Sample Questions and Answers
Which of the following best describes a “subsequent event” under accounting principles?
A) An event that occurs after the balance sheet date but before the financial statements are issued.
B) An event that occurs during the fiscal year and is disclosed in the year’s financial statements.
C) A change in accounting policy that requires restating prior period financial statements.
D) An event that only affects the income statement and not the balance sheet.
Answer: A) An event that occurs after the balance sheet date but before the financial statements are issued.
How should a company account for a contingent liability under U.S. GAAP?
A) Recognize a liability only when it is probable and the amount can be reasonably estimated.
B) Recognize a liability when the event is remote.
C) Disclose the contingent liability in the footnotes if it is remote.
D) Only disclose a contingent liability if it is probable and measurable.
Answer: A) Recognize a liability only when it is probable and the amount can be reasonably estimated.
Which of the following is an objective of financial reporting?
A) To provide information that is useful for decision making.
B) To provide detailed tax calculations for government entities.
C) To disclose all managerial decision-making processes.
D) To provide competitive financial information for industry analysis.
Answer: A) To provide information that is useful for decision making.
Under IFRS, how should research and development costs be treated?
A) Both research and development costs must be capitalized.
B) Research costs are expensed, but development costs can be capitalized if certain criteria are met.
C) Both research and development costs must be expensed.
D) Research costs are capitalized, but development costs must be expensed.
Answer: B) Research costs are expensed, but development costs can be capitalized if certain criteria are met.
Which of the following statements is true regarding the recognition of revenue under ASC 606?
A) Revenue should be recognized when it is earned, regardless of when it is received.
B) Revenue recognition is deferred until cash is collected.
C) Revenue should be recognized once the payment is received.
D) Revenue recognition is based solely on the transfer of cash.
Answer: A) Revenue should be recognized when it is earned, regardless of when it is received.
The correct accounting treatment for goodwill impairment under U.S. GAAP is to:
A) Amortize goodwill over 10 years.
B) Write off goodwill immediately if impaired.
C) Test goodwill for impairment annually and write down if necessary.
D) Test goodwill for impairment only upon the sale of the business.
Answer: C) Test goodwill for impairment annually and write down if necessary.
Which of the following statements is correct about operating leases under ASC 842?
A) Operating leases are recorded as an asset and a liability on the balance sheet.
B) Operating leases are not recognized on the balance sheet, only in footnotes.
C) Operating leases are expensed only when paid.
D) Operating leases are capitalized and amortized over the lease term.
Answer: A) Operating leases are recorded as an asset and a liability on the balance sheet.
Which of the following is the proper accounting treatment for a change in accounting estimate?
A) The change should be applied retrospectively to prior periods.
B) The change should be applied prospectively from the period of change.
C) The change requires a restatement of prior financial statements.
D) The change must be disclosed in the footnotes only.
Answer: B) The change should be applied prospectively from the period of change.
Which of the following items is considered a temporary difference for tax purposes?
A) Depreciation of assets for tax purposes being greater than depreciation for financial reporting purposes.
B) Dividend income from equity securities.
C) Unrealized gains on available-for-sale securities.
D) Revenue recognized from contracts that are tax-exempt.
Answer: A) Depreciation of assets for tax purposes being greater than depreciation for financial reporting purposes.
The correct treatment for a forward contract used for hedging purposes under U.S. GAAP is:
A) The gain or loss from the contract is immediately recognized in income.
B) The gain or loss is deferred until the hedged item affects earnings.
C) The contract is not recorded in the financial statements until the transaction occurs.
D) The forward contract is not recognized at all unless it is settled.
Answer: B) The gain or loss is deferred until the hedged item affects earnings.
When consolidating financial statements, which of the following eliminates the intercompany transactions?
A) Income from the sale of goods between subsidiaries.
B) Dividends paid by the parent company.
C) Gains or losses on intercompany sales of assets.
D) All of the above.
Answer: D) All of the above.
Which of the following is true regarding the accounting for leases under IFRS 16?
A) Lessees must recognize both a lease liability and a right-of-use asset.
B) Lessees have the option to recognize the lease liability but do not need to recognize the asset.
C) Operating leases are recognized in the income statement only.
D) Leases are treated the same as under U.S. GAAP, with minimal changes.
Answer: A) Lessees must recognize both a lease liability and a right-of-use asset.
A financial instrument is classified as “held-to-maturity” under U.S. GAAP if:
A) The company has the intent and ability to hold the instrument until maturity.
B) The instrument is intended to be sold in the short term.
C) The company intends to sell the instrument within the next fiscal year.
D) The company must hold the instrument for at least 5 years.
Answer: A) The company has the intent and ability to hold the instrument until maturity.
How is the fair value of an asset determined under ASC 820?
A) Based on the asset’s historical cost.
B) Based on market prices if available, or using an observable input.
C) Based on the highest possible value regardless of market conditions.
D) Based on management’s judgment and expectations.
Answer: B) Based on market prices if available, or using an observable input.
Which of the following describes a characteristic of a “special purpose entity” (SPE)?
A) It is primarily used to engage in real estate investments for tax benefits.
B) It is created for specific, limited purposes and often involves off-balance-sheet transactions.
C) It is an entity whose activities are not subject to consolidation.
D) It is used solely for accounting purposes and does not engage in business operations.
Answer: B) It is created for specific, limited purposes and often involves off-balance-sheet transactions.
A company enters into a sales agreement to transfer goods to a customer in the future. When should the company recognize revenue?
A) When the contract is signed.
B) When the goods are transferred to the customer.
C) When the payment is received.
D) When the company has completed its performance obligations.
Answer: B) When the goods are transferred to the customer.
Under ASC 606, how should a company treat the costs of obtaining a contract?
A) Capitalize and amortize over the term of the contract.
B) Expense the costs as incurred.
C) Capitalize and expense as part of revenue recognition.
D) Amortize the costs only when the related revenue is recognized.
Answer: A) Capitalize and amortize over the term of the contract.
Which of the following would be classified as “current liabilities”?
A) Bonds payable with a maturity date in 2 years.
B) Accounts payable due within 90 days.
C) A pension liability due in 10 years.
D) Equipment purchase payable in 5 years.
Answer: B) Accounts payable due within 90 days.
When an entity issues debt with detachable warrants, the accounting for the issuance involves:
A) Recognizing the full amount of debt as a liability.
B) Allocating the proceeds between debt and equity components.
C) Recognizing only the debt as a liability and ignoring the warrants.
D) Allocating proceeds between debt and stock dividends.
Answer: B) Allocating the proceeds between debt and equity components.
Which of the following describes the purpose of a “statement of cash flows”?
A) To show the changes in a company’s assets and liabilities over time.
B) To reconcile net income to cash flows from operating activities.
C) To detail a company’s income and expenses for tax purposes.
D) To provide an overview of financial ratios and performance metrics.
Answer: B) To reconcile net income to cash flows from operating activities.
When accounting for an acquisition of a business, the acquirer must:
A) Allocate the purchase price based on fair value to identifiable assets and liabilities.
B) Recognize the goodwill based on historical cost.
C) Recognize all liabilities at their book value.
D) Include only tangible assets in the acquisition calculation.
Answer: A) Allocate the purchase price based on fair value to identifiable assets and liabilities.
Under IFRS, the impairment of assets is recognized when:
A) The asset’s carrying amount exceeds its recoverable amount.
B) The asset is sold or disposed of.
C) The asset’s carrying amount is higher than market value.
D) The company changes its business strategy.
Answer: A) The asset’s carrying amount exceeds its recoverable amount.
Which of the following is a characteristic of “variable interest entities” (VIEs)?
A) VIEs are always consolidated under U.S. GAAP if the reporting entity is the primary beneficiary.
B) VIEs are excluded from consolidation under U.S. GAAP.
C) VIEs are consolidated only if the entity is a non-profit organization.
D) VIEs must always be treated as separate entities without consolidation.
Answer: A) VIEs are always consolidated under U.S. GAAP if the reporting entity is the primary beneficiary.
Under ASC 842, the definition of a lease includes:
A) A contract that conveys the right to control the use of an asset for a period of time in exchange for consideration.
B) A contract that provides temporary possession of an asset without control.
C) Only contracts that are longer than one year.
D) Contracts that transfer ownership of the asset at the end of the lease term.
Answer: A) A contract that conveys the right to control the use of an asset for a period of time in exchange for consideration.
How should an entity account for the impairment of long-lived assets under U.S. GAAP?
A) The asset is tested for impairment only when there is a triggering event.
B) The asset must be tested for impairment at least annually.
C) The impairment loss is calculated based on the fair value at the acquisition date.
D) The asset is never tested for impairment after initial recognition.
Answer: A) The asset is tested for impairment only when there is a triggering event.
In the context of pension accounting, the projected benefit obligation (PBO) represents:
A) The present value of future pension benefits earned to date.
B) The future value of benefits that have already been paid.
C) The total pension costs recognized in the income statement.
D) The amount that the pension plan is expected to pay out each year.
Answer: A) The present value of future pension benefits earned to date.
When applying the “percentage-of-completion” method in long-term contracts, revenue is recognized:
A) Based on the amount billed to the customer.
B) When the contract is signed and a payment is made.
C) Based on the percentage of costs incurred to date relative to the total estimated costs.
D) Only once the contract is completed and the final payment is received.
Answer: C) Based on the percentage of costs incurred to date relative to the total estimated costs.
Under the “cost method” of accounting for investments, the investor:
A) Records the investment at fair value and recognizes unrealized gains or losses.
B) Recognizes its share of the investee’s income or loss in its own financial statements.
C) Records the investment at historical cost and does not adjust for changes in fair value.
D) Recognizes the fair value of the investment only when it is sold.
Answer: C) Records the investment at historical cost and does not adjust for changes in fair value.
What is the primary difference between the equity method and consolidation accounting?
A) The equity method is used when the investor owns less than 20% of the investee.
B) Consolidation is used when the investor has significant influence over the investee.
C) The equity method involves combining the financial statements of the parent and subsidiary.
D) The equity method is used when the investor has control over the investee.
Answer: A) The equity method is used when the investor owns less than 20% of the investee.
When calculating earnings per share (EPS) under U.S. GAAP, which of the following would be excluded from the calculation of diluted EPS?
A) Convertible preferred stock
B) Stock options
C) Convertible debt
D) Treasury stock
Answer: D) Treasury stock
Under IFRS, which of the following is true regarding the classification of leases?
A) All leases are classified as operating leases.
B) The lessee must classify leases as finance or operating leases.
C) Only leases exceeding five years must be classified as finance leases.
D) Operating leases are capitalized on the balance sheet under IFRS.
Answer: B) The lessee must classify leases as finance or operating leases.
When an entity applies the “goodwill impairment” test under U.S. GAAP, the goodwill impairment loss is calculated by:
A) Comparing the fair value of the reporting unit to its carrying amount.
B) Using the average of the last three years’ earnings.
C) Adjusting for changes in the market value of assets.
D) Reassessing the purchase price allocation to fair value.
Answer: A) Comparing the fair value of the reporting unit to its carrying amount.
In a defined contribution pension plan, the employer’s contribution is:
A) Based on the employee’s salary and years of service.
B) Fixed and determined by the pension plan’s trustee.
C) Determined by the investment performance of the plan’s assets.
D) Fixed by law and must be the same for all employees.
Answer: A) Based on the employee’s salary and years of service.
The term “consolidation” under U.S. GAAP means:
A) Combining the financial statements of two or more related entities into a single set of financial statements.
B) Merging two companies into a single legal entity.
C) Combining the financials of parent and subsidiary companies with different accounting methods.
D) Reporting the individual financial results of each company in a group.
Answer: A) Combining the financial statements of two or more related entities into a single set of financial statements.
The primary objective of financial statement analysis is:
A) To predict future earnings.
B) To confirm the accuracy of financial statements.
C) To assess an entity’s financial performance and position.
D) To determine tax liabilities.
Answer: C) To assess an entity’s financial performance and position
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