ACCT 305 EXAM PREP QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. Delta Corporation acquires equipment by issuing common stock directly to the seller, with no cash exchanged.
How should the transaction be reflected in the statement of cash flows?
A. Report only an operating outflow
B. Exclude it from the main cash-flow sections and disclose it as a significant noncash investing and financing
activity
C. Report an investing outflow and financing inflow for the fair value even though no cash moved
D. Report only a financing inflow
Correct Answer: B. Exclude it from the main cash-flow sections and disclose it as a significant noncash investing
and financing activity
Explanation: Significant investing and financing transactions that do not involve cash are excluded from the main
statement of cash flows but are disclosed so users can assess important noncash capital transactions.
2. Granite Corporation provides a routine cleaning service continuously over a 12-month contract, and the
customer simultaneously receives and consumes the benefits as Granite Corporation performs. When is revenue
generally recognized?
A. Entirely at contract signing
B. Only when the customer makes the final cash payment
C. Only at the end of month 12
D. Over time as the service is performed
Correct Answer: D. Over time as the service is performed
Explanation: A performance obligation is satisfied over time when the customer simultaneously receives and consumes
the benefits as the entity performs. Revenue is therefore recognized over the service period using an appropriate measure
of progress.
3. When employees exercise vested stock options of Summit Corporation, which cash-flow classification generally
applies to cash received from the employees for the exercise price?
A. Financing inflow
B. Investing inflow
C. The receipt is excluded from the statement of cash flows
D. Operating inflow
Correct Answer: A. Financing inflow
Explanation: Cash received from issuing the entity's own shares, including proceeds received when employees exercise
options, is generally a financing cash inflow because it is a transaction with owners in their capacity as owners.
, 4. Falcon Corporation incurs $24,000 of direct costs to issue long-term bonds. Under U.S. GAAP, how are these
debt issuance costs generally presented after issuance?
A. As an immediate reduction of retained earnings
B. As a direct deduction from the carrying amount of the related debt
C. As an element of other comprehensive income until the bonds mature
D. As a separate deferred asset reported with other noncurrent assets
Correct Answer: B. As a direct deduction from the carrying amount of the related debt
Explanation: Debt issuance costs related to a recognized debt liability are generally presented as a direct deduction
from the debt's carrying amount. They are then amortized to interest expense over the debt term, typically using the
effective-interest method.
5. A derivative held by Delta Corporation has a positive fair value at year-end. How is the instrument generally
presented?
A. As common stock
B. As a derivative liability
C. As revenue with no balance-sheet amount
D. As a derivative asset, subject to any applicable offsetting rules
Correct Answer: D. As a derivative asset, subject to any applicable offsetting rules
Explanation: A derivative with positive fair value is generally an asset; a negative fair value generally produces a
derivative liability, subject to specific master netting and offsetting guidance.
6. During year-end close, Unity Corporation identifies several uncertain matters. Which item most clearly requires
immediate accrual rather than disclosure only?
A. A remote lawsuit with no indication of material exposure
B. A probable, estimable obligation arising from a past event
C. A possible future operating loss caused by expected competition
D. A probable future gain from a pending claim
Correct Answer: B. A probable, estimable obligation arising from a past event
Explanation: Accrual focuses on an existing obligation from a past event when loss is probable and reasonably
estimable. Expected future operating losses do not represent present obligations, gains are not accrued before realization,
and remote losses usually require neither accrual nor disclosure.
7. How should Redwood Corporation, a lessee, generally classify cash payments for leases in the statement of cash
flows under U.S. GAAP?
A. Operating-lease payments are financing; finance-lease principal is operating
B. All lease payments are investing cash flows
C. Operating-lease payments are operating; finance-lease principal is financing and finance-lease interest is
operating
D. All lease payments are financing cash flows
Correct Answer: C. Operating-lease payments are operating; finance-lease principal is financing and finance-lease
interest is operating
Explanation: Under U.S. GAAP, operating lease payments are operating cash flows. For finance leases, principal
repayments are financing cash flows, while interest payments are generally operating cash flows.
ANSWERS AND EXPLANATIONS
| American Public University
1. Delta Corporation acquires equipment by issuing common stock directly to the seller, with no cash exchanged.
How should the transaction be reflected in the statement of cash flows?
A. Report only an operating outflow
B. Exclude it from the main cash-flow sections and disclose it as a significant noncash investing and financing
activity
C. Report an investing outflow and financing inflow for the fair value even though no cash moved
D. Report only a financing inflow
Correct Answer: B. Exclude it from the main cash-flow sections and disclose it as a significant noncash investing
and financing activity
Explanation: Significant investing and financing transactions that do not involve cash are excluded from the main
statement of cash flows but are disclosed so users can assess important noncash capital transactions.
2. Granite Corporation provides a routine cleaning service continuously over a 12-month contract, and the
customer simultaneously receives and consumes the benefits as Granite Corporation performs. When is revenue
generally recognized?
A. Entirely at contract signing
B. Only when the customer makes the final cash payment
C. Only at the end of month 12
D. Over time as the service is performed
Correct Answer: D. Over time as the service is performed
Explanation: A performance obligation is satisfied over time when the customer simultaneously receives and consumes
the benefits as the entity performs. Revenue is therefore recognized over the service period using an appropriate measure
of progress.
3. When employees exercise vested stock options of Summit Corporation, which cash-flow classification generally
applies to cash received from the employees for the exercise price?
A. Financing inflow
B. Investing inflow
C. The receipt is excluded from the statement of cash flows
D. Operating inflow
Correct Answer: A. Financing inflow
Explanation: Cash received from issuing the entity's own shares, including proceeds received when employees exercise
options, is generally a financing cash inflow because it is a transaction with owners in their capacity as owners.
, 4. Falcon Corporation incurs $24,000 of direct costs to issue long-term bonds. Under U.S. GAAP, how are these
debt issuance costs generally presented after issuance?
A. As an immediate reduction of retained earnings
B. As a direct deduction from the carrying amount of the related debt
C. As an element of other comprehensive income until the bonds mature
D. As a separate deferred asset reported with other noncurrent assets
Correct Answer: B. As a direct deduction from the carrying amount of the related debt
Explanation: Debt issuance costs related to a recognized debt liability are generally presented as a direct deduction
from the debt's carrying amount. They are then amortized to interest expense over the debt term, typically using the
effective-interest method.
5. A derivative held by Delta Corporation has a positive fair value at year-end. How is the instrument generally
presented?
A. As common stock
B. As a derivative liability
C. As revenue with no balance-sheet amount
D. As a derivative asset, subject to any applicable offsetting rules
Correct Answer: D. As a derivative asset, subject to any applicable offsetting rules
Explanation: A derivative with positive fair value is generally an asset; a negative fair value generally produces a
derivative liability, subject to specific master netting and offsetting guidance.
6. During year-end close, Unity Corporation identifies several uncertain matters. Which item most clearly requires
immediate accrual rather than disclosure only?
A. A remote lawsuit with no indication of material exposure
B. A probable, estimable obligation arising from a past event
C. A possible future operating loss caused by expected competition
D. A probable future gain from a pending claim
Correct Answer: B. A probable, estimable obligation arising from a past event
Explanation: Accrual focuses on an existing obligation from a past event when loss is probable and reasonably
estimable. Expected future operating losses do not represent present obligations, gains are not accrued before realization,
and remote losses usually require neither accrual nor disclosure.
7. How should Redwood Corporation, a lessee, generally classify cash payments for leases in the statement of cash
flows under U.S. GAAP?
A. Operating-lease payments are financing; finance-lease principal is operating
B. All lease payments are investing cash flows
C. Operating-lease payments are operating; finance-lease principal is financing and finance-lease interest is
operating
D. All lease payments are financing cash flows
Correct Answer: C. Operating-lease payments are operating; finance-lease principal is financing and finance-lease
interest is operating
Explanation: Under U.S. GAAP, operating lease payments are operating cash flows. For finance leases, principal
repayments are financing cash flows, while interest payments are generally operating cash flows.
