CGA Financial Accounting & Reporting 3 — Questions and Answers
Question 1: Which financial statement presents information about cash receipts and cash payments during a period?
- Balance sheet
- Income statement
- Statement of cash flows (Correct answer)
- Statement of stockholders' equity
Correct answer: Statement of cash flows
The statement of cash flows classifies and reports cash inflows and outflows from operating, investing, and financing activities.
Question 2: Under the equity method of accounting, how does the investor record dividends received from the investee?
- Increase the investment account
- Recognize as dividend income
- Decrease the investment account (Correct answer)
- No entry required
Correct answer: Decrease the investment account
Under the equity method, dividends received reduce the carrying value of the investment because they represent a return of the investor's capital.
Question 3: A contingent liability should be accrued when the likelihood of loss is probable AND the amount can be:
- Precisely determined
- Reasonably estimated (Correct answer)
- Confirmed by legal counsel
- Approved by the board
Correct answer: Reasonably estimated
ASC 450 requires accrual when a loss is probable and the amount can be reasonably estimated, even if not precisely known.
Question 4: Which depreciation method allocates the highest depreciation expense in the early years of an asset's life?
- Straight-line
- Units-of-production
- Double-declining balance (Correct answer)
- Sum-of-years-digits (tie with straight-line)
Correct answer: Double-declining balance
Double-declining balance applies a fixed rate (2× straight-line rate) to the declining book value, generating the most depreciation in early years.
Question 5: When a company restates prior-period financial statements due to an error, the correction is reported as an adjustment to:
- Current period income
- Other comprehensive income
- Beginning retained earnings of the earliest period presented (Correct answer)
- Additional paid-in capital
Correct answer: Beginning retained earnings of the earliest period presented
Prior-period error corrections are reported as adjustments to the opening retained earnings balance of the earliest period presented in comparative statements.
Question 6: Under ASC 606, variable consideration (e.g., rebates, discounts) should be included in the transaction price only to the extent it is:
- Agreed upon in writing
- Probable that a significant reversal will not occur (Correct answer)
- Fixed or determinable
- Approved by management
Correct answer: Probable that a significant reversal will not occur
ASC 606 requires variable consideration to be constrained — included only when it is probable that a significant revenue reversal will not occur when the uncertainty resolves.
Question 7: The lower-of-cost-or-net-realizable-value (LCNRV) rule for inventory applies under which accounting standard?
- LIFO only
- FIFO and weighted-average only
- All inventory methods under US GAAP (Correct answer)
- Only when market prices are rising
Correct answer: All inventory methods under US GAAP
ASC 330 requires all companies (except those using LIFO or retail method) to write down inventory to NRV; LIFO/retail use lower-of-cost-or-market.
CGA Financial Accounting & Reporting 3
Which financial statement presents information about cash receipts and cash payments during a period?