Certified Management Accountant Financial Reporting 2 — Questions and Answers
Question 1: Under ASC 842, how must a lessee classify a lease that transfers ownership of the underlying asset to the lessee by the end of the lease term?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Sale-leaseback
Correct answer: Finance lease
ASC 842 classifies a lease as a finance lease when any one of five criteria is met, including transfer of ownership at lease end.
Question 2: Which inventory costing method results in the highest net income during a period of rising prices?
- LIFO
- Weighted-average
- FIFO (Correct answer)
- Specific identification
Correct answer: FIFO
FIFO assigns the oldest (lowest) costs to COGS during rising prices, leaving higher-cost inventory on the balance sheet and producing the highest net income.
Question 3: A company issues bonds with a face value of $500,000 at a discount of $20,000. Under the effective interest method, how is the discount amortized each period?
- Equal amounts each period
- As a percentage of face value
- Interest expense minus cash interest paid (Correct answer)
- Cash interest paid minus interest expense
Correct answer: Interest expense minus cash interest paid
Under the effective interest method, discount amortization equals interest expense (carrying value × market rate) minus cash interest paid (face value × coupon rate).
Question 4: In a defined benefit pension plan, which component of net periodic pension cost represents the increase in the projected benefit obligation due to passage of time?
- Service cost
- Interest cost (Correct answer)
- Expected return on plan assets
- Amortization of prior service cost
Correct answer: Interest cost
Interest cost is the increase in the PBO during a period due to the passage of time, calculated as the beginning PBO multiplied by the discount rate.
Question 5: When a company changes from LIFO to FIFO inventory valuation, it must report the change as a:
- Prior period adjustment with retrospective restatement (Correct answer)
- Cumulative effect in current period net income
- Prospective change applied going forward only
- Footnote disclosure with no financial statement impact
Correct answer: Prior period adjustment with retrospective restatement
Changes in accounting principle, such as switching from LIFO to FIFO, generally require retrospective restatement of all prior period financial statements.
Question 6: Under the equity method of accounting, how does an investor record dividends received from an investee?
- As dividend income on the income statement
- As a reduction of the investment account (Correct answer)
- As an increase to retained earnings
- As other comprehensive income
Correct answer: As a reduction of the investment account
Under the equity method, dividends received reduce the carrying value of the investment because they represent a return of the investor's interest, not income.
Question 7: Which of the following is NOT a required disclosure in the notes to financial statements under US GAAP for operating segments?
- Segment revenues
- Segment profit or loss
- Segment total assets
- Segment return on equity (Correct answer)
Correct answer: Segment return on equity
ASC 280 requires disclosure of segment revenues, profit/loss, and assets, but does not require return on equity disclosures at the segment level.
Certified Management Accountant Financial Reporting 2
Under ASC 842, how must a lessee classify a lease that transfers ownership of the underlying asset to the lessee by the end of the lease term?