CIA Financial Reporting 2 — Questions and Answers
Question 1: Under ASC 606, when should revenue be recognized for a contract that includes both a product delivery and a two-year maintenance service?
- At the point the product is delivered
- Ratably over the two-year maintenance period
- Allocated to each performance obligation and recognized as each is satisfied (Correct answer)
- At contract inception when the price is determined
Correct answer: Allocated to each performance obligation and recognized as each is satisfied
ASC 606 requires the transaction price to be allocated to distinct performance obligations and recognized as each obligation is satisfied.
Question 2: Which financial statement best shows a company's ability to meet short-term obligations?
- Income statement
- Balance sheet
- Statement of cash flows (Correct answer)
- Statement of retained earnings
Correct answer: Statement of cash flows
The statement of cash flows, especially the operating section, reveals actual cash generated to cover short-term obligations.
Question 3: A company issues 10,000 shares of $1 par value stock at $15 per share. What is credited to Additional Paid-In Capital?
- $10,000
- $140,000 (Correct answer)
- $150,000
- $15,000
Correct answer: $140,000
APIC equals proceeds above par: ($15 - $1) × 10,000 = $140,000.
Question 4: Under GAAP, how are unrealized gains on available-for-sale (AFS) debt securities reported?
- In net income on the income statement
- In other comprehensive income (OCI) (Correct answer)
- As a deferred liability on the balance sheet
- Netted against cost of goods sold
Correct answer: In other comprehensive income (OCI)
Unrealized gains and losses on AFS securities flow through OCI, not net income, until the securities are sold.
Question 5: Which depreciation method results in 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-the-years'-digits
Correct answer: Double-declining balance
Double-declining balance applies twice the straight-line rate to the book value, producing the steepest early-year expense.
Question 6: A contingent liability should be accrued on the balance sheet when it is:
- Reasonably possible and the amount can be estimated
- Probable and the amount can be reasonably estimated (Correct answer)
- Remote but the amount is known exactly
- Disclosed in the notes regardless of probability
Correct answer: Probable and the amount can be reasonably estimated
ASC 450 requires accrual only when the loss is probable and the amount can be reasonably estimated.
Question 7: What does the quick ratio exclude that the current ratio includes?
- Cash and cash equivalents
- Accounts receivable
- Inventories and prepaid expenses (Correct answer)
- Short-term investments
Correct answer: Inventories and prepaid expenses
The quick ratio excludes inventories and prepaid expenses because they are less liquid than cash or receivables.
CIA Financial Reporting 2
Under ASC 606, when should revenue be recognized for a contract that includes both a product delivery and a two-year maintenance service?