CCA Financial Reporting & Analysis 2 — Questions and Answers
Question 1: Under US GAAP, which method is prohibited for inventory valuation that is allowed under IFRS?
- FIFO
- Weighted Average Cost
- LIFO (Correct answer)
- Specific Identification
Correct answer: LIFO
IFRS prohibits the Last-In, First-Out (LIFO) method, while US GAAP permits it.
Question 2: A company reports total assets of $500,000 and total liabilities of $200,000. What is the debt-to-equity ratio?
- 0.40
- 0.67 (Correct answer)
- 2.50
- 1.50
Correct answer: 0.67
Equity = $500,000 - $200,000 = $300,000; Debt-to-Equity = $200,000 / $300,000 = 0.67.
Question 3: Which financial statement reconciles net income to cash provided by operating activities?
- Balance Sheet
- Income Statement
- Statement of Cash Flows (Correct answer)
- Statement of Retained Earnings
Correct answer: Statement of Cash Flows
The Statement of Cash Flows (indirect method) starts with net income and adjusts for non-cash items and working capital changes.
Question 4: Goodwill impairment testing under ASC 350 requires companies to perform the test at minimum:
- Monthly
- Quarterly
- Annually (Correct answer)
- Every three years
Correct answer: Annually
ASC 350 requires goodwill to be tested for impairment at least annually, or more frequently if triggering events occur.
Question 5: The quick ratio differs from the current ratio because it excludes:
- Cash and cash equivalents
- Accounts receivable
- Inventory and prepaid expenses (Correct answer)
- Short-term investments
Correct answer: Inventory and prepaid expenses
The quick ratio excludes inventory and prepaid expenses as they are less liquid than other current assets.
Question 6: A company using the percentage-of-completion method recognizes revenue:
- Only when the project is fully complete
- Based on cash received
- Proportionally as the project progresses (Correct answer)
- At contract signing
Correct answer: Proportionally as the project progresses
The percentage-of-completion method recognizes revenue and profit in proportion to the work completed each period.
Question 7: Which of the following would be classified as a financing activity on the Statement of Cash Flows?
- Purchase of equipment
- Payment of dividends (Correct answer)
- Collection of accounts receivable
- Interest received on investments
Correct answer: Payment of dividends
Payment of dividends to shareholders is a financing activity because it involves transactions with equity holders.
CCA Financial Reporting & Analysis 2
Under US GAAP, which method is prohibited for inventory valuation that is allowed under IFRS?