CFC Financial Reporting & Analysis 2 — Questions and Answers
Question 1: Under ASC 842, how must a lessee classify a lease that transfers ownership of the asset to the lessee by the end of the lease term?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Variable lease
Correct answer: Finance lease
Transfer of ownership is one of the five criteria that automatically classify a lease as a finance lease under ASC 842.
Question 2: Which financial statement reconciles net income to cash provided by operating activities under the indirect method?
- Balance sheet
- Statement of changes in equity
- Statement of cash flows (Correct answer)
- Income statement
Correct answer: Statement of cash flows
The indirect method starts with net income and adjusts for non-cash items and working capital changes to arrive at operating cash flow.
Question 3: A company reports a current ratio of 0.8. What does this indicate?
- The company has more current assets than current liabilities
- The company may struggle to meet short-term obligations (Correct answer)
- The company is highly profitable
- The company has excessive inventory
Correct answer: The company may struggle to meet short-term obligations
A current ratio below 1.0 means current liabilities exceed current assets, signaling potential short-term liquidity risk.
Question 4: Under IFRS 15, revenue is recognized when a performance obligation is:
- Signed in a contract
- Invoiced to the customer
- Satisfied by transferring control to the customer (Correct answer)
- Collected in cash
Correct answer: Satisfied by transferring control to the customer
IFRS 15 requires revenue recognition when (or as) the entity satisfies a performance obligation by transferring control of the promised good or service.
Question 5: Which inventory costing method reports the highest cost of goods sold during a period of rising prices?
- FIFO
- Weighted-average cost
- LIFO (Correct answer)
- Specific identification
Correct answer: LIFO
LIFO assigns the most recently purchased (highest-cost) inventory to COGS first, producing the highest COGS in an inflationary environment.
Question 6: What does the debt-to-equity ratio measure?
- The proportion of assets financed by creditors versus shareholders (Correct answer)
- The company's ability to pay dividends
- The return generated on invested capital
- The market value premium over book value
Correct answer: The proportion of assets financed by creditors versus shareholders
The debt-to-equity ratio compares total debt to shareholders' equity, indicating the relative proportion of creditor versus owner financing.
Question 7: When a company issues a bond at a discount, the carrying value of the bond over its life will:
- Decrease to par value at maturity
- Remain constant
- Increase to par value at maturity (Correct answer)
- Decrease below the discount amount
Correct answer: Increase to par value at maturity
Amortization of the bond discount increases the carrying value each period until it equals par value at maturity.
CFC Financial Reporting & Analysis 2
Under ASC 842, how must a lessee classify a lease that transfers ownership of the asset to the lessee by the end of the lease term?