CSC Corporate Financial Statements 4 — Questions and Answers
Question 1: Under accrual accounting, revenue is recognized when:
- Cash is received from the customer
- The performance obligation is satisfied, regardless of cash receipt (Correct answer)
- The invoice is sent to the customer
- Management decides it is appropriate
Correct answer: The performance obligation is satisfied, regardless of cash receipt
Under IFRS 15 and accrual accounting, revenue is recognized when (or as) a performance obligation is satisfied, not necessarily when cash is received.
Question 2: A deferred revenue balance on a balance sheet indicates that a company has:
- Earned revenue not yet collected in cash
- Collected cash for services not yet performed (Correct answer)
- Overstated its accounts receivable
- Recorded a contingent liability
Correct answer: Collected cash for services not yet performed
Deferred revenue (unearned revenue) is a liability representing cash received before the company has fulfilled its obligation to the customer.
Question 3: Which depreciation method results in the highest depreciation expense in the early years of an asset's life?
- Straight-line method
- Units-of-production method
- Double-declining balance method (Correct answer)
- Sum-of-years-digits method
Correct answer: Double-declining balance method
The double-declining balance method is an accelerated depreciation method that applies twice the straight-line rate to the asset's book value, producing higher expense in early years.
Question 4: Which item would appear in the investing activities section of the cash flow statement?
- Payment of dividends to shareholders
- Purchase of a manufacturing plant (Correct answer)
- Repayment of a bank loan
- Collection of accounts receivable
Correct answer: Purchase of a manufacturing plant
Purchasing property, plant, and equipment (PP&E) is a capital expenditure and is classified as an investing activity in the cash flow statement.
Question 5: What does a company's EBITDA measure?
- Net income after all deductions
- Earnings before interest, taxes, depreciation, and amortization (Correct answer)
- Total cash generated from operations
- Gross profit minus selling expenses
Correct answer: Earnings before interest, taxes, depreciation, and amortization
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, commonly used as a proxy for operating cash generation.
Question 6: If a company's current ratio is 2.5 and current liabilities are $200,000, what are its current assets?
- $80,000
- $200,000
- $500,000 (Correct answer)
- $450,000
Correct answer: $500,000
Current ratio = Current assets ÷ Current liabilities; therefore Current assets = 2.5 × $200,000 = $500,000.
Question 7: Which note disclosure is typically required in Canadian corporate financial statements regarding significant accounting policies?
- Management's personal compensation details
- The basis of presentation and key accounting policies applied (Correct answer)
- Competitors' financial results for comparison
- Future dividend payment schedules
Correct answer: The basis of presentation and key accounting policies applied
Companies must disclose their significant accounting policies (e.g., revenue recognition, depreciation methods, inventory valuation) in the notes to financial statements.
CSC Corporate Financial Statements 4
Under accrual accounting, revenue is recognized when: