1. Which of the following is the core principle of revenue recognition according
to ASC 606?
• A. Revenue is recognized when control of a good or service is transferred to the
customer.
• B. Revenue is recognized when cash is received.
• C. Revenue is recognized when a contract is signed.
• D. Revenue is recognized when the goods are shipped.
Answer: A
Rationale: ASC 606 dictates that revenue should be recognized when control of a good or
service is transferred to the customer, which is a departure from previous rules focusing
primarily on risks and rewards.
2. Under the percentage-of-completion method, how is revenue recognized?
• A. When the contract is fully completed.
• B. Based on the proportion of costs incurred to total estimated costs.
• C. Upon receipt of payment.
• D. When the project reaches 50% completion.
Answer: B
Rationale: The percentage-of-completion method recognizes revenue based on the proportion of
costs incurred to total estimated costs. This is particularly used in long-term contracts.
3. Which inventory costing method typically results in the lowest net income in
periods of rising prices?
• A. FIFO
• B. LIFO
• C. Weighted-Average
• D. Specific Identification
Answer: B
Rationale: LIFO (Last-In, First-Out) typically results in lower net income during periods of
inflation as the more recent, higher costs are matched with current revenues, increasing the cost
of goods sold.
4. Which of the following represents a key characteristic of intangible assets?
, • A. They have a physical substance.
• B. They are typically held for short-term purposes.
• C. They lack physical substance but have long-term value.
• D. They are measured at historical cost indefinitely.
Answer: C
Rationale: Intangible assets, such as patents and trademarks, lack physical substance but provide
long-term benefits to the company. They are typically amortized over their useful lives, unless
they are indefinite.
5. How should a company report changes in accounting estimates?
• A. Retrospectively by adjusting prior period financial statements.
• B. Prospectively in the financial statements of the current and future periods.
• C. By restating all previous periods affected.
• D. No adjustments are needed as estimates change regularly.
Answer: B
Rationale: Changes in accounting estimates are accounted for prospectively. The effect is
reflected in the period of change and future periods, with no retrospective adjustments required.
6. Which of the following is NOT a component of internal control according to
COSO?
• A. Risk Assessment
• B. Monitoring Activities
• C. Financial Reporting
• D. Control Environment
Answer: C
Rationale: Financial reporting is an outcome of strong internal control, but it is not considered
one of the five components of internal control under COSO, which are control environment, risk
assessment, control activities, information and communication, and monitoring activities.
7. Under IFRS, how are research and development costs handled?
• A. All research and development costs are expensed as incurred.
• B. Research costs are expensed, but development costs may be capitalized if certain
criteria are met.
• C. Development costs are always expensed.
, • D. Both research and development costs are capitalized.
Answer: B
Rationale: Under IFRS, research costs are expensed as incurred. However, development costs
can be capitalized if specific criteria (e.g., technical feasibility, intention to complete) are met.
8. What is the purpose of the Statement of Comprehensive Income?
• A. To provide a summary of all financial transactions over a period.
• B. To show changes in equity, including items not captured in net income.
• C. To reflect changes in cash flow over a period.
• D. To summarize only the income and expenses from operations.
Answer: B
Rationale: The Statement of Comprehensive Income includes both net income and other
comprehensive income (e.g., unrealized gains and losses on certain investments), which are not
included in the income statement but affect equity.
9. Which of the following is an acceptable approach to recognizing contingent
liabilities under U.S. GAAP?
• A. Recognize all contingent liabilities.
• B. Recognize liabilities only if the probability of a loss is remote.
• C. Recognize a liability if the loss is probable and can be reasonably estimated.
• D. Recognize liabilities only when they become actual losses.
Answer: C
Rationale: Under U.S. GAAP, contingent liabilities should be recognized when it is probable
that a loss will occur, and the amount of the loss can be reasonably estimated.
10. Which of the following is NOT a fundamental qualitative characteristic of
useful financial information, according to the FASB’s conceptual framework?
• A. Relevance
• B. Faithful representation
• C. Comparability
• D. Materiality
Answer: D
Rationale: While materiality is important in financial reporting, it is not one of the two
to ASC 606?
• A. Revenue is recognized when control of a good or service is transferred to the
customer.
• B. Revenue is recognized when cash is received.
• C. Revenue is recognized when a contract is signed.
• D. Revenue is recognized when the goods are shipped.
Answer: A
Rationale: ASC 606 dictates that revenue should be recognized when control of a good or
service is transferred to the customer, which is a departure from previous rules focusing
primarily on risks and rewards.
2. Under the percentage-of-completion method, how is revenue recognized?
• A. When the contract is fully completed.
• B. Based on the proportion of costs incurred to total estimated costs.
• C. Upon receipt of payment.
• D. When the project reaches 50% completion.
Answer: B
Rationale: The percentage-of-completion method recognizes revenue based on the proportion of
costs incurred to total estimated costs. This is particularly used in long-term contracts.
3. Which inventory costing method typically results in the lowest net income in
periods of rising prices?
• A. FIFO
• B. LIFO
• C. Weighted-Average
• D. Specific Identification
Answer: B
Rationale: LIFO (Last-In, First-Out) typically results in lower net income during periods of
inflation as the more recent, higher costs are matched with current revenues, increasing the cost
of goods sold.
4. Which of the following represents a key characteristic of intangible assets?
, • A. They have a physical substance.
• B. They are typically held for short-term purposes.
• C. They lack physical substance but have long-term value.
• D. They are measured at historical cost indefinitely.
Answer: C
Rationale: Intangible assets, such as patents and trademarks, lack physical substance but provide
long-term benefits to the company. They are typically amortized over their useful lives, unless
they are indefinite.
5. How should a company report changes in accounting estimates?
• A. Retrospectively by adjusting prior period financial statements.
• B. Prospectively in the financial statements of the current and future periods.
• C. By restating all previous periods affected.
• D. No adjustments are needed as estimates change regularly.
Answer: B
Rationale: Changes in accounting estimates are accounted for prospectively. The effect is
reflected in the period of change and future periods, with no retrospective adjustments required.
6. Which of the following is NOT a component of internal control according to
COSO?
• A. Risk Assessment
• B. Monitoring Activities
• C. Financial Reporting
• D. Control Environment
Answer: C
Rationale: Financial reporting is an outcome of strong internal control, but it is not considered
one of the five components of internal control under COSO, which are control environment, risk
assessment, control activities, information and communication, and monitoring activities.
7. Under IFRS, how are research and development costs handled?
• A. All research and development costs are expensed as incurred.
• B. Research costs are expensed, but development costs may be capitalized if certain
criteria are met.
• C. Development costs are always expensed.
, • D. Both research and development costs are capitalized.
Answer: B
Rationale: Under IFRS, research costs are expensed as incurred. However, development costs
can be capitalized if specific criteria (e.g., technical feasibility, intention to complete) are met.
8. What is the purpose of the Statement of Comprehensive Income?
• A. To provide a summary of all financial transactions over a period.
• B. To show changes in equity, including items not captured in net income.
• C. To reflect changes in cash flow over a period.
• D. To summarize only the income and expenses from operations.
Answer: B
Rationale: The Statement of Comprehensive Income includes both net income and other
comprehensive income (e.g., unrealized gains and losses on certain investments), which are not
included in the income statement but affect equity.
9. Which of the following is an acceptable approach to recognizing contingent
liabilities under U.S. GAAP?
• A. Recognize all contingent liabilities.
• B. Recognize liabilities only if the probability of a loss is remote.
• C. Recognize a liability if the loss is probable and can be reasonably estimated.
• D. Recognize liabilities only when they become actual losses.
Answer: C
Rationale: Under U.S. GAAP, contingent liabilities should be recognized when it is probable
that a loss will occur, and the amount of the loss can be reasonably estimated.
10. Which of the following is NOT a fundamental qualitative characteristic of
useful financial information, according to the FASB’s conceptual framework?
• A. Relevance
• B. Faithful representation
• C. Comparability
• D. Materiality
Answer: D
Rationale: While materiality is important in financial reporting, it is not one of the two
