CFA Practice Question

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CFA Practice Question

When evaluating a company's significant accounting policy disclosures, an analyst should pay special attention to two items usually requiring significant judgment. They are ______.

I. revenue recognition
II. goodwill and intangible assets
III. stock options
IV. timing of expenses
V. inventories
Correct Answer: I and IV

User Contributed Comments 6

User Comment
cong Both revenue and expense recognitions are vulnerable to manipulations.
JoeHoong Goodwill can't be manipulated, but what about intangible assets? E.g. can advertising cost be written as an intangible asset?
SrobH Advertising cost is an operating expense and would not be classified as an intangible asset. The only time advertising/marketing costs get tricky is when companies amortize the costs instead of writing off in a single period.
bsm9 Intangible assets and goodwill cannot be altered, they only appear on a balance sheet after a company acquires another. The goodwill/intangible asset is the surplus paid above the book value of the company.
HolzGe1 How about an intangible asset's impairment test? Thats a lot of judgement required right there.
Ewan2015 This makes no sense. Goodwill and intangible assets most definitely be manipulated. By not separately recognizing intangible assets in an acquisition such as customer lists or brand names then what would be definite life assets would become indefinite life which would change accounting net income over the following years. Additionally depending on how the business unit is identified for Goodwill there may or may not be an impairment again changing net income. Finally if expenses is screwed its because its been either completely not recorded or more likely incorrectly capitalize most likely to inventory.
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