CFC Financial Reporting & Analysis 5 — Questions and Answers
Question 1: Which of the following scenarios would trigger an impairment test for a long-lived asset under ASC 360?
- The asset has been fully depreciated
- A significant adverse change in the asset's physical condition or business climate (Correct answer)
- The company changes its depreciation method
- The asset's market value exceeds its carrying value
Correct answer: A significant adverse change in the asset's physical condition or business climate
ASC 360 requires a recoverability test when a triggering event occurs, such as a significant adverse change in the extent or manner the asset is used or in its physical condition.
Question 2: When computing free cash flow (FCF) for financial analysis, which formula is most commonly used?
- Net income minus dividends paid
- Operating cash flow minus capital expenditures (Correct answer)
- EBITDA minus taxes
- Net income plus depreciation
Correct answer: Operating cash flow minus capital expenditures
Free cash flow is most commonly defined as operating cash flow minus capital expenditures, representing cash available after maintaining or expanding the asset base.
Question 3: A firm has an interest coverage ratio of 1.2. What does this indicate?
- The firm comfortably covers its interest expense with operating earnings
- The firm barely covers its interest expense, indicating high financial risk (Correct answer)
- The firm has no debt obligations
- The firm's interest payments exceed its equity returns
Correct answer: The firm barely covers its interest expense, indicating high financial risk
An interest coverage ratio (EBIT ÷ Interest Expense) near 1.0 means earnings barely cover interest, signaling elevated default risk and limited financial cushion.
Question 4: Under the percentage-of-completion method, how is revenue recognized for long-term contracts?
- Entirely when the contract is signed
- Proportionally based on the stage of completion (Correct answer)
- Only upon final delivery and acceptance
- Evenly over the contract period regardless of progress
Correct answer: Proportionally based on the stage of completion
The percentage-of-completion method recognizes revenue in proportion to work completed, typically measured by costs incurred relative to total estimated costs.
Question 5: Which of the following items would appear in the financing activities section of the cash flow statement?
- Purchase of equipment
- Collection of accounts receivable
- Issuance of long-term debt (Correct answer)
- Payment of income taxes
Correct answer: Issuance of long-term debt
Proceeds from issuing long-term debt are a financing inflow because they represent borrowing from lenders to fund the business.
Question 6: A company restates prior-period financial statements due to a material accounting error. How is the correction reported?
- As a current-period charge to operating expenses
- As a cumulative effect adjustment in the current year's income statement
- As a prior-period adjustment to the opening retained earnings balance (Correct answer)
- As an extraordinary item below the line
Correct answer: As a prior-period adjustment to the opening retained earnings balance
Under ASC 250, correction of a material error in prior-period statements is reported as a retrospective restatement, with the cumulative effect reflected as an adjustment to beginning retained earnings.
Question 7: In horizontal (trend) analysis, what is the base-year figure used to calculate percentage change?
- The most recent year's figure
- The earliest year presented in the analysis (Correct answer)
- The industry average for the period
- The budgeted figure for the current year
Correct answer: The earliest year presented in the analysis
Horizontal analysis uses the earliest year (base year) as the denominator to measure the percentage change in financial statement items over subsequent periods.
CFC Financial Reporting & Analysis 5
Which of the following scenarios would trigger an impairment test for a long-lived asset under ASC 360?