CIA Financial Accounting 2 — Questions and Answers
Question 1: Under the accrual basis of accounting, when should revenue generally be recognized?
- When cash is received from the customer
- When the performance obligation is satisfied (Correct answer)
- When the sales contract is signed
- At the end of the fiscal year
Correct answer: When the performance obligation is satisfied
ASC 606 recognizes revenue when (or as) control of goods or services transfers, satisfying the performance obligation.
Question 2: A company prepays a 12-month insurance policy for $12,000 on October 1. What is the prepaid insurance balance at December 31?
- $3,000
- $12,000
- $9,000 (Correct answer)
- $0
Correct answer: $9,000
Three months ($3,000) have expired, leaving $9,000 of prepaid insurance.
Question 3: Which inventory method, during a period of rising prices, generally results in the highest reported net income?
- LIFO
- Weighted average
- Specific identification
- FIFO (Correct answer)
Correct answer: FIFO
FIFO charges older, cheaper costs to cost of goods sold, so gross profit is highest when prices rise.
Question 4: Which financial statement reports a company's assets, liabilities, and equity at a specific point in time?
- Balance sheet (Correct answer)
- Income statement
- Statement of cash flows
- Statement of retained earnings
Correct answer: Balance sheet
The balance sheet (statement of financial position) is a snapshot as of a single date.
Question 5: Equipment costing $50,000 with a $5,000 salvage value and a 5-year life is depreciated straight-line. What is annual depreciation expense?
- $10,000
- $9,000 (Correct answer)
- $11,000
- $8,000
Correct answer: $9,000
($50,000 − $5,000) ÷ 5 = $9,000 per year.
Question 6: Under the allowance method, writing off a specific uncollectible account receivable has what effect?
- Decreases net income
- Increases bad debt expense
- Has no effect on net accounts receivable (Correct answer)
- Decreases total current assets
Correct answer: Has no effect on net accounts receivable
The write-off reduces both accounts receivable and the allowance equally, leaving net receivables unchanged.
Question 7: Which characteristic is a fundamental qualitative characteristic of useful financial information under the FASB Conceptual Framework?
- Comparability
- Timeliness
- Understandability
- Faithful representation (Correct answer)
Correct answer: Faithful representation
Relevance and faithful representation are fundamental; comparability, verifiability, timeliness, and understandability are enhancing.
