CA Financial Reporting & Analysis 2 — Questions and Answers
Question 1: Under IFRS 16, how should a lessee classify a lease on the balance sheet at commencement date?
- Recognize only a lease liability equal to future payments
- Recognize a right-of-use asset and a corresponding lease liability (Correct answer)
- Expense all lease payments in the period incurred
- Recognize an intangible asset and deferred revenue
Correct answer: Recognize a right-of-use asset and a corresponding lease liability
IFRS 16 requires lessees to recognize a right-of-use asset and a lease liability at commencement, reflecting the present value of future lease payments.
Question 2: A company reports net income of $500,000, depreciation of $80,000, and an increase in accounts receivable of $30,000. What is operating cash flow using the indirect method?
- $550,000 (Correct answer)
- $450,000
- $580,000
- $470,000
Correct answer: $550,000
Operating cash flow = $500,000 + $80,000 – $30,000 = $550,000 under the indirect method.
Question 3: Which financial 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 + cash equivalents ÷ current liabilities) is the most conservative liquidity measure, excluding receivables and inventory.
Question 4: Under IAS 36, when must an entity test goodwill for impairment?
- Only when there is an indication of impairment
- Annually, regardless of impairment indicators (Correct answer)
- Every three years as part of regular review
- When the carrying amount exceeds fair value by 10%
Correct answer: Annually, regardless of impairment indicators
IAS 36 requires goodwill to be tested for impairment annually and whenever there is an indication that it may be impaired.
Question 5: A company uses the percentage-of-completion method for a long-term contract. In Year 1, costs incurred are $200,000 out of estimated total costs of $500,000 on a $750,000 contract. What revenue is recognized in Year 1?
- $200,000
- $300,000 (Correct answer)
- $750,000
- $150,000
Correct answer: $300,000
Percentage complete = 200,000/500,000 = 40%; Revenue recognized = 40% × $750,000 = $300,000.
Question 6: Which of the following is NOT a component of other comprehensive income (OCI) under IFRS?
- Foreign currency translation differences
- Unrealized gains on fair value through OCI instruments
- Remeasurements of defined benefit pension plans
- Gains from sale of inventory (Correct answer)
Correct answer: Gains from sale of inventory
Gains from inventory sales are recognized in profit or loss, not OCI; OCI includes items bypassing the income statement.
Question 7: Under US GAAP, how are research costs and development costs treated?
- Both are capitalized as intangible assets
- Both are expensed as incurred (Correct answer)
- Research is expensed; development is capitalized if criteria met
- Research is capitalized; development is expensed
Correct answer: Both are expensed as incurred
Under US GAAP (ASC 730), both research and development costs are generally expensed as incurred, unlike IFRS which allows development cost capitalization.
CA Financial Reporting & Analysis 2
Under IFRS 16, how should a lessee classify a lease on the balance sheet at commencement date?