Certified Management Accountant Financial Reporting 4 — Questions and Answers
Question 1: A company writes down inventory to net realizable value. Under US GAAP, if market prices later recover, how is this handled?
- The write-down can be reversed up to the original cost
- No reversal is permitted; the written-down value becomes the new cost basis (Correct answer)
- The inventory is written up to current market value
- The recovery is recognized as other comprehensive income
Correct answer: No reversal is permitted; the written-down value becomes the new cost basis
Under US GAAP, inventory write-downs establish a new cost basis and cannot be reversed, unlike IFRS which allows partial reversals.
Question 2: Which of the following best describes the concept of a 'variable interest entity' (VIE) under ASC 810?
- An entity that issues variable rate debt instruments
- An entity where the equity at risk is insufficient to finance its activities without additional support (Correct answer)
- An entity with fluctuating ownership interests
- An entity consolidated based on majority voting interest
Correct answer: An entity where the equity at risk is insufficient to finance its activities without additional support
A VIE is an entity that lacks sufficient equity investment at risk to finance its activities, or where equity investors lack typical ownership characteristics.
Question 3: Under ASC 350, goodwill impairment testing requires comparing the fair value of a reporting unit to its carrying amount. If the reporting unit's fair value is less than its carrying amount, the impairment loss is:
- Equal to the excess of carrying amount over fair value, limited to the goodwill balance (Correct answer)
- The full goodwill balance written off immediately
- Allocated proportionally to all assets in the reporting unit
- Deferred and amortized over the remaining useful life
Correct answer: Equal to the excess of carrying amount over fair value, limited to the goodwill balance
Under ASU 2017-04, goodwill impairment equals the excess of carrying amount over fair value but cannot exceed the total goodwill assigned to the reporting unit.
Question 4: A company sells a product with a one-year warranty. Under ASC 606, how should warranty obligations be accounted for?
- Always as a separate performance obligation
- As a provision (liability) under ASC 460 if it provides assurance-type coverage only (Correct answer)
- Deferred until warranty claims are actually made
- Expensed immediately at point of sale
Correct answer: As a provision (liability) under ASC 460 if it provides assurance-type coverage only
Assurance-type warranties (guaranteeing the product meets agreed specifications) are accounted for as a liability under ASC 460, not as a separate performance obligation.
Question 5: Which of the following transactions would be classified as a financing activity on the statement of cash flows?
- Purchase of equipment for cash
- Collection of principal on a note receivable
- Payment of dividends to shareholders (Correct answer)
- Purchase of short-term investments
Correct answer: Payment of dividends to shareholders
Payment of dividends to shareholders is a financing activity because it represents a return of capital to equity providers.
Question 6: In a sale-leaseback transaction where the transfer qualifies as a sale under ASC 606, how does the seller-lessee recognize any gain on the sale?
- Defer the entire gain over the lease term
- Recognize the full gain immediately at the time of sale (Correct answer)
- Recognize only the portion of gain related to the buyer-lessor's retained interest
- Recognize no gain; only adjust the right-of-use asset
Correct answer: Recognize the full gain immediately at the time of sale
When a sale-leaseback qualifies as a sale, the seller-lessee recognizes the full gain immediately, and the leaseback is recorded as an operating or finance lease.
Question 7: Under SFAS 95 (ASC 230), interest paid by a company is classified in the statement of cash flows as:
- Always an investing activity
- Always a financing activity
- An operating activity under US GAAP (Correct answer)
- Either operating or financing, at management's discretion
Correct answer: An operating activity under US GAAP
Under US GAAP (ASC 230), interest paid is classified as an operating activity, though this differs from IFRS which allows financing classification.
Certified Management Accountant Financial Reporting 4
A company writes down inventory to net realizable value.
Under US GAAP, if market prices later recover, how is this handled?