US CMA Part 1 · Chapter 1
External Financial Reporting Decisions MCQs with Answers
23 multiple-choice questions on External Financial Reporting Decisions for US CMA Part 1 Financial Planning, Performance and Analytics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which financial statement reports a company's assets, liabilities and equity as at a specific date?
- A) The income statement
- B) The balance sheet (statement of financial position)
- C) The statement of cash flows
- D) The statement of changes in equity
Show answer & explanation
Answer: B) The balance sheet (statement of financial position)
The balance sheet is a snapshot of financial position at a point in time. The income statement, statement of cash flows and statement of changes in equity all report activity over a period of time.
Question 2
Under US GAAP, how is cash paid for interest on a company's bank loan classified in the statement of cash flows?
- A) Financing activities
- B) Investing activities
- C) Operating activities
- D) Either operating or financing activities, as an accounting policy choice
Show answer & explanation
Answer: C) Operating activities
US GAAP requires interest paid to be classified as an operating cash outflow because interest expense is included in net income. IAS 7 has allowed a policy choice between operating and financing (removed for most non-financial entities by the IFRS 18 amendments to IAS 7), which is the source of the last distractor; under US GAAP no such choice exists.
Question 3
Kestrel Corp reported net income of $480,000 for the year. Other information: Depreciation expense: $95,000 Increase in accounts receivable: $40,000 Decrease in inventory: $22,000 Decrease in accounts payable: $18,000 Gain on sale of equipment: $12,000 Using the indirect method, what is net cash provided by operating activities?
- A) $563,000
- B) $551,000
- C) $527,000
- D) $483,000
Show answer & explanation
Answer: C) $527,000
Start with net income $480,000, add back non-cash depreciation $95,000, deduct the increase in receivables $40,000, add the decrease in inventory $22,000, deduct the decrease in payables $18,000 and deduct the gain on sale $12,000 (the full proceeds are an investing inflow). Operating cash flow = $527,000.
Question 4
Which inventory cost flow assumption is permitted under US GAAP but prohibited under IFRS?
- A) First-in, first-out (FIFO)
- B) Weighted-average cost
- C) Last-in, first-out (LIFO)
- D) Specific identification
Show answer & explanation
Answer: C) Last-in, first-out (LIFO)
IAS 2 prohibits LIFO, while US GAAP still permits it. FIFO and weighted-average cost are allowed under both frameworks, and specific identification is permitted under both (IAS 2 requires it for items that are not ordinarily interchangeable).
Question 5
Linden Supply uses a periodic inventory system. During the year it had beginning inventory of 400 units at $20, a first purchase of 600 units at $23 and a second purchase of 500 units at $25. It sold 1,100 units. What is cost of goods sold under FIFO?
- A) $26,300
- B) $24,300
- C) $25,153
- D) $23,800
Show answer & explanation
Answer: B) $24,300
Goods available = 400 x $20 + 600 x $23 + 500 x $25 = $34,300 for 1,500 units. Ending inventory is 400 units; under FIFO these are the most recent purchases at $25, so ending inventory = $10,000. COGS = $34,300 - $10,000 = $24,300. LIFO would give $26,300 and weighted average about $25,153.
Question 6
Marlow Inc. measures its inventory using FIFO. It holds 2,500 units of a component costing $42 each. The estimated selling price is $46 per unit, and estimated costs to complete and sell are $7 per unit. What inventory write-down is required at year end under US GAAP?
- A) $0
- B) $10,000
- C) $17,500
- D) $7,500
Show answer & explanation
Answer: D) $7,500
For inventory measured using FIFO or average cost, US GAAP requires the lower of cost and net realizable value. NRV = $46 - $7 = $39 per unit, which is below cost of $42. Write-down = ($42 - $39) x 2,500 = $7,500.
Question 7
An inventory write-down recorded in a prior year is no longer needed because selling prices have recovered. How should the recovery be treated?
- A) Reversal is required under both IFRS and US GAAP
- B) Reversal is prohibited under both IFRS and US GAAP
- C) Reversal is permitted under US GAAP but prohibited under IFRS
- D) Reversal is required under IFRS, up to the original write-down, but prohibited under US GAAP
Show answer & explanation
Answer: D) Reversal is required under IFRS, up to the original write-down, but prohibited under US GAAP
Under IAS 2, a write-down is reversed, up to the amount of the original write-down, when the circumstances that caused it no longer exist. Under US GAAP the written-down amount becomes the new cost basis, so subsequent recoveries are not recognized.
Question 8
A company sells a machine together with one year of maintenance for a bundled price of $1,200. The standalone selling prices are $1,000 for the machine and $500 for the maintenance. How much of the transaction price is allocated to the machine?
- A) $1,000
- B) $700
- C) $800
- D) $600
Show answer & explanation
Answer: C) $800
Under the revenue standard (ASC 606 / IFRS 15) the transaction price is allocated to performance obligations in proportion to relative standalone selling prices. Machine share = 1,000 / (1,000 + 500) = 2/3. Allocation = $1,200 x 2/3 = $800; maintenance receives $400.
Question 9
Pinecrest Builders has a fixed-price contract for $5,000,000 that satisfies the criteria for revenue recognition over time. It measures progress using the cost-to-cost input method. In Year 1 it incurred costs of $1,200,000 and estimates total contract costs of $4,000,000. What gross profit should be recognized in Year 1?
- A) $1,500,000
- B) $1,000,000
- C) $240,000
- D) $300,000
Show answer & explanation
Answer: D) $300,000
Progress = $1,200,000 / $4,000,000 = 30%. Revenue = 30% x $5,000,000 = $1,500,000. Gross profit = $1,500,000 - $1,200,000 = $300,000, which equals 30% of the total expected gross profit of $1,000,000.
Question 10
Equipment costing $90,000 with an estimated salvage value of $10,000 and a five-year useful life is depreciated using the double-declining-balance method. What is depreciation expense in Year 2?
- A) $16,000
- B) $19,200
- C) $21,600
- D) $36,000
Show answer & explanation
Answer: C) $21,600
The DDB rate is 2 / 5 = 40%, applied to opening book value without deducting salvage. Year 1 = $90,000 x 40% = $36,000. Year 2 = ($90,000 - $36,000) x 40% = $21,600. Salvage value only limits depreciation so that book value does not fall below $10,000.
Question 11
A pharmaceutical company incurs costs in the development phase of a new product after it has demonstrated technical feasibility, intention to complete and the ability to generate future economic benefits. How are these costs treated?
- A) Capitalized as an intangible asset under IFRS, but generally expensed as incurred under US GAAP
- B) Expensed as incurred under both IFRS and US GAAP
- C) Capitalized under both IFRS and US GAAP
- D) Capitalized under US GAAP, but expensed as incurred under IFRS
Show answer & explanation
Answer: A) Capitalized as an intangible asset under IFRS, but generally expensed as incurred under US GAAP
IAS 38 requires development costs to be capitalized once the specified recognition criteria are met; research costs are always expensed. US GAAP generally requires research and development costs to be expensed as incurred, with limited exceptions such as certain software development costs.
Question 12
Which measurement approach for property, plant and equipment is available under IFRS but not under US GAAP?
- A) The cost model, carrying assets at cost less accumulated depreciation
- B) The revaluation model, carrying assets at fair value less subsequent depreciation and impairment
- C) Recognizing impairment losses when assets are impaired
- D) Depreciating assets over their useful lives
Show answer & explanation
Answer: B) The revaluation model, carrying assets at fair value less subsequent depreciation and impairment
IAS 16 allows an entity to choose either the cost model or the revaluation model for each class of PP&E. US GAAP requires the historical cost model and does not allow upward revaluation. Impairment and depreciation apply under both frameworks.
Question 13
Under US GAAP, a long-lived asset held and used has a carrying amount of $800,000. Its estimated undiscounted future cash flows are $760,000 and its fair value is $610,000. What impairment loss should be recognized?
- A) $40,000
- B) $0
- C) $150,000
- D) $190,000
Show answer & explanation
Answer: D) $190,000
Step 1 (recoverability): the undiscounted cash flows of $760,000 are less than the carrying amount of $800,000, so the asset is not recoverable. Step 2: the loss is measured as carrying amount minus fair value = $800,000 - $610,000 = $190,000.
Question 14
Under IFRS, an asset has a carrying amount of $500,000. Its fair value less costs of disposal is $430,000 and its value in use is $455,000. What impairment loss should be recognized?
- A) $45,000
- B) $70,000
- C) $0
- D) $57,500
Show answer & explanation
Answer: A) $45,000
IAS 36 uses a one-step test: the asset is written down to its recoverable amount, which is the higher of fair value less costs of disposal ($430,000) and value in use ($455,000). Recoverable amount = $455,000, so the loss = $500,000 - $455,000 = $45,000.
Question 15
Fenwick Corp has pretax financial income of $400,000, which includes $20,000 of tax-exempt municipal bond interest. Tax depreciation exceeds book depreciation by $50,000 this year. The tax rate is 21% for all years. What is Fenwick's current income tax payable for the year?
- A) $79,800
- B) $84,000
- C) $73,500
- D) $69,300
Show answer & explanation
Answer: D) $69,300
Taxable income = $400,000 - $20,000 (permanent difference) - $50,000 (temporary difference) = $330,000. Current tax payable = $330,000 x 21% = $69,300. Total tax expense would be $79,800, the difference of $10,500 being the increase in the deferred tax liability.
Question 16
Which statement correctly describes lessee accounting under IFRS 16 compared with US GAAP (ASC 842)?
- A) IFRS 16 keeps operating leases off the balance sheet, whereas ASC 842 recognizes all leases on the balance sheet
- B) IFRS 16 applies a single lessee model in which most leases produce depreciation and interest expense, whereas ASC 842 classifies lessee leases as finance or operating
- C) Both standards require lessees to recognize a single straight-line lease cost for all leases
- D) ASC 842 applies a single lessee model, whereas IFRS 16 classifies lessee leases as finance or operating
Show answer & explanation
Answer: B) IFRS 16 applies a single lessee model in which most leases produce depreciation and interest expense, whereas ASC 842 classifies lessee leases as finance or operating
Under IFRS 16 a lessee recognizes a right-of-use asset and lease liability for most leases and then depreciates the asset and accrues interest on the liability. Under ASC 842 a lessee also recognizes both on the balance sheet, but classifies each lease as finance (depreciation plus interest) or operating (single straight-line lease cost).
Question 17
A lessee signs a five-year lease requiring annual payments of $50,000 at the end of each year. The rate implicit in the lease is 6%, and there are no other payments or initial direct costs. What is the initial lease liability (rounded to the nearest dollar)?
- A) $210,618
- B) $250,000
- C) $223,255
- D) $186,815
Show answer & explanation
Answer: A) $210,618
The lease liability is the present value of the payments, an ordinary annuity. PV factor = [1 - 1.06^-5] / 0.06 = 4.2124. Liability = $50,000 x 4.2124 = $210,618 (rounded). Treating the payments as in advance would give $223,255.
Question 18
A company faces a lawsuit that it will probably lose. Its lawyers estimate the loss at between $200,000 and $600,000, with no amount in the range more likely than any other. What amount should be recognized under US GAAP and under IFRS respectively?
- A) US GAAP $400,000; IFRS $200,000
- B) US GAAP $200,000; IFRS $400,000
- C) US GAAP $600,000; IFRS $600,000
- D) US GAAP $0 (disclose only); IFRS $400,000
Show answer & explanation
Answer: B) US GAAP $200,000; IFRS $400,000
Both frameworks recognize a liability when an outflow is probable and can be reasonably estimated. When no amount in a range is a better estimate, US GAAP (ASC 450) accrues the minimum of the range, so $200,000. IAS 37 uses the midpoint of a continuous range where each point is equally likely, so $400,000.
Question 19
Under US GAAP, where are cash dividends paid to the company's own shareholders reported in the statement of cash flows?
- A) Operating activities
- B) Financing activities
- C) Investing activities
- D) As a non-cash disclosure only
Show answer & explanation
Answer: B) Financing activities
Dividends paid are distributions to owners and are classified as financing cash outflows under US GAAP. IAS 7 has allowed them to be shown as either operating or financing (the IFRS 18 amendments to IAS 7 require financing for most non-financial entities), but US GAAP has always required financing.
Question 20
Harbor Tech estimates uncollectible accounts using an aging schedule: Current: $300,000 at 1% 31-60 days: $80,000 at 5% Over 60 days: $20,000 at 25% Before adjustment, the allowance for doubtful accounts has a credit balance of $2,500. What is bad debt expense for the period?
- A) $12,000
- B) $14,500
- C) $9,500
- D) $8,000
Show answer & explanation
Answer: C) $9,500
Required ending allowance = $3,000 + $4,000 + $5,000 = $12,000. The aging method is a balance sheet approach, so the expense is the adjustment needed: $12,000 - $2,500 existing credit balance = $9,500.
Question 21
Under US GAAP, how are unrealized holding gains on debt securities classified as available-for-sale reported?
- A) In net income for the period
- B) As a deferred credit in liabilities
- C) They are not recognized until the securities are sold
- D) In other comprehensive income, accumulated in equity
Show answer & explanation
Answer: D) In other comprehensive income, accumulated in equity
Available-for-sale debt securities are carried at fair value, with unrealized gains and losses (other than credit losses) reported in other comprehensive income. Trading securities report unrealized gains in net income, and held-to-maturity securities are carried at amortized cost.
Question 22
The International Integrated Reporting Framework describes six capitals that an organization uses and affects. Which of the following is NOT one of those capitals?
- A) Natural capital
- B) Social and relationship capital
- C) Intellectual capital
- D) Regulatory capital
Show answer & explanation
Answer: D) Regulatory capital
The six capitals are financial, manufactured, intellectual, human, social and relationship, and natural capital. Regulatory capital is a banking supervision concept, not one of the integrated reporting capitals.
Question 23
A company owns an aircraft whose engines have a much shorter useful life than the airframe. How do IFRS and US GAAP treat componentization?
- A) US GAAP requires component depreciation; IFRS permits but does not require it
- B) Both frameworks prohibit separate depreciation of components
- C) IFRS requires significant components with different useful lives to be depreciated separately; US GAAP permits but does not require this
- D) Both frameworks require the whole aircraft to be depreciated over the airframe's life
Show answer & explanation
Answer: C) IFRS requires significant components with different useful lives to be depreciated separately; US GAAP permits but does not require this
IAS 16 requires each part of an item of PP&E with a cost that is significant in relation to the total to be depreciated separately. Under US GAAP, component depreciation is allowed but is not mandatory, so many US companies depreciate the asset as a whole.