Financial Analysis & Reporting Flashcards
7 cards from real CPA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Analysis & Reporting flashcards as text
Which of the following best describes the matching principle in financial reporting?
Answer: Expenses should be recognized in the same period as the revenues they helped generate
The matching principle requires that expenses be recognized in the period in which the associated revenues are earned, ensuring proper period-specific profitability measurement.
A company's interest coverage ratio is 3.0 and its EBIT is $150,000. What is its annual interest expense?
Answer: $50,000
Interest expense = EBIT ÷ Interest coverage ratio = $150,000 ÷ 3.0 = $50,000.
Under ASC 842, which type of lease results in the lessee recognizing a right-of-use asset but recording a single straight-line lease expense rather than separate depreciation and interest?
Answer: Operating lease
Under ASC 842, operating leases require recognition of a right-of-use asset and liability, but the income statement reflects a single straight-line lease cost rather than depreciation plus interest.
The effective interest method for bonds payable results in:
Answer: Interest expense that varies with the carrying value of the bond
The effective interest method applies the market (effective) rate to the bond's carrying value each period, causing interest expense to change as the carrying value changes.
Which of the following would cause an overstatement of ending inventory and an understatement of cost of goods sold?
Answer: Counting goods held on consignment for others as part of inventory
Goods held on consignment for others belong to the consignor, not the consignee; counting them overstates ending inventory and understates cost of goods sold.
A contingent liability should be accrued on the balance sheet when it is:
Answer: Probable and the amount can be reasonably estimated
Under ASC 450, a loss contingency is accrued only when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Which financial ratio is most directly affected by a company's decision to repurchase its own shares?
Answer: Earnings per share
Share repurchases reduce the number of shares outstanding, which increases earnings per share even if net income remains unchanged.