and reduces the carrying value of the asset.
Q159. Under the equity method, when an investee pays dividends, the investor should:
- A) Record dividend income
- B) Reduce the carrying value of the investment
- C) Increase retained earnings
- D) Record a liability
Answer: B) Reduce the carrying value of the investment
Explanation: Dividends received are considered a return of investment and reduce the investment account under the equity method.
Q160. A company with an interest coverage ratio of 2.5x is most likely:
- A) At low risk of default
- B) At moderate credit risk
- C) At high risk of default
- D) Unable to determine
Answer: B) At moderate credit risk
Explanation: An interest coverage ratio above 2 is acceptable but not strong. Below 1.5 indicates high risk, while above 5 is strong.
Q161. Which of the following increases debt-to-equity ratio?
- A) Issue common shares
- B) Issue new bonds
- C) Repurchase bonds
- D) Repurchase shares
Answer: B) Issue new bonds
Explanation: Debt issuance increases total debt relative to equity, raising the debt-to-equity ratio.
Q162. Under IFRS, borrowing costs directly attributable to a construction project:
- A) Expensed immediately
- B) Capitalized as part of the asset
- C) Reported under OCI
- D) Recorded as deferred revenue
Answer: B) Capitalized as part of the asset
Explanation: Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset must be capitalized.
Q163. Which adjustment is required to move from LIFO to FIFO inventory valuation?
- A) Subtract LIFO reserve
- B) Add LIFO reserve
- C) Multiply by inflation index
- D) Revalue all items
Answer: B) Add LIFO reserve
Explanation: To convert LIFO inventory to FIFO, add the LIFO reserve to inventory.
Q164. Which of the following is most likely an aggressive accounting practice?
- A) Shortening useful life of equipment
- B) Recognizing revenue early
- C) Creating excessive provisions
- D) Recording impairment promptly
Answer: B) Recognizing revenue early
Explanation: Early revenue recognition inflates income and is considered an aggressive accounting practice.
Q165. Which ratio best measures a company’s efficiency in using assets to generate sales?
- A) Current ratio
- B) Asset turnover ratio
- C) Quick ratio
- D) Interest coverage
Answer: B) Asset turnover ratio
Explanation: Asset turnover measures sales relative to assets, showing efficiency in asset utilization.
Q166. Which of the following is an example of a deferred tax liability?
- A) Accelerated depreciation for tax purposes
- B) Prepaid expenses deductible for tax purposes
- C) Loss carryforward
- D) Tax credit receivable
Answer: A) Accelerated depreciation for tax purposes
Explanation: Using accelerated depreciation for tax but straight-line for accounting creates a temporary difference, leading to deferred tax liability.
Q167. Under IFRS, when is a company required to consolidate another entity?
- A) Ownership exceeds 50%
- B) Control is established
- C) Significant influence is established
- D) Joint control is agreed
Answer: B) Control is established
Explanation: IFRS requires consolidation when an investor has control, which may occur with <50% ownership if decision-making power exists.
Q168. Which ratio best indicates liquidity position?
- A) Gross margin
- B) Debt ratio
- C) Current ratio
- D) Net profit margin
Answer: C) Current ratio
Explanation: The current ratio compares current assets to current liabilities, assessing liquidity.
Q169. Under IFRS, goodwill impairment is:
- A) Reversible
- B) Irreversible
- C) Amortized over 20 years
- D) Treated as deferred revenue
Answer: B) Irreversible
Explanation: Once goodwill is impaired, it cannot be reversed under both IFRS and U.S. GAAP.
Q170. Which component is excluded from comprehensive income?
- A) Net income
- B) Foreign currency translation adjustments
- C) Pension remeasurements
- D) Treasury stock transactions
Answer: D) Treasury stock transactions
Explanation: Comprehensive income includes net income + OCI. Treasury stock is an equity transaction and not part of income.
Q171. A company’s DuPont ROE is driven primarily by high financial leverage. This indicates:
- A) Strong profitability
- B) High efficiency
- C) Higher financial risk
- D) Stable liquidity
Answer: C) Higher financial risk
Explanation: Leverage can boost ROE, but it also increases financial risk.
Q172. Which is true about IFRS vs U.S. GAAP inventory write-downs?
- A) Both allow reversals
- B) IFRS allows reversals, GAAP does not
- C) GAAP allows reversals, IFRS does not
- D) Neither allows reversals
Answer: B) IFRS allows reversals, GAAP does not
Explanation: IFRS permits reversal of inventory write-downs if value recovers; U.S. GAAP does not.
Q173. Which financial statement is most useful in assessing solvency?
- A) Balance sheet
- B) Income statement
- C) Cash flow statement
- D) Statement of changes in equity
Answer: A) Balance sheet
Explanation: Solvency refers to long-term obligations, best assessed via the balance sheet (assets vs. liabilities).
Q174. Which IFRS standard governs revenue recognition?
- A) IAS 2
- B) IAS 16
- C) IFRS 15
- D) IFRS 9
Answer: C) IFRS 15
Explanation: IFRS 15 (Revenue from Contracts with Customers) provides guidance on revenue recognition.
Q175. Which is an example of a contra-asset account?
- A) Accounts receivable
- B) Allowance for doubtful accounts
- C) Retained earnings
- D) Accrued liabilities
Answer: B) Allowance for doubtful accounts
Explanation: Contra-assets reduce asset balances. Allowance for doubtful accounts reduces A/R to reflect expected uncollectibles.
Q176. Which of the following accounting principles is most closely related to timing of revenue recognition?
- A) Prudence
- B) Matching principle
- C) Conservatism
- D) Substance over form
Answer: B) Matching principle
Explanation: The matching principle ensures expenses are recognized in the same period as the revenues they help generate, impacting timing.
Q177. Which adjustment is needed when moving from indirect to direct method of cash flows?
- A) Add depreciation
- B) Deduct accounts payable decrease
- C) Show actual cash received from customers
- D) Adjust for impairment loss
Answer: C) Show actual cash received from customers
Explanation: The direct method reports actual cash flows, while the indirect adjusts net income for non-cash items.
Q178. If a company changes depreciation method from straight-line to accelerated, it is treated as:
- A) Change in estimate
- B) Change in principle (retrospective)
- C) Error correction
- D) Restatement of prior periods
Answer: A) Change in estimate
Explanation: A change in depreciation method is considered a change in estimate applied prospectively.
Q179. Under IFRS, which statement about revaluation model is correct?
- A) Applied to all assets
- B) Can be selectively applied to individual assets
- C) Must be applied consistently within an asset class
- D) Only allowed for intangible assets
Answer: C) Must be applied consistently within an asset class
Explanation: Once chosen, the revaluation model must apply consistently to all assets in that class.
Q180. Which ratio indicates the firm’s ability to cover short-term obligations without inventory?
- A) Current ratio
- B) Quick ratio
- C) Cash ratio
- D) Debt ratio
Answer: B) Quick ratio
Explanation: The quick ratio excludes inventory and measures immediate liquidity.
Q181. Which is an example of a temporary difference creating deferred tax?
- A) Interest income from municipal bonds
- B) Depreciation differences
- C) Goodwill impairment
- D) Stock repurchases
Answer: B) Depreciation differences
Explanation: Using different depreciation methods for tax vs. financial reporting creates temporary differences.
Q182. If inventory prices are rising, which method yields the highest COGS?
- A) FIFO
- B) Weighted average
- C) LIFO
- D) Specific identification
Answer: C) LIFO
Explanation: LIFO assigns most recent (higher) costs to COGS, lowering net income.
Q183. Which financial statement provides the best insight into operating performance?
- A) Balance sheet
- B) Cash flow statement
- C) Income statement
- D) Statement of equity
Answer: C) Income statement
Explanation: The income statement reflects revenues and expenses, showing profitability.
Q184. Which of the following is NOT included in cash equivalents?
- A) Treasury bills
- B) Commercial paper
- C) Marketable securities (3-month maturity)
- D) Long-term bonds
Answer: D) Long-term bonds
Explanation: Cash equivalents are highly liquid and short-term (≤3 months). Long-term bonds do not qualify.
Q185. A company’s P/E ratio is very high compared to peers. This may indicate:
- A) Undervalued stock
- B) Overvalued stock
- C) Higher expected growth
- D) Both B and C
Answer: D) Both B and C
Explanation: A high P/E can mean overvaluation or strong growth expectations. Context matters.
Q186. Which of the following would increase ROA?
- A) Higher debt ratio
- B) Lower expenses
- C) Higher tax burden
- D) Declining revenue
Answer: B) Lower expenses
Explanation: Lower expenses increase net income, improving Return on Assets (ROA).
Q187. Which best describes horizontal analysis?
- A) Comparing across industries
- B) Comparing line items over multiple periods
- C) Comparing ratios within one company
- D) Benchmarking against competitors
Answer: B) Comparing line items over multiple periods
Explanation: Horizontal analysis studies trends over time.
Q188. Which is true about held-to-maturity securities under IFRS?
- A) Measured at fair value
- B) Measured at amortized cost
- C) Recorded in OCI
- D) Reported as equity
Answer: B) Measured at amortized cost
Explanation: HTM securities are carried at amortized cost with interest income recognized.
Q189. Which of the following is a profitability ratio?
- A) Debt ratio
- B) Current ratio
- C) Gross margin
- D) Quick ratio
Answer: C) Gross margin
Explanation: Gross margin measures profitability from sales after deducting COGS.
Q190. Under IFRS, investment property can be measured using:
- A) Cost model only
- B) Fair value model only
- C) Either cost or fair value model
- D) Must follow GAAP treatment
Answer: C) Either cost or fair value model
Explanation: IFRS allows a choice of cost or fair value for investment property.
Q191. Which is a limitation of ratio analysis?
- A) Helps compare across companies
- B) Ignores qualitative factors
- C) Provides trend analysis
- D) Identifies weaknesses
Answer: B) Ignores qualitative factors
Explanation: Ratios cannot capture non-financial elements such as brand value or management quality.
Q192. Which cash flow is classified differently under IFRS and GAAP?
- A) Interest paid
- B) Dividends received
- C) Dividends paid
- D) All of the above
Answer: D) All of the above
Explanation: Under IFRS, these items can appear under operating, investing, or financing, but GAAP restricts classification.
Q193. Which is an example of an extraordinary item under GAAP?
- A) Natural disaster loss
- B) Restructuring costs
- C) Currency fluctuations
- D) None (extraordinary items eliminated)
Answer: D) None (extraordinary items eliminated)
Explanation: Both IFRS and GAAP no longer allow extraordinary item classification.
Q194. Which ratio best indicates a firm’s ability to pay dividends?
- A) Dividend payout ratio
- B) Quick ratio
- C) Current ratio
- D) P/E ratio
Answer: A) Dividend payout ratio
Explanation: It measures proportion of earnings distributed as dividends.
Q195. If a company uses defined benefit pension plans, the obligation is recorded as:
- A) Asset
- B) Liability
- C) Equity
- D) OCI item only
Answer: B) Liability
Explanation: Defined benefit obligations are long-term liabilities.
Q196. Which describes vertical analysis?
- A) Comparing across firms
- B) Expressing items as % of a base
- C) Time-series comparison
- D) Cash vs accrual analysis
Answer: B) Expressing items as % of a base
Explanation: Vertical analysis expresses line items (e.g., sales, expenses) as a percentage of a base like total sales.
Q197. Which is most useful for credit analysis?
- A) Liquidity and solvency ratios
- B) Profitability ratios
- C) Market multiples
- D) Trend analysis
Answer: A) Liquidity and solvency ratios
Explanation: Creditors focus on ability to meet obligations, best measured by liquidity and solvency.
Q198. Under GAAP, when an asset is impaired, the loss is measured as:
- A) Carrying value – discounted cash flows
- B) Carrying value – recoverable amount
- C) Carrying value – fair value
- D) Purchase price – salvage value
Answer: C) Carrying value – fair value
Explanation: GAAP uses the fair value test for impairment. IFRS uses recoverable amount (higher of fair value less costs to sell or value in use).
Q199. Which is most likely a red flag for earnings manipulation?
- A) Rising inventory with flat sales
- B) Declining receivables turnover
- C) Frequent changes in accounting estimates
- D) All of the above
Answer: D) All of the above
Explanation: These indicators suggest possible manipulation or earnings management.
Q200. Which of the following most likely improves cash conversion cycle (CCC)?
- A) Increase receivables days
- B) Reduce inventory days
- C) Increase payable days
- D) Both B and C
Answer: D) Both B and C
Explanation: A shorter CCC improves liquidity by reducing inventory holding and extending payables.
You’ve now completed CFA FRA Questions 151–200. Practicing consistently is the key to building confidence for exam day. For a full coverage of FRA, don’t miss:
👉 CFA Level I FRA Questions (1–50)
👉 CFA Level I FRA Questions (51–100)
👉 CFA Level I FRA Questions (101–150)
Also, explore other CFA Level I topics:
📊 CFA Level I Ethics Practice Questions
📈 CFA Level I Quantitative Methods Practice Questions
Keep practicing, and you’ll be well on your way to success in the CFA exam. 🚀