Practice: Analyzing Balance Sheets

Financial Statement Analysis. 12 question(s) in this unit's pool (0 above the exam). Free up to ten a day; the coach picks which ones based on what you have already answered and when each is next due.

Financial Statement AnalysisAnalyzing Balance Sheets
Your state on this unit Not started

Back to your map

Today's practice

Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own explanation. Questions you have already answered correctly and confidently stay out of the way until they are due for review again.

Question 1Exam level

Under IFRS, which of the following items is most likely reported in other comprehensive income (OCI) rather than the income statement?

How sure are you?

Correct: B. The correct answer is Foreign currency translation adjustments on a foreign subsidiary.
A. You might know unrealized gains are 'not yet realized' and assume that means OCI. Trading securities (FVTPL) are marked to market through the P&L. Unrealized gains ARE in net income under both IFRS and GAAP.
C. Dividends sound like equity-related income that might be in OCI. Dividends received are cash income. They hit net income regardless of how the underlying investment is classified.

Unit: analyzing-balance-sheets

Question 2Exam level

A company's balance sheet shows total assets of $500 million, total liabilities of $320 million, and retained earnings of $80 million. The company paid $15 million in dividends this year. If net income was $30 million, the beginning retained earnings balance was closest to:

How sure are you?

Correct: A. The correct answer is $65 million.
B. You might subtract dividends from net income ($30M - $15M = $15M) then subtract from $80M = $65M... actually this gets B if they do $80M - $30M = $50M, forgetting dividends. Forgetting to add back dividends: $80M - $30M = $50M ignores that dividends reduced retained earnings.
C. Adding net income instead of working backwards: $80M + $15M = $95M. Wrong direction. You might add dividends instead of adding them back when solving for beginning balance.

Unit: analyzing-balance-sheets

Question 3Harder

Under IFRS, a company holds a building that has appreciated in value. If the company uses the revaluation model, the upward revaluation is most likely recognized:

How sure are you?

Correct: B. The correct answer is In other comprehensive income, increasing the revaluation surplus in equity.
A. You might know asset appreciation creates value. They assume it flows to net income like a gain on sale. The asset has NOT been sold. Unrealized revaluation gains on PP&E under IFRS revaluation model go to OCI, not P&L.
C. OCI ultimately affects equity. You might confuse OCI with retained earnings. Retained earnings is net income minus dividends. OCI items go to accumulated OCI, a separate equity component. The revaluation surplus is NOT retained earnings.

Unit: analyzing-balance-sheets

Question 4Exam level

Which of the following best describes the classification of a liability as current under IFRS (IAS 1)?

How sure are you?

Correct: A. The correct answer is The liability is due within 12 months OR the entity does not have an unconditional right to defer settlement for at least 12 months.
B. The operating cycle rule exists, but it's not the ONLY criterion. Candidates who memorized one rule miss the unconditional right test. Incomplete. Ignores the unconditional right to defer test and the 12-month rule.
C. Sounds intuitively logical. If incurred this year, it's a current-year item. Completely wrong. Classification is about settlement timing, not origination year.

Unit: analyzing-balance-sheets

Question 5Exam level

A company reports the following equity section: Common stock $100M, Additional paid-in capital $400M, Retained earnings $200M, Accumulated OCI ($50M), Treasury stock ($30M). Total stockholders' equity is closest to:

How sure are you?

Correct: A. The correct answer is $620 million.
B. You might ignore treasury stock: $100 + $400 + $200 + (-$50) = $650M, then adds treasury stock instead of subtracting: $650 + $30 = $680M... or forgets AOCI: $100+$400+$200+(-$30)=$670M. Treasury stock is a reduction to equity. It must be subtracted, not added.
C. You might ignore the AOCI negative: $100+$400+$200+(-$30) = $670M, or treats AOCI as $0. Accumulated OCI with a negative balance reduces total equity. It cannot be ignored.

Unit: analyzing-balance-sheets

Question 6Exam level

Under US GAAP, available-for-sale (AFS) debt securities are most likely measured at:

How sure are you?

Correct: B. The correct answer is Fair value, with unrealized gains and losses in OCI.
A. Held-to-maturity securities ARE at amortized cost. You might confuse HTM with AFS. HTM rule, not AFS rule. AFS requires fair value measurement on the balance sheet.
C. Trading securities ARE at fair value with unrealized gains in net income. You might confuse trading vs AFS. Trading securities go through net income. AFS unrealized gains go to OCI. This is the single most tested distinction in investment securities.

Unit: analyzing-balance-sheets

Question 7Exam level

IFRS allows companies to present their balance sheet in which order, most likely?

How sure are you?

Correct: B. The correct answer is Non-current assets first, OR current assets first. Either presentation is permitted.
A. Most US-trained candidates learned GAAP format (most liquid first) and assume it's universal. IFRS explicitly permits both orderings. Many IFRS companies (especially European banks) present non-current assets first.
C. A distractor. Sounds absurd but tests whether the candidate actually knows the rule. No standard requires alphabetical ordering.

Unit: analyzing-balance-sheets

Question 8Exam level

Goodwill on the balance sheet most likely represents:

How sure are you?

Correct: B. The correct answer is The excess of the purchase price paid over the fair value of identifiable net assets acquired.
A. Reversing the formula. 'excess of fair value over purchase price' would actually be a bargain purchase gain (negative goodwill), which is immediately recognized in income. This describes negative goodwill (a bargain purchase), which is recognized in income immediately, not recorded as an asset.
C. Goodwill is associated with brand value and reputation. You might assume it can include internally generated value. Internally generated goodwill is explicitly prohibited under both IFRS (IAS 38) and GAAP. Only acquisition goodwill is recorded.

Unit: analyzing-balance-sheets

Question 9Exam level

A company using IFRS has pension plan assets of $800M and pension obligations of $950M. How is this presented on the balance sheet, most likely?

How sure are you?

Correct: B. The correct answer is A net pension liability of $150M in non-current liabilities.
A. Seems logical. Both amounts exist, so show both. Both IFRS and GAAP require net presentation. Gross asset and liability amounts are in footnote disclosures, not on the face of the balance sheet.
C. Pre-2006 GAAP (SFAS 87 era) allowed off-balance-sheet pension treatment. You might recall this older rule. SFAS 158 (2006) and IAS 19 (revised 2011) require on-balance-sheet recognition of the net funded status. This is a frequently tested 'old rule vs current rule' trap.

Unit: analyzing-balance-sheets

Question 10Harder

Which of the following is most likely the correct treatment of a change in the fair value of a cash flow hedge under IFRS?

How sure are you?

Correct: B. The correct answer is Recognized in OCI and reclassified to net income when the hedged transaction affects profit or loss.
A. Fair value changes usually go to net income for non-hedge derivatives. You might apply the default rule. The entire point of cash flow hedge accounting is to match the gain/loss timing. Without hedge accounting, yes. It would go to P&L immediately.
C. OCI items seem like they 'stay in equity'. You might don't realize OCI items can be recycled to P&L. OCI is not a permanent parking lot. Cash flow hedge gains/losses ARE eventually recycled to P&L. They affect net income, just in a different period.

Unit: analyzing-balance-sheets

Question 11Exam level

The debt-to-equity ratio for a company with total liabilities of $400M, total assets of $700M, and shareholders' equity of $300M is closest to:

How sure are you?

Correct: B. The correct answer is 1.33.
A. You might compute Total Liabilities / Total Assets: $400M / $700M = 0.57. This is the debt ratio, not debt-to-equity. 0.57 is the debt-to-assets ratio, a different metric. The question asks for debt-to-equity.
C. You might use total assets as denominator: $700M / $300M = 2.33. Assets is not equity. Always use total equity in the denominator for debt-to-equity.

Unit: analyzing-balance-sheets

Question 12Exam level

Under IFRS, deferred tax assets and liabilities are most likely classified as:

How sure are you?

Correct: B. The correct answer is Always non-current.
A. Logical approach. If the reversal is next year, it seems current. Pre-2017 GAAP worked this way. Under current GAAP (ASU 2015-17) and IFRS (IAS 12), deferred taxes are always non-current. The old split current/non-current rule no longer applies.
C. Applies the standard current/non-current 12-month rule to deferred taxes. The 12-month rule does not apply to deferred taxes. Both IFRS and current GAAP require non-current classification.

Unit: analyzing-balance-sheets