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Financial Reporting & Analysis Flashcards

7 cards from real AICPA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Financial Reporting & Analysis flashcards as text

  1. Under ASC 842, how should a lessee classify a lease where the present value of lease payments equals 95% of the fair value of the underlying asset?

    Answer: Finance lease

    A lease is classified as a finance lease when the present value of lease payments equals substantially all (generally 90% or more) of the fair value of the underlying asset.

  2. Which of the following is NOT a component of Other Comprehensive Income (OCI) under U.S. GAAP?

    Answer: Gains on sale of trading securities

    Gains on sale of trading securities are recognized in net income, not OCI, because trading securities are marked to market through the income statement.

  3. A company reports diluted EPS of $2.50 and basic EPS of $2.75. What does the difference indicate?

    Answer: The company has dilutive potential common shares outstanding

    When diluted EPS is lower than basic EPS, it indicates the company has dilutive securities such as stock options, convertible bonds, or warrants that would increase the share count.

  4. Under ASC 606, when should revenue be recognized for a performance obligation satisfied over time?

    Answer: Progressively as the entity satisfies the performance obligation

    Revenue for performance obligations satisfied over time is recognized progressively using an appropriate measure of progress such as the input or output method.

  5. What is the effect on the financial statements when a company changes from FIFO to LIFO inventory method during a period of rising prices?

    Answer: Lower net income and lower ending inventory

    Switching to LIFO in a period of rising prices results in higher COGS (newer, costlier units expensed first), reducing net income and leaving older lower-cost units in ending inventory.

  6. Under the indirect method of preparing the statement of cash flows, how is an increase in accounts receivable treated?

    Answer: Subtracted from net income

    An increase in accounts receivable means cash collected was less than revenue recognized, so it is subtracted from net income to arrive at operating cash flows.

  7. Which ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?

    Answer: Cash ratio

    The cash ratio (cash and cash equivalents divided by current liabilities) is the most conservative liquidity measure, excluding all non-cash current assets.