ABA Financial Accounting & Reporting 3 — Questions and Answers
Question 1: A company reports basic EPS of $3.00 and has outstanding stock options. If the options are dilutive, how will diluted EPS compare to basic EPS?
- Diluted EPS will be higher than $3.00
- Diluted EPS will equal $3.00
- Diluted EPS will be lower than $3.00 (Correct answer)
- Diluted EPS cannot be calculated without net income
Correct answer: Diluted EPS will be lower than $3.00
Dilutive securities increase the denominator (shares) more than the numerator (income), which reduces EPS below the basic figure.
Question 2: Which financial statement reconciles net income to cash provided by operating activities under the indirect method?
- Balance Sheet
- Statement of Changes in Equity
- Cash Flow Statement (Correct answer)
- Income Statement
Correct answer: Cash Flow Statement
The indirect method in the Cash Flow Statement starts with net income and adjusts for non-cash items and working capital changes to arrive at operating cash flows.
Question 3: Under the percentage-of-completion method for long-term contracts, revenue is recognized based on:
- Cash received from the customer
- Contract completion and delivery
- Costs incurred to date relative to estimated total costs (Correct answer)
- Billing milestones stated in the contract
Correct answer: Costs incurred to date relative to estimated total costs
The percentage-of-completion method measures progress by dividing costs incurred to date by total estimated contract costs to determine the revenue earned.
Question 4: A contingent liability should be accrued on the balance sheet when it is:
- Reasonably possible and amount is estimable
- Probable and amount is reasonably estimable (Correct answer)
- Possible and amount is known exactly
- Remote and amount is estimable
Correct answer: Probable and amount is reasonably estimable
Under ASC 450, a contingent liability is accrued only when the loss is both probable and the amount can be reasonably estimated.
Question 5: Goodwill arising from a business combination is tested for impairment:
- Annually and when triggering events occur (Correct answer)
- Over its useful life using straight-line amortization
- Only when the acquired entity is sold
- Every three years per GAAP schedule
Correct answer: Annually and when triggering events occur
ASC 350 requires goodwill to be tested for impairment at least annually and whenever a triggering event indicates potential impairment.
Question 6: Which depreciation method allocates the largest depreciation expense in the first year of an asset's useful life?
- Straight-line
- Units-of-production
- Double-declining balance (Correct answer)
- Sum-of-years' digits
Correct answer: Double-declining balance
Double-declining balance applies twice the straight-line rate to the beginning book value, producing the highest charge in year one.
Question 7: A retail company uses the gross method to record purchases. A $10,000 purchase is made with terms 2/10, net 30. If payment is made within the discount period, the journal entry includes a credit to:
- Accounts Payable for $9,800
- Purchase Discounts for $200 (Correct answer)
- Cash for $10,000
- Inventory for $200
Correct answer: Purchase Discounts for $200
Under the gross method, the $200 discount taken is credited to Purchase Discounts, reducing cost of goods purchased.
ABA Financial Accounting & Reporting 3
A company reports basic EPS of $3.00 and has outstanding stock options.
If the options are dilutive, how will diluted EPS compare to basic EPS?