PSIA Accounting Practice Test

These questions are part of the practice quiz. Start practicing

• Which statement best explains why a company would not regularly write down its liabilities for short-term gain?
• What is the key difference between operating leases and capital leases?
• Which costing method is most appropriate for customized, unique products or jobs?
• What is the cash balance change at the end of Year 1 after these debt and interest activities?
• Distinguish between accrued revenue and unearned revenue: which statement is true?
• Cash equivalents are best described as which?
• Which statement about liquidity ratios is correct?
• When PIK interest accrues, which balance sheet changes occur?
• Which method uses a traditional overhead rate based on a single driver (for example, direct labor hours) to allocate overhead?
• What is the journal entry to record bad debt expense under the allowance method?
• What happens on the three statements when $100 of stock is issued to employees as stock-based compensation?
• Which statement best describes the typical tax deductibility of Goodwill impairment arising from acquisitions?
• Under percentage-of-completion, revenue can be recognized over time based on which criterion?
• If you could only look at two statements to assess a company's prospects, which two would you use?
• What is the primary difference between LIFO and FIFO in inventory costing?
• What are the effects on the three statements when a company writes down $100 of debt (a liability)?
• Using the straight-line method, what is the monthly interest expense for a 12-month note at 6% on a $100,000 principal?
• What does a deferred tax asset represent?
• Is it possible to have negative Shareholders' Equity? If so, under what circumstances?
• Which scenario illustrates professional skepticism?
• If a company records 100 in Tax Benefits from SBC and 40 in Excess Tax Benefits from SBC, what is the impact on the cash flow statements and equity?
• Which statement about materiality and misstatements is correct?
• What does negative (Operating) Working Capital imply?
• What's the difference between Accounts Receivable and Deferred Revenue?
• From the start of Year 2 to the end of Year 2, what is the net change in Cash Flow from Operations (CFO)?
• Under ASC 606, which option best describes a performance obligation?
• If a company earned 1,000 revenue and 200 EBITDA for 2050, and 200 revenue with 50 EBITDA in Jan–Mar 2050, and 300 revenue with 75 EBITDA in Jan–Mar 2051, what are the Trailing Twelve Months revenue and EBITDA as of March 31, 2051?
• If Depreciation increases by 10 and the tax rate is 40%, what is the impact on Net Income?
• Diluted earnings per share accounts for potential shares by adding them to which component of the calculation?
• An increase in Accounts Receivable by 10 affects cash and net income how?
• During consolidation, what happens to the acquiree's shareholders' equity?
• With 70% ownership and a subsidiary net income of 10, what is the Net Income Attributable to Noncontrolling Interests?
• Which category does paying dividends belong to in the cash flow statement?
• When you own more than 50% of another company and consolidate its financials, which of the following statements is true?
• What is the purpose of the allowance for doubtful accounts?
• Diluted earnings per share is calculated as (Net income minus preferred dividends) divided by (weighted-average shares plus potential shares). Why is this metric important?
• Which items are excluded from the Operating Working Capital calculation?
• Goodwill in this scenario is best described as the excess of purchase price over which figure?
• In Year 2, following depreciation of 10 and an additional $10 of interest expense, with a 40% tax rate, how does Net Income change relative to the start of Year 2?
• EBITDA excludes which items according to common practice?
• Pro forma earnings are often used to present 'true cash earnings' by excluding which of the following?
• If Inventory increases by 10 and is paid for in cash, which statement about assets is true?
• On the Balance Sheet, what equation must hold?
• Which statement about Paid-in-Kind (PIK) interest is true?
• What is an inventory obsolescence write-down and how is it recorded?
• In Year 1, with Book Depreciation of 10 per year and Tax Depreciation of 15 in Year 1, what are the Book NI and Tax NI changes (assume 40% tax rate and a starting Pre-Tax Income of 100)?
• Allowance for doubtful accounts: which method is described correctly?
• At issuance, a bond issued at a premium has which characteristic?
• Which of the following statements about contingent liabilities is correct?
• If cash collected is not recorded as revenue, what happens to it?
• How is stock-based compensation accounted for in financial statements?
• An equipment asset with a cost of $60,000 has accumulated depreciation of $15,000. If you record annual depreciation of $5,000, what is the journal entry and how does it affect net book value?
• End of Year 2, PP&E decreases by $90 in total. Which statement best describes this change?
• What is the effect of declaring and paying cash dividends on the financial statements?
• After a stock-based compensation expense of $100, Retained Earnings changes by what amount?
• A decrease in Prepaid Expenses of 10 affects Net Income and cash how?
• Should Short-Term Investments be included in Working Capital calculations?
• What is the overall change in cash at the end of Year 2 after all events (including financing)?
• If a company has $100 income tax expense and pays it entirely in cash, but then defers $10 to future periods, how do the statements change?
• On the Balance Sheet, how is the ending cash balance determined from the Cash Flow Statement?
• If Accrued Expenses increases by 10, what is the impact on Net Income (with a 40% tax rate)?
• With 30% ownership and the subsidiary earns net income of 20, by how much does the parent's Net Income increase?
• Sell PP&E for 120 with a book value of 100; which statements are true about Net Income and Cash Flow from Investing?
• Under the current rate method, which rate is typically used to translate the income statement?
• Which of the following is an example of an investing activities cash flow?
• Which of the following is a cash equivalent?
• At the end of Year 1, after earning interest and paying interest and repaying debt principal, what is the Net Income change?
• Under the current rate method for foreign currency translation, which rates apply and where are translation adjustments reported?
• What is the increase in the consolidated equity due to stock portion of the consideration?
• Consolidation is required when a parent company has control. This is typically evidenced by which criterion?
• Which statement best defines a Deferred Tax Liability (DTL)?
• How is Working Capital defined?
• Which of the following is an example of segregation of duties?
• During a bank reconciliation, which item would typically be added to the bank balance to reconcile to the book balance?
• Noncontrolling Interest (also called Minority Interest) on a balance sheet represents which of the following when you own more than 50% but less than 100% of another company?
• How does depreciation affect cash balance?
• In the trading-securities scenario, what is the effect on the cash flow statement?
• How are Prepaid Expenses (PE) and Accounts Payable (AP) different?
• Under the equity method, how is the investment recorded when ownership is between 20% and 50%?
• Why don't interest payments show up in Cash Flow from Financing if debt repayments do?
• Net Income from the Income Statement becomes the top line of which statement?
• What is the simplest method for projecting Depreciation and Capital Expenditures?
• If the 30% owned subsidiary issues dividends of 10, what are the changes to Investments in Equity Interests and Retained Earnings on the balance sheet?
• At the start of Year 1, Apple finances the purchase of $100 worth of factory equipment entirely with debt. Which statements change occur?
• In cash-based accounting, when does revenue from a credit card sale typically appear?
• With a value increase in trading securities, what is the effect on the balance sheet?
• Variance analysis in budgeting describes:
• Where is non-controlling interest shown in consolidated financial statements?
• Goodwill impairment reduces which asset on the balance sheet and can lead to negative Net Income?
• What does Income Taxes Payable on the balance sheet represent?
• What's the difference between Accounts Payable and Accrued Expenses?
• In a debt write-down of $100, what is the impact on Net Income after tax?
• When is the expense for Inventory typically recorded in the Income Statement?
• Under percentage-of-completion accounting, when is revenue recognized for a long-term contract?
• Which financial statement shows assets, liabilities, and equity at a point in time?
• Amortization of intangibles: finite vs indefinite. Which statement is true?
• Immediately after issuing $100 of debt to buy $100 of Short-Term Securities, which statements change and how?
• Which of the following best describes the Balance Sheet after the sale of the iPads (cash increases, inventory decreases)?
• What happens to Deferred Revenue after the goods or services are delivered?
• At the end of Year 2, factories are written down to zero and the loan must be repaid. With a $10 depreciation, an $80 write-down, and a $10 of additional interest expense, and a 40% tax rate, what is the Net Income change?
• Net realizable value in inventory is defined as?
• Which statement accurately describes tax provision, current tax payable, and deferred tax liability?
• Identify three key internal controls that help prevent fraud in a typical accounting system.
• If Accrued Expenses are paid down by 10 (cash outflow), which statement is true?
• In the debt write-down example, what happens to liabilities on the balance sheet?
• What is the year-end change in Debt balance after repaying 10% of the principal?
• Under GAAP, which accounting method is required and why?
• Which cash expense not reflected in EBITDA could cause a company to become cash flow negative despite positive EBITDA?
• Which criterion determines whether a charge should be added back to EBITDA as a non-recurring item?
• Consolidated financial statements present the financial position of the parent and its subsidiaries as if they were a single entity. Which of the following is typically true in consolidation?
• Which statement explains why statutory tax rate and effective tax rate might differ?
• In revenue recognition with variable consideration, which principle governs when to recognize variable amounts?
• Goodwill impairment testing is required to be performed annually or when indicators of impairment exist. What is compared to determine impairment?
• Under the equity method of accounting for investments in associates, when is it used?
• What is the simplest method to project expenses for a company?
• What is the main advantage of using complex projection methods over simpler ones?
• Which statement represents the basic accounting equation?
• If the same securities were trading securities and their value increased by 10, with a 40% tax rate, what is the impact on Net Income?
• In contingent liability disclosure, if a contingent liability is probable but not estimable, what disclosure is required?
• Lease accounting under ASC 842 for lessees: which is true?
• A company has NOLs of 100 and generates Pre-Tax Income of 200 this year, with a 40% tax rate. What are Net Income and Cash taxes, considering the NOLs?
• What does calendarizing financial figures mean?
• What does the leverage ratio measure, and why is high leverage risky?
• Using the calendarization method, if New Partial Revenue is 400 with 90 EBITDA, Old Partial Revenue is 150 with 30 EBITDA, Full-Year Revenue is 1200 and EBITDA is 240, what is the TTM Revenue and EBITDA as of the end of the new partial period?
• If you own 60% of a company valued at $100, what is the Noncontrolling Interest?
• Where does Debt repayment show up on the Cash Flow Statement?
• Which balance sheet line item is the counterpart to 'Accrued Expenses' but for taxes?
• What are the effects on the three statements when the company receives a $100 bailout?
• Which condition is one of the criteria for classifying a lease as a capital lease?
• List three common indicators that impairment of PP&E might exist and outline the accounting test used to determine impairment.
• If accelerated depreciation for tax purposes occurs in the early years and straight-line depreciation is used for books, what happens to Deferred Tax Liability (DTL) over time?
• Which statement correctly describes unearned revenue?
• A company buys equipment for $50,000 in cash. Which journal entry records this transaction, and what is the effect on total assets and equity?
• Which statement about tax credits and tax deductions is correct?
• What are the typical effects on the three financial statements when a company records a $100 asset write-down?
• In Year 3, with Book Depreciation of 10 and Tax Depreciation of 5, what is the Net Income change on the Book vs Tax statements and the Cash Taxes impact?
• What is the effect on the three statements when a company pays $100 in dividends?
• If the entire $1000 purchase price had been paid in cash instead of 50/50, what would be the immediate effect on the acquirer's cash balance?
• Under accrual basis accounting, when is revenue recognized?
• Which statement begins with net income and adjusts for non-cash expenses and changes in operating assets and liabilities?
• Under the equity method, what does the investor record?
• Notes to the financial statements are important because they provide which of the following?
• If a $100 asset write-down occurs with a 40% tax rate, what is the resulting effect on Shareholders' Equity?
• Five steps of revenue recognition under ASC 606 for a typical sale with distinct performance obligations: which sequence is correct?
• If a purchase corresponds to an Asset with a useful life over 1 year, what happens?
• A bottoms-up revenue model typically explains growth via which drivers?
• Straight-line depreciation vs double-declining-balance: which statement is true?
• Why do some companies report non-GAAP (or Pro Forma) earnings?
• Investments in Equity Interests (aka Associate Companies) appear on assets when you own what range of ownership in another company?
• Where do Net Operating Losses (NOLs) affect in a 3-statement model?
• Distinguish between accrued expenses and prepaid expenses: which statement is true?
• How long does it usually take for a company to collect its Accounts Receivable balance?
• If you own 10% of another company, how is the investment typically recorded?
• If an investor holds 10% of a company but has significant influence, which accounting treatment might be used?
• What is included in Cash Flow from Investing?
• For assets classified as Available-for-Sale securities, what happens to unrealized gains or losses in the income statement when market value increases?
• Where does Depreciation usually appear on the Income Statement?
• Do Net Operating Losses (NOLs) affect the book version of the Income Statement?
• What is the purpose of a bank reconciliation and what are typical reconciling items?
• Under which ownership threshold do you consolidate a subsidiary's statements 100% into the parent's statements?
• Depreciation is a non-cash expense; its effect on the balance sheet is to:
• Which formula correctly computes Accounts Receivable Days?
• What is the difference between cash-based and accrual accounting?
• In accrual accounting, where does revenue from a credit card sale appear initially?
• Which security classification records unrealized gains and losses on the income statement?
• From the lessee’s perspective, a capital lease results in recognizing which on the balance sheet?
• Why is Noncontrolling Interest presented on the balance sheet?
• Deferred tax liability is created by which of the following?
• Which of the following is NOT listed as one of the three ethical considerations in accounting?
• Which of the following best explains why Goodwill is recognized in this scenario?
• Why are intercompany transactions eliminated in consolidation?
• Which statement best describes the aging of receivables compared to the percentage of sales method?
• Which statement best describes the typical linking of balance sheet items with the income statement in projections?
• Which items are typically adjustments to net income to compute cash provided by operating activities?
• When a company issues common stock for cash, which of the following statements is true about the accounts affected and the effect on assets and equity?
• In Year 2, where Book Depreciation equals Tax Depreciation (both 10), what is the ending Cash impact described in the example?
• If the company sells the inventory for $20 with cost $10, what is the Net Income change?
• Which statement about lease recognition under ASC 842 for a finance lease is true?
• Which statement about indefinite-lived intangibles is true?
• The bottom line of the Cash Flow Statement is the net change in cash.
• What distinguishes Excess Tax Benefits from standard Tax Benefits related to stock-based compensation?
• Apple orders $10 of inventory using cash on hand, with no manufacturing or sale yet. Which statements describe the effects on the three financial statements?
• Which revenue projection approach is generally more common and reliable, and why?
• Which cash flow activity is financing activities?
• What is the difference between a deferred tax asset and a deferred tax liability?
• When would a company collect cash from a customer and not record it as revenue?
• Tax provision includes which components?
• Goodwill impairment usually occurs when:
• If a 100 Goodwill impairment is not deductible for cash taxes, which statement correctly describes the three financial statements?
• Which classification does not report gains or losses on the income statement but instead reports them in Accumulated Other Comprehensive Income (AOCI)?
• Current tax payable is defined as which of the following?
• Explain what happens on the three statements when a company issues $100 worth of shares to investors.
• In a typical acquisition where the seller is fully absorbed, what happens to the seller's equity on the consolidated balance sheet?
• If you own less than 20% and have significant influence, which accounting treatment may be used?
• Depreciation reduces Pre-Tax Income.
• Following the sale, what is the change in Cash Flow from Operations (CFO)?
• What percentage of the purchase price was paid in cash in the example?
• When should an expense appear on the Income Statement?
• If Available-for-Sale securities increase in market value by 10, which accounts are affected on the 3 statements?
• Which statement correctly describes unrealized gains for Available-for-Sale vs Trading securities?
• Which factor can cause Shareholders' Equity to be negative?
• In the given 50% stock and 50% cash acquisition, what is the amount of Goodwill recognized?
• In a period of rising prices, which inventory method yields the lowest COGS and the highest ending inventory?
• Immediately after the acquisition, how are the seller's assets and liabilities reflected in the consolidated balance sheet?
• Activity-Based Costing (ABC) allocates overhead to products based on what?
• Why add back non-cash expenses on the Cash Flow Statement?
• A sale of $10,000 is made on account with a 2% discount if paid within 10 days. Provide the journal entry when the customer pays within the discount period using the gross method.
• On the Income Statement, which item is a major expense category?
• Why is the Income Statement not affected by Inventory purchases?
• How can Depreciation be presented on the Income Statement?
• In a service contract with multiple performance obligations and variable consideration, what is the proper revenue recognition approach?
• Which scenario could lead to both a Deferred Tax Asset (DTA) and a Deferred Tax Liability (DTL) existing at the same time?
• What is the formula for Operating Working Capital?
• If a 70% owned subsidiary pays a dividend of 5, what is the net effect on cash at period end?
• Why is a three-statement model preferred for forecasting a company's financials?
• When creating quarterly projections, what approach is best for revenue growth?
• Which statement would you consult to determine how much cash the company actually generated?
• When a company pays 20 in interest consisting of 10 cash and 10 PIK, what is the effect on Net Income and Cash Flow from Operations?
• In rising prices, which inventory method yields the highest net income in the early years?
• Depreciation increases by 10 with a 40% tax rate; cash flow from operations changes by what amount?
• A newly identified balance sheet item should be classified as an Asset if it will result in which?
• Wait a minute... Deferred Revenue reflects cash that we've already collected upfront for a product/service we haven't delivered yet. Why is it a Liability?
• Under the equity method, where is the Investments in Equity Interests shown on the balance sheet?