Financial Accounting & Reporting Flashcards

In a defined benefit pension plan, the service cost component represents:

Answer: The PV of benefits earned by employees during the current period

Service cost is the present value of projected benefits that employees earn for services rendered during the current reporting period.

Which of the following would be classified as an investing activity on the statement of cash flows?

Answer: Purchase of equipment for cash

Purchases of long-lived assets like equipment represent investing activities since they involve acquiring productive resources.

Under the indirect method for operating cash flows, a decrease in accounts payable is:

Answer: Subtracted from net income

A decrease in accounts payable means more cash was paid to suppliers than expensed, so it is subtracted from net income to arrive at operating cash flows.

A company has EPS of $4.00 and reports a P/E ratio of 15. What is the market price per share?

Answer: $60.00

Market price = P/E ratio × EPS = 15 × $4.00 = $60.00.

Under ASC 740, a deferred tax liability arises when:

Answer: Tax expense exceeds taxes payable

A deferred tax liability is created when book income exceeds taxable income (tax expense > taxes currently payable), indicating future tax payments will be higher.

Which accounting change requires prospective treatment under US GAAP?

Answer: Change in accounting estimate

Changes in accounting estimate (e.g., useful life, bad debt rate) are applied prospectively — only current and future periods are affected.

The debt-to-equity ratio measures a company's:

Answer: Financial leverage and long-term solvency

The debt-to-equity ratio indicates how much debt a company uses relative to equity, measuring financial leverage and the risk to long-term creditors.