AICPA Financial Reporting & Analysis 2 — Questions and Answers
Question 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?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Sales-type lease
Correct 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.
Question 2: Which of the following is NOT a component of Other Comprehensive Income (OCI) under U.S. GAAP?
- Unrealized gains on available-for-sale securities
- Foreign currency translation adjustments
- Actuarial gains and losses on defined benefit pension plans
- Gains on sale of trading securities (Correct answer)
Correct 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.
Question 3: A company reports diluted EPS of $2.50 and basic EPS of $2.75. What does the difference indicate?
- The company has a net loss for the period
- The company has dilutive potential common shares outstanding (Correct answer)
- The company repurchased shares during the year
- The company declared a stock dividend
Correct 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.
Question 4: Under ASC 606, when should revenue be recognized for a performance obligation satisfied over time?
- At the point when the customer pays
- When the contract is signed
- Progressively as the entity satisfies the performance obligation (Correct answer)
- Only after the contract term ends
Correct 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.
Question 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?
- Higher net income and higher ending inventory
- Lower net income and lower ending inventory (Correct answer)
- Higher net income and lower ending inventory
- Lower net income and higher ending inventory
Correct 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.
Question 6: Under the indirect method of preparing the statement of cash flows, how is an increase in accounts receivable treated?
- Added to net income
- Subtracted from net income (Correct answer)
- Reported as an investing activity
- Reported as a financing activity
Correct 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.
Question 7: Which ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?
- Current ratio
- Quick ratio
- Cash ratio (Correct answer)
- Debt-to-equity ratio
Correct 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.
AICPA Financial Reporting & Analysis 2
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?