Financial Accounting Flashcards

Under U.S. GAAP, how are interest payments on a company's debt classified in the statement of cash flows?

Answer: Operating activities

U.S. GAAP classifies interest paid as an operating cash outflow.

A company purchases land by issuing common stock. How is this transaction reported in the statement of cash flows?

Answer: As a noncash investing and financing activity disclosure

Significant noncash investing and financing transactions are disclosed separately, not in the cash flow sections.

Using the indirect method, how is an increase in accounts receivable treated when computing cash flows from operating activities?

Answer: Deducted from net income

An increase in receivables means revenue exceeded cash collected, so it is subtracted from net income.

A company's current assets are $400,000, including $100,000 of inventory, and current liabilities are $200,000. What is the quick (acid-test) ratio?

Answer: 1.5

($400,000 − $100,000) ÷ $200,000 = 1.5.

Which of the following is most likely classified as a contingent liability requiring accrual under U.S. GAAP?

Answer: A pending lawsuit where loss is probable and reasonably estimable

Loss contingencies are accrued only when probable and reasonably estimable; reasonably possible losses are disclosed.

Goodwill acquired in a business combination is accounted for under U.S. GAAP (public companies) by:

Answer: Testing it for impairment at least annually

Public companies do not amortize goodwill but test it for impairment at least annually.

Which error would cause both net income and ending retained earnings to be overstated in the current year?

Answer: Failing to accrue wages owed at year-end

Unrecorded accrued wages understate expenses, which overstates net income and retained earnings.