CPB / BookKeeping Financial Statement Preparation 4 — Questions and Answers
Question 1: Which of the following is NOT disclosed in the notes to financial statements?
- Summary of significant accounting policies
- Contingent liabilities
- The external auditor's personal salary (Correct answer)
- Details of long-term debt
Correct answer: The external auditor's personal salary
Notes to financial statements disclose accounting policies, contingencies, and debt details, but not personal compensation of auditors.
Question 2: A company collects $12,000 in advance for a 12-month service contract. After 3 months, how much should be reported as unearned revenue?
- $12,000
- $9,000 (Correct answer)
- $3,000
- $0
Correct 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.
Question 3: Which depreciation method allocates an equal amount of depreciation expense each year?
- Double-declining balance
- Sum-of-the-years'-digits
- Straight-line (Correct answer)
- Units of production
Correct answer: Straight-line
The straight-line method spreads the depreciable cost evenly over the asset's useful life, resulting in equal annual depreciation charges.
Question 4: When preparing a bank reconciliation, which item would be added to the book (company) balance?
- Outstanding checks
- Deposits in transit
- Bank service charges not yet recorded
- Interest earned credited by bank (Correct answer)
Correct 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.
Question 5: How is a contingent liability recorded if it is both probable and reasonably estimable?
- Disclosed in footnotes only
- Recorded as a liability and an expense on the financial statements (Correct answer)
- Ignored until the contingency is resolved
- Recorded as an asset until settled
Correct 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.
Question 6: Operating income on a multi-step income statement equals:
- Gross profit minus operating expenses (Correct answer)
- Net income plus taxes
- Revenue minus cost of goods sold only
- Gross profit plus interest income
Correct answer: Gross profit minus operating expenses
Operating income is derived by subtracting operating expenses (selling, general, and administrative) from gross profit.
Question 7: Which financial statement presentation method starts with net income and adjusts for non-cash items to determine operating cash flows?
- Direct method
- Indirect method (Correct answer)
- Cash basis method
- Accrual method
Correct 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.
CPB / BookKeeping Financial Statement Preparation 4
Which of the following is NOT disclosed in the notes to financial statements?