CFO Financial Reporting & Accounting Flashcards

What is a 'deferred tax liability' and what commonly creates it?

Answer: A temporary difference where taxable income is lower than book income now, meaning more taxes will be owed in the future

A deferred tax liability arises when a company recognizes less taxable income than book income now (e.g., accelerated depreciation for taxes), creating a future tax obligation.

Under U.S. GAAP, which inventory cost flow assumption typically results in the lowest net income during periods of rising prices?

Answer: LIFO (Last-In, First-Out)

LIFO assigns the most recent (highest) costs to COGS during inflation, resulting in lower net income compared to FIFO, which matches older lower costs to COGS.

What is the 'matching principle' in accrual accounting?

Answer: Expenses should be recognized in the same period as the revenues they helped generate

The matching principle requires that expenses be recorded in the period when the related revenues are earned, regardless of when cash is paid.

What is a 'going concern' qualification in an audit opinion and what does it signal?

Answer: The auditor has substantial doubt about the company's ability to continue operations for the next 12 months

A going concern opinion indicates auditors have identified conditions (e.g., recurring losses, debt defaults) that raise substantial doubt about the company's survival for 12 months.

What is the primary distinction between a 'clean' (unqualified) audit opinion and a 'qualified' audit opinion?

Answer: A clean opinion means financial statements are fairly presented in all material respects; a qualified opinion indicates a specific material departure from GAAP or scope limitation

An unqualified (clean) opinion is the standard, indicating the financial statements are free of material misstatement, while a qualified opinion means there is a specific issue the auditor must highlight.

What is the purpose of 'segment reporting' under ASC 280 in U.S. GAAP?

Answer: To disclose financial information about each reportable operating segment so investors can assess performance and resource allocation

ASC 280 requires companies to report financial information for each operating segment that management uses internally for decision-making, giving investors insight into business diversification.