FAC Finance and Accounting Reporting & Analysis 2 — Questions and Answers
Question 1: Under ASC 230, which of the following is classified as a financing activity on the statement of cash flows?
- Payment of dividends to shareholders (Correct answer)
- Purchase of equipment
- Collection of accounts receivable
- Payment of interest expense
Correct answer: Payment of dividends to shareholders
Dividend payments to shareholders are financing activities under ASC 230 because they represent distributions to equity providers.
Question 2: A company reports a current ratio of 0.8. Which of the following best describes this situation?
- The company has more current liabilities than current assets (Correct answer)
- The company is highly profitable
- The company has strong liquidity
- The company's long-term debt exceeds equity
Correct answer: The company has more current liabilities than current assets
A current ratio below 1.0 means current liabilities exceed current assets, indicating potential short-term liquidity concerns.
Question 3: Which financial statement metric is used to assess how efficiently a company collects its receivables?
- Days Sales Outstanding (DSO) (Correct answer)
- Gross profit margin
- Debt-to-equity ratio
- Operating leverage
Correct answer: Days Sales Outstanding (DSO)
Days Sales Outstanding measures the average number of days a company takes to collect payment after a sale has been made.
Question 4: Under GAAP, when should a contingent liability be recorded on the balance sheet?
- When it is probable and the amount can be reasonably estimated (Correct answer)
- When it is reasonably possible only
- When it is remote but significant
- Only after the lawsuit is settled
Correct answer: When it is probable and the amount can be reasonably estimated
ASC 450 requires recording a contingent liability when the loss is probable and the amount can be reasonably estimated.
Question 5: Which of the following best describes the purpose of horizontal analysis in financial reporting?
- Comparing financial data across time periods to identify trends (Correct answer)
- Comparing a company's ratios to industry benchmarks
- Expressing each line item as a percentage of a base figure in the same period
- Analyzing the structure of the balance sheet
Correct answer: Comparing financial data across time periods to identify trends
Horizontal analysis compares financial statement data across multiple periods to identify growth trends or anomalies.
Question 6: A company using FIFO inventory costing during a period of rising prices will report:
- Higher net income and higher ending inventory than LIFO (Correct answer)
- Lower net income and lower ending inventory than LIFO
- The same net income as LIFO
- Lower gross profit than LIFO
Correct answer: Higher net income and higher ending inventory than LIFO
FIFO assigns older (lower-cost) inventory to COGS, resulting in higher gross profit and higher ending inventory values during inflation.
Question 7: Which of the following is NOT typically included in operating expenses on an income statement?
- Interest expense on long-term debt (Correct answer)
- Selling, general, and administrative expenses
- Depreciation and amortization
- Research and development costs
Correct answer: Interest expense on long-term debt
Interest expense is typically reported below operating income as a non-operating item, separate from core operating expenses.
FAC Finance and Accounting Reporting & Analysis 2
Under ASC 230, which of the following is classified as a financing activity on the statement of cash flows?