Financial statements — CPA FAR practice questions

Under ASC 230, which item is required as a supplemental disclosure for a company using the indirect method of presenting operating cash flows?

1. Cash paid during the period for interest and income taxes
2. A reconciliation of beginning and ending retained earnings
3. The fair value of all outstanding stock options
4. A rollforward of accumulated other comprehensive income

Answer: A — Cash paid during the period for interest and income taxes

A) correct - ASC 230-10-50-2 requires disclosure of cash paid for interest and income taxes when the indirect method is used, since these amounts aren't otherwise visible on the face of the operating activities section. B) that's a statement of retained earnings/equity item, not a cash flow supplemental disclosure. C) stock option fair value is a stock compensation disclosure (ASC 718), unrelated to ASC 230's cash paid requirement. D) AOCI rollforward relates to comprehensive income presentation (ASC 220), not cash flow supplemental disclosures.

For interim periods under ASC 740, income tax expense on ordinary income is computed using:

1. The estimated annual effective tax rate applied to year-to-date income
2. The prior year's actual effective tax rate applied to current YTD income
3. The statutory tax rate applied to interim book income only for period
4. The stand-alone quarterly rate with no annual estimation performed

Answer: A — The estimated annual effective tax rate applied to year-to-date income

A) Correct - AETR times YTD income. B) Prior-year rates ignore current forecasts. C) Statutory rate ignores differences. D) Interim tax uses a YTD estimate.

Under ASC 280, an operating segment must be separately reported if it meets any 10% test based on:

1. CEO's stated preferences or investor relations priorities of the segment
2. Number of employees, geographic area, or product lines of the segment
3. Historical trends, forecasts, or competitor benchmarks of the segment
4. Revenue, absolute value of profit or loss, or assets of the segment

Answer: D — Revenue, absolute value of profit or loss, or assets of the segment

A) Discretion is not the basis. B) These are not the quantitative thresholds. C) Tests are based on current amounts. D) Correct - the ASC 280 revenue, profit/loss, assets 10% tests.

Basic EPS excludes the effect of which of the following?

1. Preferred dividends declared to preferred shareholders during year
2. Weighted-average common shares outstanding during the year
3. Convertible bonds and options not yet exercised at year-end
4. Net income available to common shareholders during the year

Answer: C — Convertible bonds and options not yet exercised at year-end

A) Preferred dividends are subtracted from the numerator. B) Weighted-average is the denominator. C) Correct - potential dilutive securities enter diluted EPS. D) That is the numerator of basic EPS.

When substantial doubt about going concern exists, ASU 2014-15 requires:

1. Disclosure of the conditions, management's evaluation, and its plans
2. No disclosure, since management may rely on general accounting rules
3. An immediate qualified audit opinion regardless of mitigating plans
4. Liquidation basis accounting effective at the current balance sheet date

Answer: A — Disclosure of the conditions, management's evaluation, and its plans

A) Correct - the notes must state the principal conditions raising substantial doubt, management's evaluation of their significance, and the plans intended to mitigate them. B) Silence is not an option once substantial doubt exists. C) The auditor's report is a separate matter. D) Liquidation basis applies only when liquidation is imminent.

Related party transactions under ASC 850 must be disclosed:

1. With the relationship, the transactions, amounts, and balances due
2. Only when the transactions are not at arm's-length pricing terms
3. Only in the auditor's report, as a going concern matter identified
4. Only when the related party is a director or an executive officer

Answer: A — With the relationship, the transactions, amounts, and balances due

A) Correct - the notes must describe the relationship, the nature of the transactions, the dollar amounts, and amounts due at the balance sheet date. B) Disclosure is required regardless of pricing. C) The obligation sits with the financial statements, not the audit report. D) Related parties include affiliates, principal owners, and management.

Under current GAAP (post-ASU 2015-01), gains or losses from unusual or infrequent events are reported:

1. On a pretax basis within continuing operations, without a separate tax allocation specific to that item
2. Net of the specific tax effect attributable only to that item, presented in a separate income statement section
3. As an adjustment to other comprehensive income
4. As a prior period adjustment to retained earnings, net of tax

Answer: A — On a pretax basis within continuing operations, without a separate tax allocation specific to that item

A) correct - because extraordinary item treatment (which required isolating and tax-effecting the item separately) was eliminated, unusual or infrequent items are now included on a pretax basis within income from continuing operations like other operating items, without a separate net-of-tax presentation. B) net-of-tax, separately captioned presentation described the discontinued extraordinary item treatment, not the current approach. C) these are income statement (earnings) items, not OCI items, since they don't meet any OCI classification criteria. D) unusual/infrequent operating items are current-period income statement items, not prior period retained earnings adjustments, which are reserved for error corrections.

Under ASC 220, comprehensive income may be presented in:

1. The notes to the financial statements only, not on the face of statements
2. A single continuous statement or two consecutive statements
3. The statement of stockholders' equity as its sole presentation location
4. A separately issued supplementary schedule outside the annual report

Answer: B — A single continuous statement or two consecutive statements

A) A formal statement is required. B) Correct - both formats are permitted. C) Stockholders' equity is not the required presentation. D) A supplementary schedule alone is insufficient.

Under U.S. GAAP, a complete set of financial statements includes which of the following?

1. Balance sheet, income statement, cash flows, changes in equity, and notes
2. Balance sheet, income statement, and cash flows, with the notes optional
3. Income statement, MD&A, and notes, with the balance sheet optional
4. Balance sheet, income statement, and the entity's federal tax return

Answer: A — Balance sheet, income statement, cash flows, changes in equity, and notes

A) Correct - the required set is the four statements plus the accompanying notes. B) The notes are an integral part of the statements, not an optional supplement. C) MD&A is SEC supplementary information and the balance sheet is never optional. D) A tax return is a filing with the taxing authority, not a GAAP statement.

Which of the following is an example of a non-GAAP financial measure commonly reconciled under SEC Regulation G?

1. Adjusted EBITDA excluding stock compensation and restructuring charges
2. Net income as presented on the face of the audited income statement
3. Total assets as presented on the audited consolidated balance sheet
4. Basic earnings per share computed under the GAAP EPS requirements

Answer: A — Adjusted EBITDA excluding stock compensation and restructuring charges

A) correct - it starts from a GAAP result and removes items management considers non-representative, which is what makes it a non-GAAP measure needing reconciliation. B) Reported net income is itself the GAAP benchmark. C) Total assets as reported is a GAAP balance sheet figure. D) Basic EPS computed under GAAP is a required GAAP disclosure.

Direct method cash paid for interest formula?

Interest expense minus the increase (or plus the decrease) in accrued interest payable.

Other comprehensive income (OCI) items?

Foreign currency translation adjustments, unrealized gains/losses on AFS debt, pension adjustments, derivative cash flow hedges.

Working capital?

Current assets - Current liabilities.

Interim period income tax?

Use estimated annual effective rate × YTD pre-tax income.