CFO CFO Financial Reporting & Accounting 2 — Questions and Answers
Question 1: What is a 'deferred tax liability' and what commonly creates it?
- A tax refund owed by the government to the company
- A temporary difference where taxable income is lower than book income now, meaning more taxes will be owed in the future (Correct answer)
- An installment tax payment arrangement with the IRS
- Excess depreciation claimed on tax returns beyond GAAP allowance
Correct 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.
Question 2: Under U.S. GAAP, which inventory cost flow assumption typically results in the lowest net income during periods of rising prices?
- FIFO (First-In, First-Out)
- LIFO (Last-In, First-Out) (Correct answer)
- Weighted Average Cost
- Specific Identification
Correct 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.
Question 3: What is the 'matching principle' in accrual accounting?
- Revenue and expenses must be reported in the same SEC filing
- Expenses should be recognized in the same period as the revenues they helped generate (Correct answer)
- Assets must equal liabilities plus equity on every reporting date
- Tax expense must match cash taxes paid each quarter
Correct 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.
Question 4: What is a 'going concern' qualification in an audit opinion and what does it signal?
- The auditor has approved all financial statements without reservation
- The auditor has substantial doubt about the company's ability to continue operations for the next 12 months (Correct answer)
- The company's revenue growth rate is unsustainable
- The auditor found minor errors requiring management correction
Correct 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.
Question 5: What is the primary distinction between a 'clean' (unqualified) audit opinion and a 'qualified' audit opinion?
- A clean opinion means no audit was performed; qualified means a full audit was done
- 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 (Correct answer)
- A qualified opinion is issued only for non-public companies
- A clean opinion requires SEC pre-approval; qualified does not
Correct 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.
Question 6: What is the purpose of 'segment reporting' under ASC 280 in U.S. GAAP?
- To break down financial results by geographic region only for multinational companies
- To disclose financial information about each reportable operating segment so investors can assess performance and resource allocation (Correct answer)
- To separate regulated and non-regulated business activities for utility companies
- To reconcile GAAP earnings to non-GAAP metrics by product line
Correct 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.
CFO CFO Financial Reporting & Accounting 2
What is a 'deferred tax liability' and what commonly creates it?