CFC Financial Reporting & Analysis 3 — Questions and Answers
Question 1: Which of the following best describes the purpose of segment reporting under ASC 280?
- To consolidate all subsidiary financials into one report
- To disclose financial information about distinct operating units of an entity (Correct answer)
- To compare financial results across multiple fiscal years
- To report tax liabilities by jurisdiction
Correct answer: To disclose financial information about distinct operating units of an entity
ASC 280 requires public companies to disclose disaggregated financial information for each reportable operating segment based on how management internally reviews performance.
Question 2: In a vertical analysis of the income statement, each line item is expressed as a percentage of:
- Total assets
- Net income
- Net revenues (sales) (Correct answer)
- Gross profit
Correct answer: Net revenues (sales)
Vertical analysis of the income statement uses net revenues as the base (100%) to express each item as a proportional percentage.
Question 3: What is the primary difference between comprehensive income and net income?
- Comprehensive income excludes extraordinary items
- Comprehensive income includes other comprehensive income items bypassing net income (Correct answer)
- Comprehensive income is only reported on a cash basis
- Comprehensive income equals net income minus dividends
Correct answer: Comprehensive income includes other comprehensive income items bypassing net income
Other comprehensive income (OCI) items such as unrealized gains on AFS securities and foreign currency translation adjustments are included in comprehensive income but excluded from net income.
Question 4: A company's days sales outstanding (DSO) increases significantly year-over-year. What is the most likely implication?
- The company is collecting receivables more quickly
- The company's credit sales have declined
- Customers are taking longer to pay, potentially signaling collection risk (Correct answer)
- Inventory turnover has improved
Correct answer: Customers are taking longer to pay, potentially signaling collection risk
Rising DSO indicates accounts receivable are outstanding for more days, which may signal deteriorating credit quality or aggressive revenue recognition.
Question 5: Under the equity method of accounting, how does an investor record dividends received from an investee?
- As dividend income on the income statement
- As an increase in the investment account
- As a reduction of the investment account (Correct answer)
- As other comprehensive income
Correct answer: As a reduction of the investment account
Under the equity method, dividends received reduce the carrying value of the investment rather than being recognized as income, since income was already recorded based on the investor's share of the investee's earnings.
Question 6: Which qualitative characteristic of financial information ensures that similar transactions are accounted for in the same way across periods?
- Relevance
- Faithful representation
- Comparability (Correct answer)
- Timeliness
Correct answer: Comparability
Comparability, which includes consistency, ensures that users can identify similarities and differences between periods or entities when similar economic events are reported using consistent methods.
Question 7: How is goodwill tested for impairment under US GAAP (post-ASU 2017-04)?
- Annually by comparing carrying value to fair value; impairment equals the excess of carrying value over fair value (Correct answer)
- By reversing previously recognized impairment losses
- Through straight-line amortization over 40 years
- Only when there is a triggering event, not annually
Correct answer: Annually by comparing carrying value to fair value; impairment equals the excess of carrying value over fair value
Under the simplified one-step test (ASU 2017-04), goodwill impairment equals the amount by which a reporting unit's carrying value exceeds its fair value, tested at least annually.
CFC Financial Reporting & Analysis 3
Which of the following best describes the purpose of segment reporting under ASC 280?