CFO CFO Financial Reporting & Accounting 2

Question 1

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

Accepted Answer

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

Answer

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?

Accepted Answer

LIFO (Last-In, First-Out)

Answer

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?

Accepted Answer

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

Answer

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?

Accepted Answer

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

Answer

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?

Accepted 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

Answer

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.

CFO - Certified Chief Financial Officer Practice Test

CFO - Certified Chief Financial Officer Practice Test

CFO CFO Financial Reporting & Accounting 2