Financial Reporting & Analysis Flashcards

A company has net income of $120,000, depreciation of $30,000, and an increase in accounts receivable of $15,000. What is cash flow from operations using the indirect method?

Answer: $135,000

CFO = $120,000 + $30,000 (add back non-cash) - $15,000 (increase in receivables uses cash) = $135,000.

Which of the following events would most likely trigger goodwill impairment testing before the annual date?

Answer: A significant adverse change in legal factors

ASC 350 lists significant adverse changes in legal, regulatory, or business climate as triggering events requiring interim impairment testing.

The operating cycle of a manufacturing company is best defined as:

Answer: The time from purchase of raw materials to collection of cash from customers

The operating cycle spans from acquiring raw materials, through production and sales, to final cash collection from customers.

Diluted EPS is lower than basic EPS when:

Answer: Potentially dilutive securities would increase shares outstanding

Diluted EPS assumes exercise of in-the-money options and conversion of convertible securities, increasing the share count and reducing EPS.

Under ASC 606, the core principle of revenue recognition is that revenue should be recognized:

Answer: To depict the transfer of promised goods or services in an amount that reflects consideration the entity expects to receive

ASC 606's core principle ties revenue recognition to the actual transfer of control of goods or services to the customer.

If a company switches from straight-line to double-declining-balance depreciation, the most immediate financial statement effect in early years will be:

Answer: Lower net income and lower asset values

Double-declining-balance accelerates depreciation expense, reducing net income and the book value of assets in early periods.

A company's accounts receivable turnover ratio decreased from 12 to 8 year-over-year. This most likely indicates:

Answer: Slower collection of receivables or looser credit policies

A declining receivables turnover ratio means accounts receivable are being collected less frequently, suggesting slower collections or more lenient credit terms.