Financial Reporting and Analysis Flashcards

Depreciation is recorded to comply with which accounting principle?

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.

When a company uses the straight-line depreciation method, what remains constant each period?

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.

Which of the following items would be found in the financing activities section of the Statement of Cash Flows?

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.

What is the formula for calculating the debt-to-equity ratio?

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.

Under ASC 842, operating leases are now required to be recorded on a lessee's balance sheet as what?

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.

Which inventory method typically results in the highest net income during a period of rising prices?

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.

A contingent liability should be accrued on the balance sheet when it is probable and the amount can be what?

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.