CA Financial Accounting & Reporting 4

Question 1

A company using the indirect method starts with net income to prepare the operating section of the cash flow statement. Which adjustment is correct?

Accepted Answer

Add depreciation expense

Answer

Depreciation is a non-cash expense deducted in computing net income, so it must be added back under the indirect method to reconcile to cash from operations.

Question 2

Under the equity method of accounting for investments, how does the investor record dividends received from the investee?

Accepted Answer

As a reduction of the Investment account

Answer

Under the equity method, dividends received reduce the carrying amount of the investment because they represent a return of capital, not income.

Question 3

Which financial statement element is increased by a credit entry?

Accepted Answer

Revenues

Answer

Revenues are equity-related accounts with a normal credit balance, so they increase with a credit entry.

Question 4

A manufacturing company's cost of goods sold includes all of the following EXCEPT:

Accepted Answer

Selling and distribution expenses

Answer

Selling and distribution expenses are period costs expensed immediately and are not included in the product cost that flows through inventory to COGS.

Question 5

What is the purpose of a bank reconciliation?

Accepted Answer

To agree the bank balance and book balance to a corrected true cash balance

Answer

A bank reconciliation identifies and explains the differences between the company's book balance and the bank statement balance to arrive at the correct cash balance.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Financial Accounting & Reporting 4