CFO CFO Financial Reporting & Accounting 1 — Questions and Answers
Question 1: Under U.S. GAAP, which revenue recognition standard replaced the previous industry-specific guidance and is now the primary framework for recognizing revenue?
- ASC 605
- ASC 606 (Correct answer)
- ASC 840
- ASC 815
Correct answer: ASC 606
ASC 606 (Revenue from Contracts with Customers) established a five-step model for revenue recognition, replacing dozens of prior industry-specific standards.
Question 2: What is the key difference between the cash basis and accrual basis of accounting?
- Cash basis records transactions when cash changes hands; accrual basis records when earned or incurred regardless of cash flow (Correct answer)
- Accrual basis is only used by nonprofits; cash basis by for-profit entities
- Cash basis requires GAAP compliance; accrual does not
- Accrual basis only applies to revenues, not expenses
Correct answer: Cash basis records transactions when cash changes hands; accrual basis records when earned or incurred regardless of cash flow
Accrual accounting matches revenues to the period earned and expenses to the period incurred, while cash basis only records transactions when cash is received or paid.
Question 3: What is 'goodwill' on a balance sheet, and how is it currently tested under U.S. GAAP?
- The premium paid over fair value in an acquisition, tested annually for impairment (Correct answer)
- Brand equity estimated by marketing, amortized over 40 years
- Customer loyalty reserves, tested quarterly
- Intangible assets from patents, tested when disposed of
Correct answer: The premium paid over fair value in an acquisition, tested annually for impairment
Goodwill represents the excess purchase price over the fair value of identifiable net assets acquired and must be tested for impairment at least annually under ASC 350.
Question 4: Under ASC 842 (the new U.S. GAAP lease standard), how are operating leases now recorded on the balance sheet by lessees?
- Only disclosed in footnotes, no balance sheet impact
- As a right-of-use (ROU) asset and a corresponding lease liability (Correct answer)
- As a capital lease asset depreciated over the lease term
- As prepaid rent under current assets only
Correct answer: As a right-of-use (ROU) asset and a corresponding lease liability
ASC 842 requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for virtually all leases with terms over 12 months.
Question 5: What is the difference between 'basic' and 'diluted' earnings per share (EPS)?
- Basic EPS uses net income; diluted EPS uses operating income
- Basic EPS uses weighted average shares outstanding; diluted EPS also includes the effect of all potentially dilutive securities (Correct answer)
- Diluted EPS excludes discontinued operations; basic EPS does not
- Basic EPS is reported quarterly; diluted EPS is annual
Correct answer: Basic EPS uses weighted average shares outstanding; diluted EPS also includes the effect of all potentially dilutive securities
Diluted EPS includes the potential impact of options, warrants, convertible debt, and other dilutive instruments on the share count, providing a more conservative measure.
Question 6: What is the purpose of the statement of cash flows, and what are its three sections?
- Shows asset values; sections are current, long-term, and intangible
- Shows sources and uses of cash; sections are operating, investing, and financing activities (Correct answer)
- Reconciles net income to retained earnings; sections are revenue, expenses, and dividends
- Reports liquidity ratios; sections are quick, current, and cash ratios
Correct answer: Shows sources and uses of cash; sections are operating, investing, and financing activities
The cash flow statement reconciles the change in cash, separating cash generated from operations, cash used in investing activities, and cash from financing activities.
CFO CFO Financial Reporting & Accounting 1
Under U.S.
GAAP, which revenue recognition standard replaced the previous industry-specific guidance and is now the primary framework for recognizing revenue?