Certified Public Accountant (Financial Accounting & Reporting) 5 — Questions and Answers
Question 1: Which financial statement reports a company's financial position at a specific point in time?
- Income statement
- Statement of cash flows
- Balance sheet (Correct answer)
- Statement of retained earnings
Correct answer: Balance sheet
The balance sheet (statement of financial position) presents assets, liabilities, and equity as of a specific date.
Question 2: Under ASC 805, how are acquisition-related costs (e.g., legal and advisory fees) treated in a business combination?
- Capitalized as part of goodwill
- Included in the fair value of consideration transferred
- Expensed in the period incurred (Correct answer)
- Amortized over the useful life of acquired assets
Correct answer: Expensed in the period incurred
ASC 805 requires that direct transaction costs in a business combination be expensed as incurred, not capitalized.
Question 3: A company reports comprehensive income of $150,000 and net income of $120,000. What is the amount of other comprehensive income?
- $270,000
- $30,000 (Correct answer)
- $120,000
- $150,000
Correct answer: $30,000
Other comprehensive income = Comprehensive income − Net income = $150,000 − $120,000 = $30,000.
Question 4: Under the indirect method of presenting operating cash flows, depreciation expense is:
- Subtracted from net income because it is a non-cash charge
- Added back to net income because it is a non-cash charge (Correct answer)
- Reported as a separate investing activity
- Excluded from the cash flow statement entirely
Correct answer: Added back to net income because it is a non-cash charge
Depreciation is added back to net income under the indirect method because it reduced net income without using cash.
Question 5: Which of the following events occurring after the balance sheet date but before the financial statements are issued would require adjustment to the financial statements?
- A major flood that destroys a warehouse after year-end
- Settlement of a lawsuit that existed at year-end for an amount different from the accrual (Correct answer)
- Issuance of new debt to refinance existing obligations
- Declaration of a cash dividend after year-end
Correct answer: Settlement of a lawsuit that existed at year-end for an amount different from the accrual
A subsequent event that provides evidence of conditions that existed at the balance sheet date requires adjustment to the financial statements.
Question 6: Under ASC 350, goodwill is:
- Amortized over its estimated useful life, not to exceed 40 years
- Tested for impairment annually or when a triggering event occurs, and not amortized (Correct answer)
- Expensed immediately in the period of acquisition
- Amortized on a straight-line basis over 15 years for financial reporting
Correct answer: Tested for impairment annually or when a triggering event occurs, and not amortized
Under US GAAP, goodwill is not amortized but is tested for impairment at least annually at the reporting unit level.
Question 7: When a company retires treasury stock, the excess of the cost of treasury stock over its par value is charged to:
- Retained earnings only
- Paid-in capital from treasury stock transactions and retained earnings as needed (Correct answer)
- Common stock account only
- Other comprehensive income
Correct answer: Paid-in capital from treasury stock transactions and retained earnings as needed
On retirement, the excess of treasury stock cost over par is first charged against paid-in capital from prior treasury stock transactions, with any remaining excess charged to retained earnings.
Certified Public Accountant (Financial Accounting & Reporting) 5
Which financial statement reports a company's financial position at a specific point in time?