CSC Corporate Financial Statements 5 — Questions and Answers
Question 1: A company writes down inventory from $80,000 to its net realizable value of $60,000. How does this affect the financial statements?
- Increases assets and decreases expenses
- Decreases assets and increases expenses (Correct answer)
- Has no effect on net income
- Only affects the cash flow statement
Correct answer: Decreases assets and increases expenses
An inventory write-down reduces the inventory asset on the balance sheet and increases cost of goods sold (an expense) on the income statement, reducing net income.
Question 2: What is the primary purpose of an auditor's report accompanying financial statements?
- To guarantee the company will remain profitable
- To provide an independent opinion on whether the financial statements are fairly presented (Correct answer)
- To certify that management has acted legally
- To predict future financial performance
Correct answer: To provide an independent opinion on whether the financial statements are fairly presented
An independent auditor's report expresses an opinion on whether the financial statements present fairly, in all material respects, the financial position of the company in accordance with applicable accounting standards.
Question 3: Which of the following transactions increases total assets without affecting net income?
- Recording depreciation expense
- Issuing common shares for cash (Correct answer)
- Recognizing revenue earned on account
- Writing off a bad debt
Correct answer: Issuing common shares for cash
Issuing common shares for cash increases both cash (an asset) and share capital (equity), with no effect on the income statement or net income.
Question 4: On the balance sheet, a bond payable with a face value of $1,000,000 maturing in 8 years is classified as:
- A current liability
- A non-current (long-term) liability (Correct answer)
- A contingent liability
- An operating liability
Correct answer: A non-current (long-term) liability
Debt maturing beyond one year from the balance sheet date is classified as a non-current (long-term) liability.
Question 5: Which accounting treatment applies when a company acquires a controlling interest in another company under IFRS?
- Equity method of accounting
- Cost method of accounting
- Consolidation with full acquisition method (Correct answer)
- Proportionate consolidation only
Correct answer: Consolidation with full acquisition method
Under IFRS 3 and IFRS 10, when a parent acquires control of a subsidiary, it must prepare consolidated financial statements using the acquisition method.
Question 6: A company has net income of $150,000 and declares dividends of $40,000. Beginning retained earnings were $200,000. What are ending retained earnings?
- $310,000 (Correct answer)
- $390,000
- $190,000
- $350,000
Correct answer: $310,000
Ending retained earnings = Beginning retained earnings + Net income − Dividends = $200,000 + $150,000 − $40,000 = $310,000.
Question 7: Which of the following best describes the 'going concern' assumption in financial reporting?
- The company will only report historical cost information
- The company is expected to continue operating for the foreseeable future (Correct answer)
- All assets must be valued at their liquidation value
- Revenue should only be recognized when cash is received
Correct answer: The company is expected to continue operating for the foreseeable future
The going concern assumption presumes a company will continue to operate indefinitely, which justifies historical cost valuation and deferring expenses over future periods.
CSC Corporate Financial Statements 5
A company writes down inventory from $80,000 to its net realizable value of $60,000.
How does this affect the financial statements?