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Basic Question 1 of 8
Which of the following statements is (are) true with respect to the adjustments that an analyst should make to a company's balance sheet before interpreting them?
II. Remove any intangible assets and liability amounts from the balance sheet.
III. If a company reports its inventory using the FIFO method, then no adjustments need be made to its reported value for inventory.
IV. Liabilities that are unlikely to be reversed in the future should be turned into equity.
I. Marketable securities should be restated at lower of cost or market.
II. Remove any intangible assets and liability amounts from the balance sheet.
III. If a company reports its inventory using the FIFO method, then no adjustments need be made to its reported value for inventory.
IV. Liabilities that are unlikely to be reversed in the future should be turned into equity.
User Contributed Comments 6
| User | Comment |
|---|---|
| Nightsurfer | It's a reference to future tax liability. If it won't be realized (i.e. company keeps adding assets) it may as well be equity. In effect, this is an equity injection from the government. |
| HenryQ | In IV the correct term is 'Deferred liabilities'... |
| AusPhD | I am not sure that you are correct HenryQ, as it specifically states that they are unlikely to be reversed. |
| vi2009 | HenryQ: The example will be life deferred taxes which if over time has accumulated and unlikely to be reversed, then we treat it as equity. So in a way, an example will be a deferred liability .. but it must be seen as not reversible over time. |
| NIKKIZ | I had a doubt regarding III - I wouldn't say that the use of FIFO automatically means that inventory shouldn't be scrutinized because there may be obsolescence issues lurking which would be less of a concern if LIFO was employed... Specifically, if reported inventory is growing without a corresponding increase in sales, then that's a cause for concern. |
| daverco | @NIKKIZ: FIFO simply means inventory is carried at most recent costs, thus reflecting economic reality more closely than LIFO (again, on the balance sheet; the reverse is true from the income-statement perspective). I don't think the issue of obsolescence has anything to do with it. LIFO and FIFO are just cost allocation methods. Your actual/physical inventory is the same. |
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Learning Outcome Statements
identify financial reporting choices and biases that affect the quality and comparability of companies' financial statements and explain how such biases may affect financial decisions;
evaluate the quality of a company's financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions;
evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios;
analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company's financial statements, financial ratios, and overall financial condition.
CFA® 2025 Level II Curriculum, Volume 2, Module 15.