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Free Questions › CPA › Business Analysis and Reporting
Free CPA Business Analysis and Reporting Practice Questions & Answers
500 exam-style Business Analysis and Reporting questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 211
Intangibles NOT recognised by the acquiree (e.g. an internally developed brand) are:
Select an option first.
Correct answer: D — RECOGNISED at fair value, REDUCING goodwill
Explanation: The acquisition method requires recognition of ALL IDENTIFIABLE intangibles at FAIR VALUE — even those the target could never recognise itself (brands, customer relationships, technology). This REDUCES goodwill, since goodwill is the residual. Failing to identify them inflates goodwill.
Question 212
In a STEP acquisition, a previously held equity interest is:
Select an option first.
Correct answer: B — REMEASURED to FAIR VALUE, with the gain or loss in EARNINGS
Explanation: In a STEP acquisition, the previously held interest is REMEASURED to FAIR VALUE at the acquisition date, with the resulting gain or loss recognised in EARNINGS. That fair value is then included in the goodwill computation.
Question 213
A change in a parent's ownership that does NOT result in loss of control is accounted for as:
Select an option first.
Correct answer: A — An EQUITY transaction — the difference goes to APIC, NOT income
Explanation: So long as CONTROL is RETAINED, transactions in a subsidiary's shares are EQUITY transactions between owners. NO gain or loss touches income; the difference between the consideration and the adjustment to the NCI's carrying amount goes to APIC. Only LOSS OF CONTROL triggers income recognition.
Question 214
On LOSS of control of a subsidiary, any retained investment is:
Select an option first.
Correct answer: D — REMEASURED to FAIR VALUE, with the gain or loss in EARNINGS
Explanation: On LOSS OF CONTROL, the parent derecognises the subsidiary's assets and liabilities and REMEASURES any retained interest to FAIR VALUE, with the gain or loss in EARNINGS. Any related CTA in AOCI is also RECLASSIFIED to income.
Question 215
Intercompany profit in ending inventory is eliminated:
Select an option first.
Correct answer: C — Only to the extent the goods REMAIN UNSOLD to outside parties at year-end
Explanation: Only the profit on goods STILL ON HAND at year-end is UNREALISED and eliminated. Goods already sold on to OUTSIDE parties ARE realised from the group's perspective. Eliminating the full intercompany profit would understate consolidated income.
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Question 216
A DOWNSTREAM intercompany sale (parent to subsidiary) allocates the unrealised profit:
Select an option first.
Correct answer: C — ENTIRELY to the PARENT
Explanation: In a DOWNSTREAM sale (parent is the seller), the unrealised profit belongs to the PARENT and is allocated 100% to the parent — the NCI is unaffected. In an UPSTREAM sale (subsidiary is the seller), the unrealised profit IS shared with the NCI.
Question 217
The functional currency of a foreign subsidiary is:
Select an option first.
Correct answer: B — The currency of the PRIMARY ECONOMIC ENVIRONMENT in which the entity operates
Explanation: The FUNCTIONAL currency is that of the PRIMARY ECONOMIC ENVIRONMENT — the currency that mainly influences sales prices and costs. It is a matter of FACT and judgement, not a free election. It determines whether TRANSLATION (gain to OCI) or REMEASUREMENT (gain to net income) applies.
Question 218
Under TRANSLATION, the resulting adjustment is recorded in:
Select an option first.
Correct answer: A — OCI, as the CUMULATIVE TRANSLATION ADJUSTMENT
Explanation: TRANSLATION (functional = local currency): assets/liabilities at the CURRENT rate, equity at HISTORICAL, income at AVERAGE, with the adjustment to OCI (the CTA). REMEASUREMENT (functional = parent's currency) sends the gain or loss to NET INCOME.
Question 219
The CTA is reclassified to net income when:
Select an option first.
Correct answer: D — The foreign subsidiary is SOLD or substantially liquidated
Explanation: The accumulated CTA is RECLASSIFIED to NET INCOME only on SALE or SUBSTANTIAL LIQUIDATION of the foreign subsidiary. Until then it accumulates in equity, sometimes for decades — which is why reported disposal gains can differ sharply from the cash economics.
Question 220
Hedge documentation must be prepared:
Select an option first.
Correct answer: A — AT INCEPTION of the hedge
Explanation: Formal DOCUMENTATION AT INCEPTION is a PREREQUISITE for hedge accounting — identifying the hedging instrument, the hedged item, the risk being hedged, and the method of assessing effectiveness. Without contemporaneous documentation, hedge accounting is unavailable, however economically effective the hedge is.
Question 221
Under ASU 2017-12, cash flow hedge INEFFECTIVENESS is:
Select an option first.
Correct answer: C — NO LONGER separately measured — the ENTIRE change goes to OCI and is reclassified when the hedged item affects earnings
Explanation: ASU 2017-12 ELIMINATED the requirement to separately measure and report hedge ineffectiveness for cash flow hedges. The ENTIRE change in the hedging instrument's fair value goes to OCI and is reclassified when the hedged item affects earnings. Pre-2017 material describes the old bifurcation.
Question 222
An embedded derivative must be BIFURCATED when:
Select an option first.
Correct answer: A — It is NOT clearly and closely related to the host, the hybrid is not at FV through earnings, AND it would be a derivative standalone
Explanation: ALL THREE conditions must hold for bifurcation. The entity may instead ELECT the FAIR VALUE OPTION for the entire hybrid instrument, avoiding the need to separate the components.
Question 223
A contract asset differs from a receivable in that a contract asset:
Select an option first.
Correct answer: A — Is CONDITIONAL on something other than the passage of time
Explanation: A CONTRACT ASSET arises when the entity has performed but its right to payment is CONDITIONAL on something beyond the passage of time (completing another obligation). Once the right becomes UNCONDITIONAL, it becomes a RECEIVABLE. A contract asset therefore carries PERFORMANCE risk as well as credit risk.
Question 224
A contract liability (deferred revenue) arises when:
Select an option first.
Correct answer: A — The entity has RECEIVED consideration (or it is due) BEFORE transferring the goods or services
Explanation: A CONTRACT LIABILITY arises when the entity has been paid (or payment is due) BEFORE it has satisfied the performance obligation. It represents the obligation to transfer goods or services — or refund the money.
Question 225
Under ASC 606, a SERVICE-type warranty is:
Select an option first.
Correct answer: D — A SEPARATE PERFORMANCE OBLIGATION, with revenue allocated to it and recognised over the coverage period
Explanation: A SERVICE-type warranty (coverage the customer could buy separately) IS a separate performance obligation — part of the transaction price is allocated to it and recognised over the coverage period. An ASSURANCE-type warranty (the product will work as promised) is NOT a performance obligation; it is a COST ACCRUAL.
Question 226
Under ASC 606, an entity that is an AGENT recognises revenue:
Select an option first.
Correct answer: D — NET — only its fee or commission
Explanation: An AGENT arranges for another party to provide the goods and does NOT control them before transfer, so it recognises revenue NET (fee or commission only). A PRINCIPAL, which CONTROLS the goods before transfer, recognises revenue GROSS. The decision can change reported revenue by an order of magnitude without changing profit at all.
Question 227
Contract acquisition costs (e.g. sales commissions) that are incremental and recoverable are:
Select an option first.
Correct answer: D — CAPITALISED and amortised over the period of benefit
Explanation: INCREMENTAL costs of obtaining a contract (costs that would NOT have been incurred had the contract not been won) are CAPITALISED if recovery is expected, and amortised over the PERIOD OF BENEFIT — which may include anticipated RENEWALS. A practical expedient permits expensing if the amortisation period is one year or less.
Question 228
IFRS uses a SINGLE lease model for lessees, meaning:
Select an option first.
Correct answer: A — ALL leases are treated like FINANCE leases (amortisation plus interest) — there is NO operating lease classification for lessees
Explanation: IFRS 16 uses a SINGLE lessee model: virtually all leases produce a right-of-use asset and a lease liability, with expense split into AMORTISATION and INTEREST (front-loaded). US GAAP retains the DUAL model — finance leases (front-loaded) versus operating leases (straight-line). A major divergence.
Question 229
Under IFRS, an impairment loss (other than goodwill) may be:
Select an option first.
Correct answer: B — REVERSED if the recoverable amount subsequently increases
Explanation: IFRS PERMITS reversal of impairment losses (except for GOODWILL, which may never be reversed) when the recoverable amount recovers. US GAAP PROHIBITS reversal for held-for-use assets entirely. GAAP fears the earnings management that reversals invite.
Question 230
An acquirer pays $10m for 80% of a target; the FV of the NCI is $2.4m and the FV of identifiable net assets is $11m. Goodwill is:
Select an option first.
Correct answer: D — $1.4m
Explanation: Goodwill = Consideration ($10m) + FV of NCI ($2.4m) − FV of identifiable net assets ($11m) = $1.4m. Note the FULL goodwill method (required under US GAAP) includes the NCI at fair value, capturing goodwill attributable to the NCI as well.
Question 231
A subsidiary (80%-owned) sells inventory upstream to its parent at a $50,000 profit; 40% remains unsold. Net income attributable to the NCI, if sub income is $400,000, is:
Select an option first.
Correct answer: A — $76,000 — 20% of ($400,000 − $20,000 unrealised profit)
Explanation: UPSTREAM sale (subsidiary is the seller): the unrealised profit is attributed to the SUBSIDIARY and therefore SHARED with the NCI. Unrealised = 40% × $50,000 = $20,000. Adjusted sub income = $380,000. NCI = 20% × $380,000 = $76,000. A DOWNSTREAM sale would leave the NCI at 20% × $400,000 = $80,000.
Question 232
Under ASC 606, a customer's LOYALTY POINTS are:
Select an option first.
Correct answer: D — A MATERIAL RIGHT — a separate performance obligation, with revenue DEFERRED until redemption or expiry
Explanation: Loyalty POINTS give the customer a MATERIAL RIGHT — a separate performance obligation. Part of the transaction price is ALLOCATED to the points (based on their standalone selling price, adjusted for expected redemption rates) and DEFERRED as a contract liability until redeemed or they expire (breakage).
Question 233
Breakage (unexercised customer rights) is recognised:
Select an option first.
Correct answer: C — In PROPORTION to the pattern of rights EXERCISED, if the entity expects to be entitled to breakage
Explanation: If the entity EXPECTS breakage, it recognises the expected amount as revenue IN PROPORTION to the pattern of rights EXERCISED by customers. If it does NOT expect breakage, revenue is recognised only when the likelihood of exercise becomes remote. Waiting for legal expiry is the pre-606 approach.
Question 234
Consideration PAYABLE to a customer (e.g. a slotting fee) is:
Select an option first.
Correct answer: C — A REDUCTION OF THE TRANSACTION PRICE (and thus of revenue), unless a DISTINCT good or service is received in exchange
Explanation: Consideration payable to a customer is PRESUMED to REDUCE revenue. It is treated as an EXPENSE only if the entity receives a DISTINCT good or service from the customer whose fair value can be reasonably estimated. Slotting fees and coupons typically reduce revenue.
Question 235
A significant FINANCING COMPONENT exists when payment is deferred, requiring revenue to be measured at:
Select an option first.
Correct answer: D — The CASH SELLING PRICE, with the difference recognised as INTEREST income over time
Explanation: With a significant financing component, revenue is measured at the CASH SELLING PRICE (the discounted amount), and the difference is INTEREST income recognised over the financing period. A PRACTICAL EXPEDIENT permits ignoring the component if the period between transfer and payment is ONE YEAR or less.
Question 236
A company's cost-to-cost measure includes UNINSTALLED materials. This would:
Select an option first.
Correct answer: C — OVERSTATE progress — the standard requires excluding them from the ratio and recognising revenue at ZERO margin equal to their cost
Explanation: UNINSTALLED materials whose control has transferred would inflate the percentage complete if included in the cost-to-cost ratio. The standard requires EXCLUDING them from the measure of progress and recognising revenue EQUAL TO THEIR COST (a ZERO margin) — so no profit is recognised until they are actually installed.
Question 237
Costs that do NOT contribute to progress (e.g. wasted materials) should be:
Select an option first.
Correct answer: B — EXCLUDED from the measure of progress and EXPENSED as incurred
Explanation: WASTED materials, unexpected rework and abnormal inefficiencies do NOT depict transfer of control, so they are EXCLUDED from the progress measure and EXPENSED. Including them would falsely inflate the percentage complete and accelerate revenue that has not been earned.
Question 238
A liability-classified share-based award is:
Select an option first.
Correct answer: A — REMEASURED to fair value at EACH reporting date until settlement, with changes in earnings
Explanation: An award classified as a LIABILITY (typically cash-settled, such as a cash-settled SAR) is REMEASURED to fair value at EACH reporting date through settlement, with changes in EARNINGS. An EQUITY-classified award is fixed at GRANT-DATE fair value and never remeasured. Classification drives everything.
Question 239
A share option with a MARKET condition (a share price target) that is NEVER met results in:
Select an option first.
Correct answer: A — Compensation cost STILL RECOGNISED, provided the service was rendered — the market condition was priced into the grant-date fair value
Explanation: A MARKET condition is BUILT INTO the grant-date fair value via the option-pricing model. Compensation cost is recognised as long as the SERVICE is rendered, EVEN IF the market condition is never achieved. Contrast a PERFORMANCE condition (an EPS target), where failure means NO cost is recognised and prior cost is REVERSED.
Question 240
The measurement period for a business combination ends:
Select an option first.
Correct answer: B — At the EARLIER of one year from the acquisition date, or when the acquirer obtains the information it sought
Explanation: The MEASUREMENT PERIOD ends at the EARLIER of (a) ONE YEAR from the acquisition date, or (b) the date the acquirer receives the information it was seeking (or determines it cannot be obtained). Adjustments within it go to GOODWILL; adjustments after it go to EARNINGS.
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