CFE Financial Analysis & Reporting 5

Question 1

A company records a large restructuring charge in the fourth quarter of a profitable year. A financial examiner should be alert to the possibility that:

Accepted Answer

The charge is being used as a 'big bath' to shift future costs to the current period and boost future earnings

Answer

A 'big bath' strategy involves taking an unusually large charge in one period to clean the balance sheet and set the stage for improved future reported results.

Question 2

When translating a foreign subsidiary's financial statements into the parent's reporting currency under ASC 830, monetary assets and liabilities are translated at:

Accepted Answer

The current (closing) exchange rate at the balance sheet date

Answer

Under the current rate method, monetary items are remeasured at the closing rate; resulting translation adjustments flow through other comprehensive income.

Question 3

An examiner reviewing segment disclosures under ASC 280 finds that a company reports all operations as one segment despite having diverse business lines. The primary risk this raises is:

Accepted Answer

Insufficient transparency, potentially masking underperforming divisions or hiding fraud

Answer

Improper aggregation of segments into one unit can obscure poor performance in individual divisions and limit the examiner's ability to detect fraud or financial distress.

Question 4

The Altman Z-Score model is primarily used to:

Accepted Answer

Predict the probability of corporate bankruptcy using financial ratios

Answer

The Altman Z-Score combines five weighted financial ratios into a composite score used to assess the likelihood of corporate financial distress or bankruptcy.

Question 5

Under GAAP, contingent liabilities must be accrued on the balance sheet when the loss is:

Accepted Answer

Probable and the amount can be reasonably estimated

Answer

ASC 450 requires accrual when a contingent loss is both probable and the amount can be reasonably estimated; otherwise, disclosure in footnotes may be required.

(CFE) Certified Financial Examiner Practice Test

(CFE) Certified Financial Examiner Practice Test

CFE Financial Analysis & Reporting 5