CFL Corporate Financial Reporting & Valuation 2

Question 1

Under ASC 606, what is the fourth step of the five-step revenue recognition model?

Accepted Answer

Allocate the transaction price to the performance obligations

Answer

ASC 606 steps are: identify the contract, identify performance obligations, determine price, allocate price, then recognize revenue.

Question 2

A company ships excess inventory to distributors at quarter-end with generous return rights to meet targets. Which accounts are most directly inflated?

Accepted Answer

Revenue and accounts receivable

Answer

Channel stuffing pulls future sales into the current period, inflating revenue and receivables.

Question 3

Revenue grows 15% while days sales outstanding rises sharply from 45 to 80 days. What does a forensic analyst most likely suspect?

Accepted Answer

Aggressive or fictitious revenue recognition

Answer

Receivables growing much faster than sales suggests revenue being booked that is not being collected.

Question 4

Under ASC 606, which condition must be met for a seller to recognize revenue on a bill-and-hold arrangement?

Accepted Answer

The product is identified separately as belonging to the customer

Answer

Bill-and-hold criteria include a substantive reason, separate identification, readiness for transfer, and inability to redirect the product.

Question 5

WorldCom improperly capitalized line costs that should have been expensed. Which effect did this have on reported results?

Accepted Answer

Higher net income and higher operating cash flow

Answer

Capitalizing expenses removes them from the income statement and moves the cash outflow from operating to investing activities.

CFL - Certified Financial Litigator Practice Test

CFL - Certified Financial Litigator Practice Test

CFL Corporate Financial Reporting & Valuation 2