Financial Statement Preparation Flashcards

Which of the following is NOT disclosed in the notes to financial statements?

Answer: The external auditor's personal salary

Notes to financial statements disclose accounting policies, contingencies, and debt details, but not personal compensation of auditors.

A company collects $12,000 in advance for a 12-month service contract. After 3 months, how much should be reported as unearned revenue?

Answer: $9,000

After 3 months, $3,000 has been earned ($1,000/month × 3), leaving $9,000 still unearned and reported as a liability.

Which depreciation method allocates an equal amount of depreciation expense each year?

Answer: Straight-line

The straight-line method spreads the depreciable cost evenly over the asset's useful life, resulting in equal annual depreciation charges.

When preparing a bank reconciliation, which item would be added to the book (company) balance?

Answer: Interest earned credited by bank

Interest credited by the bank but not yet recorded in the company's books increases the book balance and must be added.

How is a contingent liability recorded if it is both probable and reasonably estimable?

Answer: Recorded as a liability and an expense on the financial statements

Under US GAAP, a contingent liability that is both probable and reasonably estimable must be accrued as a liability and recognized as an expense.

Operating income on a multi-step income statement equals:

Answer: Gross profit minus operating expenses

Operating income is derived by subtracting operating expenses (selling, general, and administrative) from gross profit.

Which financial statement presentation method starts with net income and adjusts for non-cash items to determine operating cash flows?

Answer: Indirect method

The indirect method begins with net income and adjusts for non-cash items and working capital changes to calculate net cash from operating activities.