CNA Financial Reporting and Analysis 2 — Questions and Answers
Question 1: Depreciation is recorded to comply with which accounting principle?
- Revenue recognition principle
- Matching principle (Correct answer)
- Full disclosure principle
- Consistency principle
Correct answer: Matching principle
The matching principle requires that expenses be recognized in the same period as the revenues they help generate, so depreciation spreads a long-term asset's cost over its useful life.
Question 2: When a company uses the straight-line depreciation method, what remains constant each period?
- The book value of the asset
- The amount of depreciation expense (Correct answer)
- The accumulated depreciation rate
- The market value of the asset
Correct answer: The amount of depreciation expense
Straight-line depreciation spreads the depreciable cost evenly over the asset's useful life, resulting in an equal depreciation expense each period.
Question 3: Which of the following items would be found in the financing activities section of the Statement of Cash Flows?
- Purchase of equipment
- Payment of dividends (Correct answer)
- Collection of interest income
- Sale of inventory
Correct answer: Payment of dividends
Payment of dividends is a financing activity because it represents cash distributed to shareholders as a return on their equity investment.
Question 4: What is the formula for calculating the debt-to-equity ratio?
- Total Assets ÷ Total Equity
- Total Liabilities ÷ Total Equity (Correct answer)
- Net Income ÷ Total Debt
- Total Equity ÷ Total Liabilities
Correct answer: Total Liabilities ÷ Total Equity
Debt-to-Equity Ratio = Total Liabilities ÷ Total Shareholders' Equity, measuring financial leverage and the relative proportion of debt versus equity financing.
Question 5: Under ASC 842, operating leases are now required to be recorded on a lessee's balance sheet as what?
- Only a footnote disclosure
- A right-of-use asset and a lease liability (Correct answer)
- A deferred revenue item
- An off-balance-sheet contingency
Correct answer: A right-of-use asset and a lease liability
ASC 842 requires lessees to recognize a right-of-use asset and a corresponding lease liability for operating leases with terms exceeding 12 months.
Question 6: Which inventory method typically results in the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted Average
- Specific Identification
Correct answer: FIFO
FIFO assigns older, lower-cost inventory to cost of goods sold during rising prices, leaving newer, higher-cost items in ending inventory and producing higher net income.
Question 7: A contingent liability should be accrued on the balance sheet when it is probable and the amount can be what?
- Estimated and immaterial
- Reasonably estimated (Correct answer)
- Precisely calculated
- Determined by legal counsel only
Correct answer: Reasonably estimated
Under ASC 450, a contingent liability is accrued when a loss is probable (likely to occur) and the amount can be reasonably estimated.
CNA Financial Reporting and Analysis 2
Depreciation is recorded to comply with which accounting principle?