CCA Financial Reporting & Analysis 3 — Questions and Answers
Question 1: Under the effective interest method, bond discount amortization causes interest expense to be:
- Equal to the coupon payment
- Less than the coupon payment
- Greater than the coupon payment (Correct answer)
- Zero
Correct answer: Greater than the coupon payment
When a bond is issued at a discount, the carrying value is below face value, so effective interest expense exceeds the stated coupon payment.
Question 2: A company's earnings per share (EPS) calculation must exclude which of the following from the share count for basic EPS?
- Common shares outstanding
- Vested stock options
- Weighted average shares
- Treasury shares (Correct answer)
Correct answer: Treasury shares
Treasury shares are repurchased shares held by the company and are excluded from both basic and diluted EPS calculations.
Question 3: Which ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?
- Current ratio
- Cash ratio (Correct answer)
- Debt-to-equity ratio
- Interest coverage ratio
Correct answer: Cash ratio
The cash ratio (cash + cash equivalents / current liabilities) uses only the most liquid assets to measure short-term solvency.
Question 4: Deferred tax liabilities arise when:
- Tax expense exceeds taxes currently payable (Correct answer)
- Taxes payable exceed book tax expense
- Pre-tax book income is less than taxable income
- A company has a net operating loss carryforward
Correct answer: Tax expense exceeds taxes currently payable
Deferred tax liabilities arise when tax expense on the income statement exceeds actual taxes currently owed to the government.
Question 5: The DuPont analysis breaks return on equity (ROE) into which three components?
- Gross margin, operating margin, net margin
- Profit margin, asset turnover, financial leverage (Correct answer)
- Liquidity, solvency, profitability
- Revenue growth, cost control, capital efficiency
Correct answer: Profit margin, asset turnover, financial leverage
DuPont analysis decomposes ROE into net profit margin × asset turnover × equity multiplier (financial leverage).
Question 6: Under ASC 842, operating leases appear on a lessee's balance sheet as:
- Nothing; operating leases are off-balance-sheet
- A right-of-use asset and a lease liability (Correct answer)
- Only a lease liability
- Only a right-of-use asset
Correct answer: A right-of-use asset and a lease liability
ASC 842 requires lessees to recognize both a right-of-use asset and a corresponding lease liability for operating leases.
Question 7: Horizontal analysis of financial statements compares:
- Line items as a percentage of a base figure within a single period
- Financial data across multiple time periods (Correct answer)
- A company's ratios to industry benchmarks
- Assets to liabilities at a single point in time
Correct answer: Financial data across multiple time periods
Horizontal analysis examines changes in financial statement items over multiple accounting periods to identify trends.
CCA Financial Reporting & Analysis 3
Under the effective interest method, bond discount amortization causes interest expense to be: