MCQ questions on Financial Reporting Compreh examinable

 

US CMA–style MCQ questions strictly aligned with US GAAP. Questions are conceptual + tricky, similar to Part 1 exam patterns.

Section A.. 

1. Cash Flow After Tax

Q1. Cash flow after tax is best described as:

A. Net income + depreciation

B. Cash inflows minus cash outflows after income taxes

C. EBIT × (1 − tax rate)

D. Operating cash flow before tax

Answer:

 

2. Cash Flow from Operating Activities (CFO)

Q2. Under the indirect method, which item is added back to net income?

A. Gain on sale of equipment

B. Increase in accounts receivable

C. Depreciation expense

D. Decrease in accounts payable

Answer: 

 

3. Cash Flow from Investing Activities

Q3. Which of the following is reported as an investing activity?

A. Payment of dividends

B. Issuance of bonds

C. Purchase of machinery

D. Interest paid

Answer: 

 

4. Cash Flow from Financing Activities

Q4. Cash received from issuing common stock is classified as:

A. Operating

B. Investing

C. Financing

D. Non-cash activity

Answer: 

 

5. Closing Cash & Cash Equivalents

Q5. Which item is considered a cash equivalent under US GAAP?

A. 6-month treasury bill

B. 120-day commercial paper

C. Equity securities

D. Restricted cash

Answer: 

(≤ 3 months maturity)

 

6. Trading Securities

Q6. Trading securities are reported at:

A. Cost

B. Lower of cost or market

C. Fair value with unrealized gains in OCI

D. Fair value with unrealized gains in net income

Answer: 

 

7. Held-to-Maturity (HTM) Securities

Q7. HTM debt securities are reported at:

A. Fair value

B. Amortized cost

C. Market value

D. Lower of cost or market

Answer: 

 

8. Available-for-Sale (AFS) Securities

Q8. Unrealized gains on AFS securities are reported in:

A. Net income

B. Retained earnings

C. Other comprehensive income

D. Notes only

Answer: 

 

9. Mortgaged Loan

Q9. A mortgaged loan means:

A. Loan without collateral

B. Loan secured by property

C. Loan payable on demand

D. Loan guaranteed by government

Answer: 

 

10. Earnings Per Share (EPS)

Q10. Basic EPS is calculated as:

A. Net income / outstanding shares

B. Net income − preferred dividends ÷ weighted avg common shares

C. Operating income ÷ shares

D. Net income ÷ diluted shares

Answer: 

 

11. Diluted EPS

Q11. Which instrument causes dilution?

A. Treasury stock

B. Stock options

C. Cash dividends

D. Stock dividends

Answer: 

 

12. Operating Cycle vs Fiscal Period

Q12. Classification of current assets is based on the longer of:

A. 6 months or 1 year

B. Operating cycle or fiscal year

C. Cash cycle or accounting period

D. Budget year or operating cycle

Answer: 

 

13. Inventory Valuation

Q13. Ending inventory is valued at:

A. Cost only

B. Market only

C. Lower of cost or market

D. Higher of cost or NRV

Answer: 

 

14. Allowance for Uncollectible Accounts

Q14. The allowance method recognizes bad debts:

A. When cash is not received

B. When account becomes uncollectible

C. At time of sale

D. Based on estimates

Answer: 

 

15. Credit Loss Recovery

Q15. Recovery of bad debts previously written off is recorded as:

A. Other income

B. Reduction of bad debt expense

C. Increase in allowance

D. Revenue

Answer: 

 

16. Impairment Loss

Q16. Asset impairment loss occurs when:

A. Carrying value > fair value

B. Undiscounted cash flows < carrying value

C. Discounted cash flows < carrying value

D. Market price declines

Answer: 

 

17. Accumulated Depreciation

Q17. Accumulated depreciation is classified as:

A. Asset

B. Liability

C. Contra-asset

D. Expense

Answer: 

 

18. Temporary Difference

Q18. Which creates a temporary difference?

A. Fines & penalties

B. Tax-exempt interest

C. Depreciation method difference

D. Meals expense disallowed

Answer: 

 

19. Permanent Difference

Q19. Which creates a permanent difference?

A. Warranty provision

B. Accelerated depreciation

C. Tax-exempt municipal bond interest

D. Unearned revenue

Answer: 

 

20. Deferred Tax Expense

Q20. Deferred tax expense appears in:

A. Balance sheet

B. Statement of cash flows

C. Income statement

D. OCI

Answer: 

 

21. Indirect Method – CFO

Q21. Increase in prepaid expenses under indirect method:

A. Added

B. Deducted

C. Ignored

D. Financing

Answer: 

 

22. Age-wise Analysis of Trade Receivables

Q22. Aging analysis is primarily used to estimate:

A. Revenue

B. Cash flow

C. Bad debt allowance

D. Sales growth

Answer: 

 

23. Factoring Without Recourse

Q23. Factoring without recourse means:

A. Seller retains risk

B. Buyer retains risk

C. Factor assumes credit risk

D. It is a loan

Answer: 

 

24. Operating Lease

Q24. Operating lease payments are recorded as:

A. Asset & liability

B. Expense only

C. Financing activity

D. OCI

Answer: 

 

25. Finance (Capital) Lease Criteria

Q25. Which indicates a finance lease?

A. Lease term < 75% of asset life

B. No bargain purchase option

C. Transfer of ownership at end

D. Cancelable lease

Answer: 

 

26. Off-Balance Sheet Financing

Q26. Operating leases are considered:

A. On-balance sheet financing

B. Off-balance sheet financing

C. Equity financing

D. Cash financing

Answer: 

 

27. FIFO vs LIFO

Q27. During rising prices, FIFO results in:

A. Higher COGS

B. Lower inventory

C. Higher net income

D. Lower tax

Answer: 

 

28. FOB Destination

Q28. Under FOB destination, ownership transfers:

A. At shipment

B. At factory

C. At delivery

D. At billing

Answer: 

 

29. Annual Cash Dividend

Q29. Cash dividend declaration creates:

A. Expense

B. Liability

C. Equity increase

D. Revenue

Answer: 

 

30. Stock Dividend

Q30. Stock dividends result in:

A. Increase in total equity

B. Decrease in equity

C. Reclassification within equity

D. Cash outflow

Answer: 

 

31. Internal Stakeholders

Q31. Which is an internal stakeholder?

A. Supplier

B. Customer

C. Employee

D. Government

Answer: 

 

32. Other Comprehensive Income (OCI)

Q32. Which item is reported in OCI?

A. Net profit

B. Unrealized gain on AFS securities

C. Dividend income

D. Interest income

Answer: 

 

33. Deferred Tax Asset (DTA)

Q33. Deferred tax assets arise when:

A. Accounting income > taxable income

B. Taxable income > accounting income

C. Permanent differences exist

D. Taxes are unpaid

Answer: 

 

34. Deferred Tax Liability (DTL)

Q34. Accelerated tax depreciation creates:

A. DTA

B. DTL

C. OCI

D. Equity reserve

Answer: 

 

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Section B…

NUMERICAL MCQs exactly in US CMA Part 1 exam style, focused on conceptual traps, mixed adjustments, and examiner favorites.

 

1. CFO – Indirect Method (Multiple Traps)

Net income (after tax) = $120,000

Additional data:

• Depreciation expense = $25,000

• Gain on sale of equipment = $8,000

• Accounts receivable ↑ $12,000

• Inventory ↓ $6,000

• Prepaid expenses ↑ $4,000

• Accounts payable ↓ $5,000

Cash flow from operations = ?

A. $122,000

B. $132,000

C. $118,000

D. $150,000

✅ Answer:

 

2. Cash Flow After Tax (Exam Favorite)

Operating income = $200,000

Tax rate = 30%

Depreciation = $40,000

Cash flow after tax = ?

A. $140,000

B. $154,000

C. $180,000

D. $200,000

✅ Answer: 

 

3. Investing vs Operating Trap

Company sold land for $90,000.

Book value = $65,000.

Effect on CFO (indirect method)?

A. +$90,000

B. −$65,000

C. −$25,000

D. +$25,000

✅ Answer:

 

4. Depreciation vs Accumulated Depreciation

Asset cost = $300,000

Accumulated depreciation at beginning = $90,000

Depreciation for year = $30,000

Ending book value = ?

A. $210,000

B. $180,000

C. $150,000

D. $120,000

✅ Answer: 

 

5. Deferred Tax Liability – Numerical Trap

Accounting depreciation = $40,000

Tax depreciation = $70,000

Tax rate = 25%

Deferred tax effect = ?

A. DTA $7,500

B. DTL $7,500

C. DTA $10,000

D. DTL $10,000

✅ Answer:

 

6. Inventory LIFO vs FIFO – Rising Prices

FIFO COGS = $380,000

LIFO COGS = $420,000

Tax rate = 30%

Difference in net income (FIFO − LIFO)?

A. $40,000

B. $28,000

C. $12,000

D. $20,000

✅ Answer: 

 

7. EPS vs Diluted EPS (Options)

Net income = $500,000

Preferred dividends = $50,000

Weighted avg shares = 100,000

Options outstanding = 20,000 (treasury stock method adds 8,000 shares)

Diluted EPS = ?

A. $4.50

B. $4.25

C. $4.09

D. $4.00

✅ Answer:

 

8. Factoring Without Recourse

Receivables factored = $200,000

Cash received = $190,000

Loss on factoring = ?

A. $0

B. $10,000

C. $190,000

D. $200,000

✅ Answer:

 

9. Operating Cycle Trap

Inventory period = 260 days

Receivable period = 140 days

Classification period for current assets = ?

A. 365 days

B. 400 days

C. 260 days

D. Fiscal year only

✅ Answer: 

 

10. Lease Classification Numerical

Asset life = 10 years

Lease term = 8 years

PV of lease payments = 92% of fair value

Lease classification?

A. Operating lease

B. Short-term lease

C. Finance lease

D. Sale-leaseback

✅ Answer: 

 

11. OCI vs Net Income Trap

AFS security cost = $100,000

Fair value end = $120,000

Unrealized gain reported where?

A. Net income $20,000

B. OCI $20,000

C. Retained earnings $20,000

D. Cash flow statement

✅ Answer: 

 

12. Allowance Method – Aging

Total receivables = $500,000

Estimated uncollectible = 4%

Existing allowance = $12,000

Bad debt expense = ?

A. $8,000

B. $20,000

C. $32,000

D. $12,000

✅ Answer:

 

🔑 CMA EXAM STRATEGY

• Indirect CFO = Net income ± non-cash ± WC

• Temporary difference → Deferred tax

• Gains always reversed in CFO

• AFS → OCI, Trading → Net Income

• FIFO boosts profit in inflation

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Financial Reporting..Very Important points for US CMA Part 1 Part 2 Exam

 Financial Reporting...very important points for US CMA Part 1 &Part 2 exam...

 In a small stock dividend, retained earnings is debited for the fair value of the shares issued, the common stock account is credited for the par value of the newly issued shares, and additional paid-in capital is credited for the difference. The effect of this is to transfer an equal amount of money from retained earnings to  contributed capital.

In a small stock dividend, the amount of retained earnings that is converted to contributed capital is the fair value of the shares, not the par value of the shares. If the stock dividend is a large stock dividend (more than 25% of the outstanding shares issued as the stock dividend), then the journal entry is based on the par value of the shares.

example  The following information is available for Paragon as of November 30.

The market price of Paragon's common stock was $4 per share on November 30.

Common stock - $1 par value; 20,000,000 shares issued and outstanding - $20,000,000

Paid-in capital in excess of par value - $12,200,000

Retained earnings - $16,000,000

If Paragon had declared a 10% stock dividend on November 30, retained earnings would have been:

answer .  Reduced by $8,000,000.

A 10% stock dividend is a small stock dividend (a small stock dividend is less than or equal to 25% of the shares outstanding). In a small stock dividend, retained earnings is reduced by the fair value of the shares

that will be issued, using the value on the date of declaration to value the shares. In a 10% dividend, Paragon would have issued 2,000,000 shares. At the date of declaration the shares had a market value of $4, so the

retained earnings of Paragon would have decreased by $8,000,000 as a result of this stock dividend

 In a stock split the par value of the shares is reduced. The total capital from the shares remains the same, but that capital needs to be split among more shares because of the stock split.

Under a stock dividend there is no effect on the par value of the shares. A stock dividend should not affect the value of the company. The distribution of a stock dividend does not increase or decrease equity and will not generate a profit or cause a loss.

The balance sheet (or statement of financial position) helps users to assess the liquidity, financial flexibil ity, solvency and risk of a company. A company with financial flexibility has the ability to  respond to unexpected needs and opportunities

Financial flexibility refers to the ability of a company to take actions that will alter the amounts and timing of its cash flows so that it is able to respond to unexpected needs and opportunities. For example, a company with a lot of debt is not financially flexible, because its available cash is committed to servicing its debt and it may have loan covenants that it must comply with. It will not have much spare cash to finance an expansion or to meet an unexpected need, nor will it have the ability to borrow much more. A firm with a high degree of financial flexibility can better survive an economic downturn or other difficult setback, and it is in a better position to take advantage of profitable and unexpected investment opportunities. Moreover, a company with greater financial flexibility has a lower risk of failure

Investing activities are those activities that the company undertakes to generate a future profit, or return, such as purchasing and selling fixed assets, purchasing and selling stock of other companies, purchasing and

selling debt instruments, and purchasing and selling available-for-sale or held-to-maturity securities. 

Therefore, the sale of available-for-sale securities should be classified on the statement of cash flows as an investing activity. According to the FASB Codification, Paragraph 230-10-45-11, "Cash flows from purchases,

sales, and maturities of available-for-sale securities shall be classified as cash flows from investing activities and reported gross in the statement of cash flows.

The sale of available-for-sale securities is not classified on the statement of cash flows as an operating activity.

The sale of trading securities is usually classified as an operating activity on the statement of cash flows. However, some securities are classified as trading securities even though they are not being held for sale in the near term. Cash

receipts and cash payments related to trading securities reported at fair value should be classified based on the nature and purpose of the securities. Therefore, the facts and circumstances of the situation need to be evaluated to

determine whether cash flows from trading securities are to be classified as operating activities or as investing activities

While the profit on inventory that is sold between companies that will be consolidated needs to be eliminated, the profit that is made on inventory sold to unaffiliated companies should not be eliminated in the

consolidation process.

A decline in the value of an available-for-sale security below cost that is deemed to be other than temporary should be treated as a realized loss and included in the determination of net income for the period.

When the decline in the market value of an available-for-sale security is considered to be permanent, the loss should be recognized in full in the period in which it occurred.

Increases or decreases in the market value of the shares after they have been issued are not recorded on the books of the issuing company. Therefore, no accounting entries should be recorded.

A change in accounting estimate is accounted for prospectively.

When the estimated useful life of an asset is changed, the company uses the current book value of the asset as its cost for depreciation (or in this case depletion) calculations going forward

In a reverse stock split the company reduces the number of shares outstanding. For example, in a 1-for-2 reverse stock split, every two shares that are held by someone become one share. This one share, however,

has a value that is twice as high as an individual share before the reverse stock split. Therefore, a reverse stock split will increase the market value of a common share.

Solvency refers to a firm's ability to cover its liabilities with its assets. If a firm is not able to generate a positive cash flow from its operating activities, it is or soon will be insolvent. Therefore, cash flows from and used for operating activities is the most important factor to consider when using the statement of cash flows to to evaluate a company's continuing solvency

An aging schedule is used to identify how old receivables are and to then calculate what the amount is that is expected to be collected. This is the calculation of the net realizable value of the receivables.

Operating activities are generally part of the company's main business activities and central operations.These are essentially items that generate revenues and expenses. When accounts payable decreases, it

means cash has been disbursed for operating activities. Thus a decrease in accounts payable during the year should be classified as an operating activity on the statement of cash flows.

The payment of a cash dividend is classified on the statement of cash flows as a financing activity, regardless of where the money to pay the dividend came from. Financing activities are the activities that a company undertakes to raise capital to finance the business, and paying a cash dividend is a financing activity

Goodwill is the amount by which the price paid for a company is greater than the fair value of the company's net assets. "Net assets" means total assets minus total liabillities. The fair value of the total assets purchased is $850,000, and the fair value of the total liabilities purchased is $350,000. The difference, or $500,000, is the fair value of the company's net assets. The difference between the purchase price ($600,000) and the fair value of the net assets purchased ($500,000), is goodwill, and that is equal to $100,000.

 In a period of rising prices, the value of assets will be understated since the current value of the assets is more than was paid for them. Similarly, the selling prices of inventory items will go up but their inventory cost

will remain the same while they are in inventory. Thus, cost of goods sold is unadjusted and so profits will be overstated.

Feel free 🆓 to discuss with me if you have any questions on this topic subtopic 

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Tel 9773464206

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