CFC Financial Reporting & Analysis 4 — Questions and Answers
Question 1: A controller notices that a subsidiary's functional currency differs from the parent's reporting currency. Which method should be used to translate the subsidiary's financials?
- Temporal method, with gains/losses in net income
- Current rate method, with translation adjustments in OCI (Correct answer)
- Historical rate method for all balances
- Fair value method with remeasurement through income
Correct answer: Current rate method, with translation adjustments in OCI
When the functional currency differs from the reporting currency, the current rate method is used and resulting translation adjustments are reported in OCI as part of accumulated other comprehensive income.
Question 2: Which ratio best measures how efficiently a company uses its assets to generate sales?
- Return on equity
- Asset turnover ratio (Correct answer)
- Current ratio
- Price-to-earnings ratio
Correct answer: Asset turnover ratio
Asset turnover (Net Sales ÷ Average Total Assets) measures the revenue generated per dollar of assets, indicating operational efficiency.
Question 3: Under GAAP, research costs must be:
- Capitalized and amortized over their useful life
- Expensed as incurred (Correct answer)
- Recorded as intangible assets if they have future economic benefit
- Deferred until the related product is launched
Correct answer: Expensed as incurred
Under US GAAP (ASC 730), research and development costs must be expensed as incurred because future benefits are too uncertain to capitalize.
Question 4: What is the effect on the financial statements when a company records an accelerated depreciation method instead of straight-line in the early years of an asset's life?
- Higher net income and higher asset book value in early years
- Lower net income and lower asset book value in early years (Correct answer)
- No effect on net income; only cash flow is affected
- Lower net income and higher asset book value in early years
Correct answer: Lower net income and lower asset book value in early years
Accelerated depreciation produces higher depreciation expense in early years, reducing net income and accelerating the reduction of the asset's book value compared to straight-line.
Question 5: A company's earnings per share (EPS) calculation uses the weighted-average number of shares outstanding. If the company repurchases shares mid-year, the effect on diluted EPS will be:
- Denominator decreases, potentially increasing EPS (Correct answer)
- Denominator increases, potentially decreasing EPS
- No effect because repurchased shares are still outstanding
- Numerator decreases proportionally
Correct answer: Denominator decreases, potentially increasing EPS
Share repurchases reduce the weighted-average share count used in the EPS denominator, which tends to increase EPS when net income remains constant.
Question 6: Which of the following is NOT a required disclosure in the notes to financial statements under US GAAP?
- Significant accounting policies
- Contingent liabilities
- Details of off-balance-sheet arrangements
- The CEO's compensation relative to competitors (Correct answer)
Correct answer: The CEO's compensation relative to competitors
While executive compensation disclosures are required in SEC filings (proxy statement), peer-relative CEO compensation is not a required note disclosure under US GAAP accounting standards.
Question 7: Under the allowance method for bad debts, recording an uncollectible account write-off affects which accounts?
- Bad debt expense and accounts receivable
- Allowance for doubtful accounts and accounts receivable (Correct answer)
- Bad debt expense and allowance for doubtful accounts
- Cash and accounts receivable
Correct answer: Allowance for doubtful accounts and accounts receivable
Writing off an uncollectible account under the allowance method debits the allowance account and credits accounts receivable, with no impact on net income at write-off.
CFC Financial Reporting & Analysis 4
A controller notices that a subsidiary's functional currency differs from the parent's reporting currency.
Which method should be used to translate the subsidiary's financials?