QUESTIONS ANSWERS COMPREH FINANCIAL REPORTING….US GAAP:
1. Financial Statements & Concepts
1. Which financial statement reports an entity’s financial position at a point in time?
A. Income Statement
B. Statement of Cash Flows
C. Statement of Changes in Equity
D. Balance Sheet
ANSWER
2. Under US GAAP, which qualitative characteristic enhances relevance and faithful representation?
A. Materiality
B. Comparability
C. Prudence
D. Conservatism
ANSWER
3. The going concern assumption implies that the entity will:
A. Liquidate in the near future
B. Continue operations indefinitely
C. Avoid losses
D. Operate profitably
ANSWER
4. Which item is reported as Other Comprehensive Income (OCI) under US GAAP?
A. Prior period adjustment
B. Unrealized gain on AFS debt securities
C. Depreciation expense
D. Dividend income
ANSWER
5. Changes in accounting principle are generally reported using:
A. Prospective approach
C. Current period adjustment
D. OCI adjustment
ANSWER
Please Read.....
In financial reporting, retrospective approach revises prior periods' financial statements as if a new accounting standard or policy was always in place (like changing inventory method), ensuring consistency, while the prospective approach applies changes only to the current and future periods without altering past statements, common for changes in estimates (like depreciation life). Retrospective offers better comparability but is complex; prospective is simpler but creates less comparable periods.
6. Restricted cash should be reported as:
A. Cash equivalent
B. Current asset only
C. Non-current asset if restriction is long-term
D. Expense
ANSWER
7. Trade receivables are initially measured at:
B. Present value
C. Fair value
D. Invoice amount
ANSWER
8. The allowance method for bad debts is required because it follows:
A. Revenue recognition principle
B. Consistency principle
D. Conservatism
ANSWER
9. Factoring receivables with recourse results in:
A. Sale of receivables
B. Secured borrowing
C. Equity transaction
D. OCI recognition
ANSWER
10. Which item is excluded from cash equivalents?
A. Treasury bills (3 months)
B. Commercial paper
C. Money market funds
D. Equity securities
ANSWER
11. Which inventory method is prohibited under US GAAP?
A. FIFO
B. LIFO
C. Weighted Average
D. Replacement cost
ANSWER
12. Under US GAAP, inventory is measured at:
A. Cost or NRV, whichever is lower
B. Cost or market, whichever is lower
C. Fair value
D. Historical cost only
ANSWER
13. Market value for inventory is defined as:
A. Replacement cost
B. NRV
C. Selling price
D. Replacement cost constrained by NRV and NRV – profit margin
ANSWER
14. Which cost is included in inventory?
A. Abnormal spoilage
B. Selling expenses
C. Freight-in
D. Administrative salaries
ANSWER
15. LIFO liquidation generally results in:
A. Lower COGS
B. Higher net income
C. Higher taxable income
D. Distorted gross margin
ANSWER
LIFO liquidation happens when a company using the Last-In, First-Out (LIFO) inventory method sells more units than it purchases or produces, forcing it to dip into older, cheaper inventory layers for its Cost of Goods Sold (COGS). This results in a lower COGS, higher gross profit, and increased taxable income, creating temporary, potentially misleading "phantom profits" during periods of rising prices, as current revenues are matched with older, lower costs.
• Distorted Profits: Creates "phantom profits" that aren't sustainable and misrepresent true profitability.
16. Which cost should be capitalized?
A. Routine maintenance
B. Training costs
C. Installation cost
D. Advertising expense
ANSWER
17. Interest capitalization under US GAAP begins when:
A. Loan is obtained
B. Construction begins
C. Asset is completed
D. Asset is placed in service
ANSWER
18. Which depreciation method results in higher expense in early years?
A. Straight line
B. Units of production
D. Sum-of-years digits
ANSWER
19. Asset impairment loss under US GAAP is recognized when:
A. Carrying amount > Fair value
B. Carrying amount > Undiscounted cash flows
C. Fair value < Discounted cash flows
D. Carrying amount > Discounted cash flows
ANSWER
20. Impairment loss equals:
A. Carrying amount – Fair value
B. Fair value – Carrying amount
C. Carrying amount – Undiscounted CF
D. Discounted CF – Fair value
ANSWER
21. Internally generated goodwill is:
A. Capitalized
B. Amortized
C. Expensed
D. Disclosed only
ANSWER
Please Read ... INTERNALLY GENERATED IS NOT RECOGNIZED AS PER US GAAP & IFRS , SO IT IS FOR INFORMATION IN NOTES TO THE ACCOUNT(DISCLOSURE).ONLY GOODWILL PURCHASED ON ACQUISITION OF BUSINESS IS RECOGNIZED & ACCOUNTED
Q ON 1ST JULY ,WE PURCHASED 100% EQUITY SHARES OF B LTS FOR 10,00,000, FAIR VALUE OF NET ASSETS (NETWORTH) OF B LTD ON DATE OF ACQUISITION IS 940,000. COMPUTE AMT OF GOODWILL PURCHASE OR BARGAIN PURCHASE .AT THE END OF YEAR 31ST DECEMBER , NETWORTH OF BLTD IS $9,90,000, ANY IMPAIREMENT LOSS? PASS J ENTRY .
ANSWER COMPUTATION OF GOODWILL
CONSIDERATION TRFD 100% 10,00,000
LESS : FAIR VALUE OF NET ASSETS
OF B LTD ON DT OF AQUISITIO (-) 940,000
= GOODWILL PURCHASED =60,000
THIS GOOD WILL WILL BE ACCOUNTED IN CONSOLIDATED B/SHEET UNDER NON CURRENT ASSETS ..INTANGIBLE FA
IMPAIREMENT TEST OF GOODWILL AT THE END OF ACCTG YEAR:
FAIR VALUE OF B LTD IS SAME 940,000 BUT B LTD CAN BE RESALE IN MARKET FOR 990,000 , WE PAID 10,00,000 BUT WE CAN RECOVER ONLY 990,000 SO DECREASE OF 10,000 , IT IS IMPAIREMENT LOSS OF GOODWILL
J ENTRY IMPAIREMENT LOSS A/C DR 10,000 GROUP I/S
TO GOODWILL A/C CR 10,000 GROUP B/S
22. Which intangible asset is amortized?
A. Goodwill
B. Trademark with indefinite life
C. Patent
D. Brand recognition
Answer:
23. Goodwill impairment testing under US GAAP is:
A. Optional annually
B. Required annually or when indicators exist
C. Only when sold
D. Based on undiscounted CF
Answer:
24. Impairment of goodwill is measured using:
A. Cost approach
B. Fair value approach
C. Replacement cost
D. NRV approach
Answer:
25. Which cost related to R&D is capitalized?
A. Research salaries
B. Development costs
C. Legal costs to acquire patent
D. Prototype costs
Answer:
6. Liabilities & Contingencies
26. A contingent liability is recognized when it is:
A. Possible and measurable
B. Probable and estimable
C. Reasonably possible
D. Remote
Answer:
27. Warranty obligation is recognized when:
A. Warranty claim is made
B. Product is sold
C. Cash is paid
D. Warranty expires
Answer:
28. Bonds issued at premium result in:
A. Higher interest expense
B. Lower interest expense
C. No amortization
D. OCI gain
Answer:
29. Which liability is current?
A. Deferred tax liability
B. Pension obligation
C. Current portion of long-term debt
D. Lease liability (long-term)
Answer:
30. Loss contingency that is reasonably possible should be:
A. Accrued
B. Ignored
C. Disclosed
D. Capitalized
Answer:
7. Revenue Recognition (ASC 606)
31. First step in revenue recognition is to:
A. Identify performance obligations
B. Determine transaction price
C. Identify the contract
D. Allocate price
Answer:
32. Revenue is recognized when control is:
A. Promised
B. Transferred
C. Billed
D. Collected
Answer:
33. Variable consideration should be recognized using:
A. Expected value or most likely amount
B. Historical average only
C. Fair value
D. Replacement cost
Answer:
34. Non-refundable upfront fees are generally:
A. Recognized immediately
B. Deferred and recognized over time
C. OCI
D. Capitalized permanently
Answer:
35. Contract liability represents:
A. Accounts receivable
B. Unearned revenue
C. Accrued expense
D. Contingent liability
Answer:
8. Accounting Changes & Errors
36. Change in depreciation method is treated as:
A. Change in estimate
B. Change in principle
C. Error correction
D. Prior period adjustment
Answer:
37. Correction of material error is reported as:
A. Current period income
B. OCI
C. Retrospective restatement
D. Prospective adjustment
Answer:
38. Cumulative effect of accounting change is adjusted to:
A. Net income
B. OCI
C. Retained earnings
D. Revenue
Answer:
9. Statement of Cash Flows
39. Interest paid under US GAAP is classified as:
A. Investing
B. Financing
C. Operating
D. OCI
Answer:
40. Purchase of equipment is a:
A. Operating activity
B. Financing activity
C. Investing activity
D. Non-cash activity
Answer:
41. Issuance of shares for land is reported as:
A. Investing inflow
B. Financing inflow
C. Non-cash disclosure
D. Operating inflow
Answer:
10. Equity & Earnings
42. Treasury stock is reported as:
A. Asset
B. Expense
C. Contra-equity
D. Liability
Answer:
43. Stock dividends primarily affect:
A. Total equity
B. Retained earnings
C. Cash flows
D. Net income
Answer:
44. EPS includes which income?
A. Net income – preferred dividends
B. Gross profit
C. OCI
D. Retained earnings
Answer:
45. Diluted EPS assumes:
A. No conversion
B. Conversion of dilutive securities
C. Conversion of all securities
D. Only debt conversion
Answer:
11. Deferred Taxes & Fair Value
46. Deferred tax asset arises from:
A. Temporary differences resulting in future taxable amounts
B. Permanent differences
C. Future deductible amounts
D. Tax penalties
Answer:
47. Valuation allowance is required when DTA realization is:
A. Certain
B. Probable
C. More likely than not NOT realized
D. Guaranteed
Answer:
48. Fair value hierarchy Level 1 inputs are:
A. Unobservable inputs
B. Internal estimates
C. Quoted prices in active markets
D. Discounted CF
Answer:
49. Changes in fair value of trading securities are reported in:
A. OCI
B. Equity
C. Net income
D. Retained earnings
Answer:
50. Accumulated OCI is reported in:
A. Income statement
B. Cash flow statement
C. Equity section of balance sheet
D. Notes only
Answer:
SECTION2:
US CMA Part 1 – Financial Reporting (US GAAP)
1. Which financial statement reports assets, liabilities, and equity at a point in time?
A. Income statement
B. Statement of cash flows
C. Statement of changes in equity
D. Balance sheet
Answer:
2. Under US GAAP, which inventory cost flow assumption is prohibited?
A. FIFO
B. Weighted average
C. Specific identification
D. LIFO
Answer:
3. Which cost is included in inventory under US GAAP?
A. Abnormal waste
B. Selling costs
C. Freight-in
D. Storage after production
Answer:
4. Revenue is recognized under US GAAP when:
A. Cash is received
B. Contract is signed
C. Performance obligation is satisfied
D. Invoice is issued
Answer:
5. Which method is used to estimate bad debts based on net credit sales?
A. Aging of receivables
B. Percentage of sales method
C. Direct write-off method
D. Allowance method
Answer:
6. The allowance for doubtful accounts is classified as:
A. Liability
B. Contra asset
C. Expense
D. Deferred revenue
Answer:
7. Which depreciation method results in the highest expense in early years?
A. Straight-line
B. Units of production
C. Double declining balance
D. Sum-of-years digits
Answer:
8. Which cost is capitalized for self-constructed assets?
A. General admin cost
B. Abnormal idle time
C. Avoidable interest
D. Selling expense
Answer:
9. An impairment loss under US GAAP is recognized when:
A. Fair value < book value
B. Carrying value > undiscounted cash flows
C. Discounted cash flows < carrying value
D. Market value declines
Answer:
10. Reversal of impairment loss on long-lived assets is:
A. Allowed
B. Mandatory
C. Prohibited
D. Optional
Answer:
11. Goodwill is tested for impairment:
A. Annually or when indicators exist
B. Every 5 years
C. Only when sold
D. Only when market declines
Answer:
12. Which item is reported as other comprehensive income (OCI)?
A. Net income
B. Unrealized gain on AFS securities
C. Depreciation expense
D. Dividend income
Answer:
13. Treasury stock is reported as:
A. Asset
B. Liability
C. Contra equity
D. Expense
Answer:
14. Which statement explains changes in retained earnings?
A. Balance sheet
B. Cash flow statement
C. Statement of shareholders’ equity
D. Income statement
Answer:
15. Dividends declared but unpaid are classified as:
A. Expense
B. Equity
C. Liability
D. Contingency
Answer:
16. Operating cash flows include:
A. Purchase of equipment
B. Issuance of shares
C. Interest paid
D. Dividend paid
Answer:
17. Under indirect method, depreciation is:
A. Subtracted
B. Added back
C. Ignored
D. Classified as investing
Answer:
18. Which lease is capitalized by lessee under US GAAP?
A. Short-term lease
B. Operating lease
C. Finance lease
D. Service contract
Answer:
19. Deferred tax liability arises when:
A. Tax depreciation > book depreciation
B. Book depreciation > tax depreciation
C. Tax loss occurs
D. Deferred revenue increases
Answer:
20. Which contingency requires disclosure but not accrual?
A. Probable & estimable
B. Remote
C. Reasonably possible
D. Certain
Answer:
21. A probable and estimable loss contingency is:
A. Disclosed only
B. Ignored
C. Accrued
D. Deferred
Answer:
22. Which accounting principle requires expenses to be matched with revenues?
A. Conservatism
B. Matching
C. Consistency
D. Materiality
Answer:
23. Which change requires retrospective application?
A. Change in estimate
B. Change in accounting principle
C. Change in depreciation method
D. Error correction
Answer:
24. Change in depreciation method is treated as:
A. Principle change
B. Error
C. Estimate change
D. Policy change
Answer:
25. Prior period errors are corrected by:
A. Prospective adjustment
B. Retrospective restatement
C. Current year expense
D. OCI adjustment
Answer:
26. Which financial statement is most useful for liquidity analysis?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of equity
Answer:
27. Current ratio equals:
A. Current assets ÷ current liabilities
B. Total assets ÷ total liabilities
C. Cash ÷ current liabilities
D. Working capital ÷ total assets
Answer:
28. Quick ratio excludes:
A. Cash
B. Marketable securities
C. Inventory
D. Accounts receivable
Answer:
29. Which ratio measures profitability?
A. Current ratio
B. Debt-to-equity
C. Gross margin
D. Inventory turnover
Answer:
30. Higher inventory turnover indicates:
A. Poor sales
B. Excess inventory
C. Efficient inventory management
D. High prices
Answer:
31. Which valuation uses Level 1 inputs?
A. Discounted cash flows
B. Appraisal values
C. Quoted market prices
D. Internal estimates
Answer:
32. Fair value hierarchy Level 3 relies on:
A. Market prices
B. Observable inputs
C. Unobservable inputs
D. Exchange rates
Answer:
33. Which item increases retained earnings?
A. Dividends declared
B. Net loss
C. Net income
D. Treasury stock purchase
Answer:
34. Accrued revenues represent:
A. Cash received in advance
B. Revenue earned but not billed
C. Expense unpaid
D. Revenue deferred
Answer:
35. Unearned revenue is reported as:
A. Asset
B. Equity
C. Liability
D. Income
Answer:
36. Which inventory method gives highest ending inventory during inflation?
A. LIFO
B. FIFO
C. Average
D. Specific ID
Answer:
37. Which cost is expensed immediately?
A. Factory rent
B. Product cost
C. Period cost
D. Direct labor
Answer:
38. Which financial statement reports comprehensive income?
A. Income statement
B. Balance sheet
C. Statement of comprehensive income
D. Cash flow statement
Answer:
39. Which bond feature increases interest expense over time?
A. Par bond
B. Premium bond
C. Discount bond
D. Zero-coupon bond
Answer:
40. Amortization of bond discount:
A. Decreases interest expense
B. Increases carrying value
C. Decreases cash flow
D. Reduces face value
Answer:
41. EPS is calculated using:
A. Gross profit
B. Net income – preferred dividends
C. Operating income
D. EBIT
Answer:
42. Diluted EPS assumes conversion of:
A. Common shares only
B. Preferred shares only
C. Potential common shares
D. Treasury stock
Answer:
43. Which item is excluded from operating income?
A. Cost of goods sold
B. Selling expense
C. Interest expense
D. Depreciation
Answer:
44. Which cost is included in COGS?
A. Selling commission
B. Factory utilities
C. Office rent
D. Advertising
Answer:
45. Which ratio measures solvency?
A. Current ratio
B. Gross margin
C. Debt-to-equity
D. Inventory turnover
Answer:
46. Which cash flow increases financing activities?
A. Dividend payment
B. Share issuance
C. Equipment purchase
D. Interest paid
Answer:
47. Which financial reporting objective emphasizes reliability?
A. Relevance
B. Comparability
C. Faithful representation
D. Timeliness
Answer:
48. Conservatism principle requires:
A. Overstating assets
B. Delaying expense recognition
C. Recognizing losses earlier
D. Ignoring gains
Answer:
49. Which item requires disclosure even if not recorded?
A. Remote contingency
B. Reasonably possible contingency
C. Certain gain
D. Accrued liability
Answer:
50. Which GAAP assumption allows periodic financial reporting?
A. Monetary unit
B. Going concern
C. Time period
D. Economic entity
Answer:
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