CPA Financial Analysis & Reporting 2 — Questions and Answers
Question 1: Under ASC 606, when is revenue recognized for a performance obligation satisfied over time?
- When the customer pays in full
- When control transfers at a point in time
- As the entity satisfies the performance obligation over the contract period (Correct answer)
- When the contract is signed
Correct answer: As the entity satisfies the performance obligation over the contract period
ASC 606 requires revenue to be recognized over time when one of three criteria is met, such as the customer simultaneously receives and consumes the benefits.
Question 2: Which of the following is classified as an investing activity on the statement of cash flows?
- Payment of dividends to shareholders
- Proceeds from issuing long-term bonds
- Purchase of equipment for cash (Correct answer)
- Repayment of short-term borrowings
Correct answer: Purchase of equipment for cash
Purchases of long-lived assets such as equipment are investing activities because they involve acquiring resources intended to generate future income.
Question 3: A company reports net income of $200,000. Depreciation was $30,000, accounts receivable increased $15,000, and accounts payable decreased $10,000. What is operating cash flow (indirect method)?
- $205,000 (Correct answer)
- $225,000
- $175,000
- $245,000
Correct answer: $205,000
$200,000 + $30,000 – $15,000 – $10,000 = $205,000; increases in receivables use cash and decreases in payables use cash.
Question 4: The current ratio is 2.5 and current liabilities are $80,000. What are current assets?
- $32,000
- $200,000 (Correct answer)
- $160,000
- $82,500
Correct answer: $200,000
Current assets = Current ratio × Current liabilities = 2.5 × $80,000 = $200,000.
Question 5: Which earnings per share figure must be disclosed on the face of the income statement for a public company with a complex capital structure?
- Basic EPS only
- Diluted EPS only
- Both basic and diluted EPS (Correct answer)
- Neither; EPS is disclosed only in the notes
Correct answer: Both basic and diluted EPS
ASC 260 requires public entities with complex capital structures to present both basic and diluted EPS on the face of the income statement.
Question 6: Under the allowance method, recording the write-off of a specific uncollectible account affects which accounts?
- Bad debt expense and accounts receivable
- Allowance for doubtful accounts and bad debt expense
- Allowance for doubtful accounts and accounts receivable (Correct answer)
- Retained earnings and accounts receivable
Correct answer: Allowance for doubtful accounts and accounts receivable
A write-off under the allowance method debits the allowance account and credits accounts receivable, with no effect on net income.
Question 7: Comprehensive income equals net income plus:
- Dividends paid
- Other comprehensive income items (Correct answer)
- Changes in paid-in capital
- Prior period adjustments
Correct answer: Other comprehensive income items
Comprehensive income includes net income and other comprehensive income (OCI) items such as unrealized gains/losses on AFS securities and foreign currency translation adjustments.
CPA Financial Analysis & Reporting 2
Under ASC 606, when is revenue recognized for a performance obligation satisfied over time?