B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: FAR 3 — Questions and Answers
Question 1: Under ASC 606, when should revenue from a contract with a customer be recognized?
- When cash is received
- When the invoice is issued
- When performance obligations are satisfied (Correct answer)
- When the contract is signed
Correct answer: When performance obligations are satisfied
ASC 606 requires revenue recognition when (or as) a performance obligation is satisfied by transferring a promised good or service to the customer.
Question 2: A company reports a temporary difference where book income exceeds taxable income by $50,000. If the tax rate is 25%, this creates a:
- Deferred tax asset of $12,500
- Deferred tax liability of $12,500 (Correct answer)
- Deferred tax asset of $50,000
- Current tax expense reduction of $12,500
Correct answer: Deferred tax liability of $12,500
When book income exceeds taxable income, taxes paid now are lower than book expense; the future tax obligation creates a deferred tax liability of $50,000 × 25% = $12,500.
Question 3: Using the indirect method for the statement of cash flows, an increase in accounts receivable is:
- Added to net income
- Subtracted from net income (Correct answer)
- Shown as a financing activity
- Ignored as a non-cash item
Correct answer: Subtracted from net income
An increase in accounts receivable means revenue was recognized but cash was not collected, so it is subtracted from net income to arrive at operating cash flows.
Question 4: Which inventory costing method produces the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted-average
- Specific identification
Correct answer: FIFO
FIFO assigns older, lower-cost inventory to COGS during rising prices, leaving more recent higher-cost inventory on the balance sheet and producing the lowest COGS and highest net income.
Question 5: A not-for-profit organization receives a $500,000 donation restricted for building construction. How should this be classified?
- Unrestricted net assets
- Net assets with donor restrictions (Correct answer)
- Net assets without donor restrictions
- Deferred revenue
Correct answer: Net assets with donor restrictions
Under ASC 958, contributions with donor-imposed restrictions are classified as net assets with donor restrictions until the restrictions are met.
Question 6: What is the purpose of a reconciliation between the governmental fund balance sheet and the government-wide statement of net position?
- To convert from cash basis to modified accrual
- To explain differences between fund accounting and full accrual reporting (Correct answer)
- To calculate tax revenues
- To eliminate interfund transactions
Correct answer: To explain differences between fund accounting and full accrual reporting
The reconciliation bridges differences such as capital assets, long-term liabilities, and accruals that appear in government-wide statements but not in fund statements using modified accrual.
Question 7: Under the lower of cost or net realizable value (LCNRV) rule, NRV is defined as:
- Replacement cost minus normal profit margin
- Estimated selling price minus costs to complete and sell (Correct answer)
- Historical cost minus accumulated depreciation
- Fair market value at the balance sheet date
Correct answer: Estimated selling price minus costs to complete and sell
NRV is the estimated selling price in the ordinary course of business less any costs of completion and costs necessary to make the sale, as defined by ASC 330.
B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: FAR 3
Under ASC 606, when should revenue from a contract with a customer be recognized?