CA Financial Accounting & Reporting 5 — Questions and Answers
Question 1: What is the primary purpose of the statement of stockholders' equity?
- To show changes in a company's cash position
- To reconcile beginning and ending balances in all equity accounts (Correct answer)
- To report total assets and liabilities at period end
- To disclose contingent liabilities
Correct answer: To reconcile beginning and ending balances in all equity accounts
The statement of stockholders' equity explains the changes in paid-in capital, retained earnings, treasury stock, and other equity components between periods.
Question 2: A company grants employees 10,000 stock options with a fair value of $5 per option on the grant date, vesting over 4 years. What is the annual compensation expense?
- $12,500 (Correct answer)
- $50,000
- $25,000
- $5,000
Correct answer: $12,500
Total compensation cost is 10,000 × $5 = $50,000, recognized evenly over the 4-year vesting period: $50,000 ÷ 4 = $12,500 per year.
Question 3: Which of the following would cause the quick ratio to differ from the current ratio?
- Accounts receivable balance
- Cash and cash equivalents
- Current portion of long-term debt
- Inventory balance (Correct answer)
Correct answer: Inventory balance
The quick ratio excludes inventory (and prepaid expenses) from current assets, so a significant inventory balance creates a difference between the two ratios.
Question 4: Under US GAAP, research and development costs are generally:
- Capitalized and amortized over the product's useful life
- Expensed as incurred (Correct answer)
- Capitalized only if technological feasibility is established
- Deferred until a product is successfully commercialized
Correct answer: Expensed as incurred
ASC 730 requires that R&D costs be expensed as incurred because future economic benefits are too uncertain to justify capitalization.
Question 5: A bond with a face value of $100,000 is sold at 97. What is the initial carrying value recorded by the issuer?
- $103,000
- $97,000 (Correct answer)
- $100,000
- $3,000
Correct answer: $97,000
Selling at 97 means 97% of face value: $100,000 × 0.97 = $97,000, which is recorded as the net proceeds and initial carrying value of the bond.
Question 6: Which earnings per share figure is required to be disclosed on the face of the income statement for a public company?
- Basic EPS only
- Diluted EPS only
- Both basic and diluted EPS (Correct answer)
- Neither; EPS is only in the notes
Correct answer: Both basic and diluted EPS
ASC 260 requires public companies to present both basic EPS and diluted EPS on the face of the income statement for each period presented.
Question 7: What is the matching principle in financial accounting?
- Assets must equal liabilities plus equity at all times
- Revenues and their related expenses should be recognized in the same period (Correct answer)
- Cash inflows must be matched with cash outflows each period
- Debits must always equal credits in every journal entry
Correct answer: Revenues and their related expenses should be recognized in the same period
The matching principle requires that expenses be recorded in the same period as the revenues they helped generate, forming the foundation of accrual accounting.
CA Financial Accounting & Reporting 5
What is the primary purpose of the statement of stockholders' equity?