CIA Financial Reporting 3 — Questions and Answers
Question 1: Under the indirect method of the cash flow statement, an increase in accounts payable is:
- Subtracted from net income
- Added to net income (Correct answer)
- Shown as a financing activity
- Ignored because it is non-cash
Correct answer: Added to net income
An increase in accounts payable means expenses were recognized but not yet paid in cash, so it is added back to net income.
Question 2: Which inventory cost flow assumption produces the lowest taxable income during periods of rising prices?
- FIFO
- LIFO (Correct answer)
- Weighted average
- Specific identification
Correct answer: LIFO
LIFO assigns the most recently purchased (highest cost) inventory to COGS, reducing taxable income when prices are rising.
Question 3: A lease is classified as a finance lease under ASC 842 if it meets any one of five criteria. Which of the following is one of those criteria?
- The lease term is at least 50% of the asset's useful life
- The present value of lease payments equals or exceeds 90% of the asset's fair value (Correct answer)
- The lessee has the option to purchase the asset at any price
- The lessor retains ownership of the asset at all times
Correct answer: The present value of lease payments equals or exceeds 90% of the asset's fair value
Under ASC 842, a lease is a finance lease if the PV of payments equals or exceeds substantially all (90% threshold often used) of the asset's fair value.
Question 4: Goodwill arising from a business combination is:
- Amortized over 40 years under US GAAP
- Tested annually for impairment under US GAAP (Correct answer)
- Immediately expensed at acquisition date
- Amortized over its useful life under US GAAP
Correct answer: Tested annually for impairment under US GAAP
Under ASC 350, goodwill is not amortized but must be tested for impairment at least annually.
Question 5: When a bond is issued at a premium, how does the carrying value change over time?
- It increases toward face value
- It decreases toward face value (Correct answer)
- It remains constant at the premium amount
- It fluctuates with market interest rates
Correct answer: It decreases toward face value
Amortization of the bond premium reduces the carrying value each period until it equals the face value at maturity.
Question 6: Which of the following items is included in comprehensive income but NOT in net income?
- Gain on sale of equipment
- Foreign currency translation adjustments (Correct answer)
- Interest expense on long-term debt
- Dividend income from equity securities
Correct answer: Foreign currency translation adjustments
Foreign currency translation adjustments are an OCI component, making them part of comprehensive income but excluded from net income.
Question 7: The debt-to-equity ratio is best used to assess a company's:
- Profitability relative to sales
- Financial leverage and long-term solvency (Correct answer)
- Efficiency in using assets to generate revenue
- Short-term liquidity position
Correct answer: Financial leverage and long-term solvency
The debt-to-equity ratio measures the proportion of financing from creditors versus owners, indicating financial leverage.
CIA Financial Reporting 3
Under the indirect method of the cash flow statement, an increase in accounts payable is: