Level I FSA practice questions

Deferred revenue for services to be delivered within the next 12 months is a current liability because it will be settled by providing services within one operating cycle.

• Option B is non-current because the refundable deposit is not due within 12 months (it is due at the end of a 3-year lease).
• Option C is non-current because deferred tax liabilities are presented as non-current under both IFRS and US GAAP and are not expected to reverse within a year.

Under IFRS, interest paid may be classified as operating or financing, and dividends received may be classified as operating or investing (policy choice applied consistently). Dividends paid may be operating or financing; interest received may be operating or investing.

• Option A: Incorrect, IFRS does not require both to be operating; interest paid can be financing, and dividends paid can be financing.
• Option C: Incorrect, IFRS does not allow interest received to be classified as financing; it can be operating or investing.

The IASB states that the objective of general purpose financial reporting is to provide useful information to existing and potential investors, lenders, and other creditors to help them make decisions about providing resources to the entity.

• Option B: Tax compliance is not the primary objective of general purpose financial reporting; it is a separate, jurisdiction-specific purpose.
• Option C: Maximizing net income/shareholder wealth is a managerial goal, not the stated objective of financial reporting.

Receivables outpacing sales alongside rising DSO and CFO lagging net income are classic red flags for premature or aggressive revenue recognition.

• Option A is wrong because stable DSO and CFO tracking revenue signal good cash realization of sales, not manipulation.
• Option C is wrong because a product mix shift can legitimately raise margins and reduce inventories without implying revenue overstatement.

Discontinued operations are reported net of tax, below income from continuing operations, under both IFRS and U.S. GAAP.

• Option A: Unusual or infrequent items are included in income from continuing operations (typically pre-tax in operating or other income), not net of tax below the line.
• Option C: A change in estimate is treated prospectively in continuing operations; it is not presented net of tax below income from continuing operations.

A deductible temporary difference (expense recognized now, deduction later) creates a deferred tax asset (DTA):

• Option B assumes future deductible amounts are not recognized as deferred taxes and records no asset, $0 (incorrect under both IFRS and US GAAP when realization is expected).
• Option C uses the gross temporary difference and forgets to apply the tax rate, yielding 60,000 instead of 18,000.

With rising prices and no significant LIFO liquidation, LIFO assigns the most recent (higher) costs to COGS, yielding the highest COGS, lowest ending inventory, and lowest gross profit.

• Option A (FIFO) is wrong because it assigns older (lower) costs to COGS, producing the lowest COGS, highest ending inventory, and highest gross profit in rising prices.
• Option B (Weighted-average) is wrong because it yields results between FIFO and LIFO, not the extreme (highest COGS/lowest ending inventory) outcome.

Annual depreciation (straight-line):

Accumulated depreciation after 3 years:

Carrying amount at 31 Dec Year 3:

Recoverable amount under IFRS is the higher of fair value less costs of disposal and value in use:

Impairment loss:

• Option A ($25,000) uses fair value less costs of disposal instead of the recoverable amount: $300,000 - 275,000 = 25,000$.
• Option B ($200,000) incorrectly compares historical cost to the recoverable amount, ignoring accumulated depreciation: $480,000 - 280,000 = 200,000$.

Implied yield y satisfies: $800,000 \times (1 + y)^3 = 1,000,000$. Thus $(1 + y)^3 = 1.25$ and $1 + y = \sqrt[3]{1.25} = 1.077217346$.

End of Year 1 carrying amount (accretion):

• Option A ($866,667) uses a naive rate of $\frac{25\%}{3} = 8.333\%$ for one year: $800,000 \times (1 + 0.083333) = 866,666.64 \approx 866,667$.
• Option C ($800,000) assumes no interest accrues because there is no coupon, ignoring accretion of the discount.
• Option B is correct: accretion at the effective rate gives $861,774 (rounded).

Paying accounts payable with cash reduces both current assets and current liabilities by the same amount.

Current balances after payment:

• Option A uses the initial ratio without reflecting the payment:

• Option B subtracts the cash from current assets but forgets to reduce current liabilities: