Sample Questions and Answers
Which of the following causes a deferred tax liability?
A) Unearned revenue recognized for tax purposes before book recognition
B) Depreciation expense deducted faster for tax purposes than for financial reporting
C) Warranty expense accrued for financial reporting but not yet deductible for tax purposes
D) Tax-exempt municipal bond interest
Answer: B
Explanation: Accelerated depreciation creates a deferred tax liability as taxable income is lower now and higher in the future.
Revenue is recognized over time under ASC 606 if:
A) The seller transfers control of goods immediately
B) The seller’s performance creates an asset with alternative use
C) The customer simultaneously receives and consumes benefits as the seller performs
D) The transaction price is uncertain
Answer: C
Explanation: Revenue is recognized over time when benefits are received continuously, such as in service contracts.
Which of the following activities is classified as an investing activity in the statement of cash flows?
A) Issuing common stock
B) Repurchasing treasury stock
C) Purchasing equipment
D) Paying interest on bonds
Answer: C
Explanation: Investing activities include purchases and sales of long-term assets such as equipment.
Which of the following lease terms would classify a lease as a finance lease?
A) Lease term is 50% of the asset’s economic life
B) The present value of lease payments is 60% of the asset’s fair value
C) The lease transfers ownership of the asset at the end of the lease
D) The lease allows the lessee to use the asset for free
Answer: C
Explanation: A lease is classified as a finance lease if ownership transfers to the lessee at the end of the lease term.
Which of the following is classified as a permanent difference for tax purposes?
A) Depreciation expense
B) Installment sales revenue
C) Interest earned on municipal bonds
D) Unearned revenue
Answer: C
Explanation: Municipal bond interest is tax-exempt and never affects taxable income, making it a permanent difference.
Which financial statement reports comprehensive income?
A) Balance sheet
B) Statement of cash flows
C) Income statement
D) Statement of comprehensive income
Answer: D
Explanation: The statement of comprehensive income includes both net income and other comprehensive income items.
Which of the following transactions does not affect diluted EPS calculations?
A) Stock options that are antidilutive
B) Convertible preferred stock that reduces EPS
C) Warrants that reduce EPS
D) Convertible bonds that are dilutive
Answer: A
Explanation: Antidilutive securities are excluded from diluted EPS calculations because they would increase EPS.
Which of the following is a cash inflow from financing activities?
A) Issuance of bonds
B) Purchase of treasury stock
C) Payment of dividends
D) Purchase of land
Answer: A
Explanation: Issuance of bonds generates cash from financing activities.
Which of the following results in a deferred tax asset?
A) Prepaid rent
B) Tax depreciation exceeding book depreciation
C) Accrued employee bonuses
D) Installment sales
Answer: C
Explanation: Accrued expenses create a deferred tax asset because they are deductible in the future.
Which lease type results in the lessee recognizing both an asset and a liability?
A) Operating lease
B) Short-term lease
C) Finance lease
D) Service contract
Answer: C
Explanation: Under ASC 842, finance leases require lessees to recognize a right-of-use asset and a lease liability.
A company’s earnings per share would decrease if it:
A) Issues new shares of common stock
B) Buys back shares
C) Declares a stock dividend
D) Declares a cash dividend
Answer: A
Explanation: Issuing new shares increases the denominator of EPS, lowering the value.
Which of the following transactions does not affect retained earnings?
A) Issuance of stock dividends
B) Payment of dividends
C) Net income
D) Stock split
Answer: D
Explanation: A stock split affects the number of shares outstanding but does not change retained earnings.
Which of the following is an example of a temporary difference leading to a deferred tax liability?
A) Municipal bond interest
B) Accrued expenses
C) Excess tax depreciation over book depreciation
D) Warranty liabilities
Answer: C
Explanation: Accelerated tax depreciation reduces taxable income initially but increases it later, leading to a deferred tax liability.
Which of the following is a component of other comprehensive income?
A) Gain on sale of equipment
B) Unrealized gains on available-for-sale securities
C) Amortization of goodwill
D) Stock compensation expense
Answer: B
Explanation: Unrealized gains and losses on available-for-sale securities are included in other comprehensive income.
Which of the following would decrease retained earnings?
A) Stock split
B) Stock dividend
C) Purchase of treasury stock
D) Issuance of common stock
Answer: B
Explanation: A stock dividend reduces retained earnings because a portion of earnings is reclassified as common stock.
How should a company report an accounting error from a prior year?
A) Adjust the current year’s net income
B) Adjust retained earnings of the prior period
C) Report it in other comprehensive income
D) Disclose it but make no adjustments
Answer: B
Explanation: Prior period errors are corrected by adjusting the earliest period’s retained earnings.
Which of the following affects the financing section of the statement of cash flows?
A) Depreciation expense
B) Sale of land
C) Issuance of bonds
D) Payment for a patent
Answer: C
Explanation: Issuance of bonds generates financing cash inflows.
Which of the following will appear in accumulated other comprehensive income?
A) Unrealized gain on available-for-sale securities
B) Depreciation expense
C) Gain on sale of inventory
D) Net income
Answer: A
Explanation: Unrealized gains on available-for-sale securities are included in accumulated other comprehensive income (AOCI).
prospectively
D) They require an adjustment to retained earnings
Answer: C
Explanation: Changes in accounting estimates are handled prospectively, meaning future financial statements are adjusted, but prior periods remain unchanged.
Which of the following is considered a financing cash outflow?
A) Paying interest on bonds
B) Paying dividends to shareholders
C) Purchasing inventory
D) Paying rent
Answer: B
Explanation: Dividends paid to shareholders are financing cash outflows because they relate to equity financing.
How is a lease classified as an operating lease under ASC 842?
A) The lease transfers ownership to the lessee
B) The lease contains a bargain purchase option
C) The present value of lease payments is substantially all of the asset’s fair value
D) The lease does not meet finance lease criteria
Answer: D
Explanation: A lease is classified as an operating lease if it does not meet any of the finance lease criteria.
Which of the following increases a company’s earnings per share?
A) Issuance of new shares
B) Declaring a stock dividend
C) Buying back common stock
D) Issuance of convertible bonds
Answer: C
Explanation: Buying back shares reduces the denominator in the EPS calculation, increasing EPS.
Which of the following requires retrospective application?
A) Correction of an accounting error
B) Change in useful life of an asset
C) Change in inventory valuation from LIFO to FIFO
D) Adoption of a new lease accounting standard
Answer: C
Explanation: A change in inventory valuation from LIFO to FIFO requires retrospective adjustment to prior financial statements.
Which of the following transactions would appear in the financing activities section of the statement of cash flows?
A) Payment of bond interest
B) Issuance of stock
C) Sale of land
D) Purchase of office equipment
Answer: B
Explanation: Issuance of stock is a financing activity as it raises capital from investors.
Which of the following is classified as other comprehensive income?
A) Amortization of patents
B) Unrealized loss on available-for-sale securities
C) Gain on sale of a building
D) Interest income on a loan
Answer: B
Explanation: Unrealized gains and losses on available-for-sale securities are recorded in other comprehensive income.
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