CFA Financial Reporting
Past Questions

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## The reasoning Think of **Assets** as everything valuable your business owns (cash, equipment, land). Now ask: *where did the money come from to buy all that?* Two sources only: 1. **Liabilities** — money you borrowed (loans, debts you owe suppliers) 2. **Equity** — money the owners put in, plus profits you've kept This is the **Accounting Equation**: **Assets = Liabilities + Equity** It's perfectly balanced because every naira in assets came from either borrowing or ownership. If you have ₦500,000 in assets, and you owe ₦200,000, then owners' equity must be ₦300,000. Always. ## Why the wrong options tempt you **B (Assets = Liabilities − Equity)** — You might subtract thinking "net worth," but that's just rearranging wrongly. Liabilities don't reduce by equity; they *add together* to form assets. **C (Equity = Assets + Liabilities)** — Mixing up the formula. If both assets AND liabilities increased equity, businesses would want more debt! **D (Assets = Revenue)** — Revenue is income over time; assets are what you *own*. Totally different concepts. ## Quick takeaway **Assets show *what you have*; Liabilities + Equity show *where it came from*** — always equal, always balanced.

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**The reasoning** The P/E ratio stands for **Price-to-Earnings ratio**. It's a fundamental metric in financial analysis that tells investors how much they're paying for each naira (or dollar) of a company's profit. **Formula**: P/E ratio = Market Price per Share ÷ Earnings per Share (EPS) For example, if a company's shares cost ₦100 and it earns ₦10 per share, the P/E ratio = 100 ÷ 10 = 10. This means investors are willing to pay ₦10 for every ₦1 of earnings. It helps compare whether stocks are overvalued or undervalued. **Why the wrong options tempt you** - **B) Profit/Equity** sounds business-y, but that's actually ROE (Return on Equity) — a different ratio entirely - **C) Price/Equity** mixes the formula — equity relates to book value, not this ratio - **D) Profit/Expense** would measure efficiency, not valuation The trap is that all options contain legitimate financial terms, but only **Price** and **Earnings** combine to form P/E. **Quick takeaway** P/E = **P**rice/**E**arnings — it tells you how expensive a stock is relative to what the company actually earns. Remember: investors pay a **Price** to buy **Earnings**.

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**The reasoning** Inventory represents goods a business owns that it plans to sell. Think of it like a provision store's stock of rice, drinks, and soap. At any point in time, this stock has value and belongs to the business — it's an **asset**. Financial statements serve different purposes: - The **balance sheet** shows what you OWN (assets), what you OWE (liabilities), and what's LEFT (equity) at a specific date - The **income statement** shows profit/loss over a period - The **cash flow** tracks money moving in and out Since inventory is something the company *currently owns*, it appears under **Current Assets** on the balance sheet. Only when you *sell* the inventory does its cost move to the income statement as "Cost of Goods Sold." **Why the wrong options tempt you** **A) Income statement** — You might think inventory goes here because it relates to sales, but only the *cost* of sold inventory appears here, not the inventory itself. **C) Cash flow** — Confuses you because buying inventory affects cash, but the inventory *item* isn't reported here. **D) Notes only** — Too restrictive; major items appear in main statements. **Quick takeaway** Inventory is what you *have*, not what you've *done* — so it lives on the balance sheet as an asset.

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**The reasoning** Think of liabilities as debts your business owes. When you borrow ₦50,000 from a bank or buy goods on credit, you've created a liability — an obligation to pay later. Now, *how* do you settle (pay off) that debt? You give away something valuable: cash, inventory, or services. These valuables are **economic resources** — anything your business controls that has value. So: Liability settled → Cash paid out (or goods given) → Economic resources leaving the business This matches the accounting definition: "Liabilities are present obligations settled by transferring economic resources." **Why the wrong options tempt you** - **Income/Profit (A & C)**: These seem related to money, but they're *results* of operations, not what you *use* to pay debts. You can't hand over "profit" directly. - **Equity (D)**: That's owners' claim on assets. Converting debt to equity (like issuing shares to creditors) is rare and special — not the standard settlement method. **Quick takeaway** Liabilities are settled by giving away *tangible value* (cash, assets, services) — collectively called economic resources — not abstract accounting results like profit.

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Fundamental accounting equation: A = L + E. Every double-entry preserves this balance.

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Plus Statement of Changes in Equity (4 total under IFRS/US GAAP). Notes accompany all.

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Operating activities cover cash flows from the firm's main business operations (sales, expenses).

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Financing activities include share issuance, debt issuance/repayment, dividends paid.

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Investing activities cover acquisition/disposal of long-term assets.

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IFRS 3 / US GAAP: goodwill not amortised; tested annually for impairment (or earlier if indicators exist).

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Basic EPS — preferred dividends are subtracted from net income before dividing by weighted-average ordinary shares.

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Diluted EPS assumes potentially dilutive securities are converted/exercised — gives a more conservative EPS.

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LIFO = Last-In First-Out (allowed under US GAAP; PROHIBITED under IFRS).

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Under LIFO in inflation: COGS higher, NI lower, ending inventory lower than FIFO.

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Current ratio = CA/CL. Liquidity check; > 1 generally healthy.

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Quick ratio = (CA − Inventory) / CL — more conservative liquidity measure than current ratio.

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ROE measures profitability relative to equity — key DuPont component (margin × turnover × leverage).

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ROE = Net Margin × Asset Turnover × Equity Multiplier. Reveals drivers of profitability.