CFA Level I · CFA Level I Exam · Financial Reporting Quality
At the start of the year, a company's net operating assets were 600 and at year-end 760. Net income for the year was 150. Using the balance sheet-based aggregate accrual ratio (change in net operating assets divided by average net operating assets), the ratio is closest to:
The balance sheet-based accrual ratio is about 23.5 percent. The change in net operating assets is 160, found as 760 minus 600, and average net operating assets are 680, so 160 divided by 680 equals 23.5 percent. Net income is irrelevant to this measure.
- A12.9%
- B23.5%Correct
- C25.0%
Explanation
Change in NOA = 760 - 600 = 160. Average NOA = (600 + 760)/2 = 680. Ratio = 160/680 = 23.5%. Using ending NOA gives 21.1%, and using beginning NOA gives 26.7%; 12.9% would be wrongly dividing by a different base. Net income is not needed.
Did you get it right without looking?
One question tells you little. A timed set on Financial Reporting Quality shows your real accuracy, how long you take and where you lose marks.
More Financial Reporting Quality questions
- A company extends the estimated useful life of its equipment from 8 years to 12 years, with no change in actual asset usage. Relative to the…
- An analyst reviewing a manufacturer's annual report notices that the company's press release highlights an "adjusted operating profit" that …
- An analyst compares two companies with identical net income. Company X has operating cash flow well above net income, while Company Y has op…
- An analyst notes that a firm's auditor also earns consulting fees from the firm that are several times larger than its audit fee. Relative t…
- Which description of earnings that are of high quality is most accurate?
- An analyst observes that a company's receivables are growing much faster than its revenue, while its allowance for doubtful accounts as a pe…