1.4 Notes to F/S Flashcards
Which of the following information should be included in Melay, Inc.’s 20X2 summary of significant accounting policies?
Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.
During 20X2, the Delay Segment was sold.
Business segment 20X2 sales are Alay $1M, Belay $2M, and Celay $3M.
Future common share dividends are expected to approximate 60% of earnings.
The correct answer is (a).
Significant accounting policies are included as an integral part of the financial statements to identify and describe accounting principles and methods, recognition criteria, measurement bases and must include:-
Accounting principles especially when alternatives exist. Principles peculiar to a particular industry. Unusual or innovative application of accounting principles.
Based on the above, Melay Inc.’s summary of significant accounting policies should disclose details about the accounting principle that has been selected among the alternatives. In this case, property, plant, and equipment is recorded at cost and straight line method is selected for depreciation among other available alternatives.
Option (b) and (c) are incorrect because both sale of Delay segment and segment sales for any particular period are recorded in the other notes to the financial statements and not under summary of significant accounting policies.
Option (d) is incorrect because this is only an estimate of earnings and does not form part of significant accounting policies.
Where in its financial statements should a company disclose information about its concentration of credit risks?
No disclosure is required.
The notes to the financial statements.
Supplementary information to the financial statements.
Management’s report to shareholders.
The correct answer is (b).
A company should disclose information about its concentration of credit risks in the notes to the financial statements. The risks and uncertainties arise because an entity is exposed to risk of loss greater than it would have had it mitigated its risk through diversification. Such risks should be disclosed in the notes to financial statements.
Options (a), (c) and (d) are incorrect because concentration of credit risks needs to be disclosed in the notes to financial statements.
Which of the following should be disclosed in a summary of significant accounting policies?
a. Basis of consolidation.
b. Concentration of credit risk of financial instruments.
c. Composition of plant assets.
d. Adequacy of pension plan assets in relation to vested benefits.
The correct answer is (a).
The summary of significant accounting policies describes the accounting policies & methods, recognition criteria and measurement basis. It must include the accounting principles especially when alternatives exist. Basis of consolidation is a commonly required disclosure under significant accounting policies.
Options (b), (c) and (d) are incorrect because they do not need to be disclosed in the summary of significant accounting policies.
Ace Co. settled litigation on February 1, 20X2 for an event that occurred during 20X1. An estimated liability was determined as of December 31, 20X1. This estimate was significantly less than the final settlement. The transaction is considered to be material. The financial statements for year-end 20X1 have not been issued. How should the settlement be reported in Ace’s year-end 20X1 financial statements?
a. Disclosure only of the settlement.
b. Only an accrual of the settlement.
c. Neither a disclosure nor an accrual.
d. Both a disclosure and an accrual.
The correct answer is (d).
If a subsequent event occurs after the balance sheet date but before the financial statement issue date, but the condition existed as on balance sheet date, the settlement items must be accrued and disclosed in the financial statement. Thus, since the contingent liability existed as on balance sheet date and the settlement was made by Ace before the issue of the financial statement, the settlement must be both a disclosure and an accrual in Ace’s year-end 20X1 financial statements.
Options (a), (b) and (c) are incorrect because of the above explanation.
Which of the following related party transactions by a company should be disclosed in the notes to the financial statements?
I. Payment of per diem expenses to members of the board of directors.
II. Consulting fees paid to a marketing research firm, one of whose partners is also a director of the company.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
The correct answer is (b).
Scenario 1:- Payment of per diem expenses to members of the board of directors need not be disclosed in the notes to the financial statements as these are normal transactions undertaken in the ordinary course of business. However, Securities and Exchange Commission (SEC) regulations do require disclosure of key management compensation arrangements.
Scenario 2:- Consulting fees paid to a marketing research firm, one of whose partner is also a director of the company, would be a related party transaction that would require disclosure. In such scenarios its important to judge if the fee arrangement was negotiated on an arms-length basis or not. In some cases, one could even question whether the consulting firm was the most appropriate firm for the engagement being the related party.
Thus, the payment of a consulting fee to a marketing research firm with a partner who is a director of the company would be a related party transaction that would require disclosure.
Dex Co. has entered into a joint venture with an affiliate to secure access to additional inventory. Under the joint venture agreement, Dex will purchase the output of the venture at prices negotiated on an arms-length basis. Which of the following is (are) required to be disclosed about the related party transaction?
I. The amount due to the affiliate at the balance sheet date.
II. The dollar amount of the purchases during the year.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
The correct answer is (c).
There should be a disclosure of all material transactions between related parties. This includes the disclosure of amounts due to/from related parties. Hence both the amounts will be disclosed.
Options (a), (b) and (d) are incorrect as per the above explanation.
Which of the following information should be disclosed in the summary of significant accounting policies?
a. Refinancing of debt subsequent to the balance sheet date.
b. Guarantees of indebtedness of others.
c. Criteria for determining which investments are treated as cash equivalents.
d. Adequacy of pension plan assets relative to vested benefits.
The correct answer is (c).
Significant accounting policies are included as an integral part of the financial statements to identify and describe accounting principles and methods, recognition criteria, measurement bases and must include:-
Accounting principles especially when alternatives exist. Principles peculiar to a particular industry. Unusual or innovative application of accounting principles.
Based on the above, summary of significant accounting policies should disclose the criteria for determining which investments are treated as cash equivalents, which involves judgment about the accounting principle that is to be selected among the alternatives.
Option (a) is incorrect because refinancing of debt subsequent to the balance sheet date should be disclosed in the other notes to the financial statements and not under summary of significant accounting policies.
Option (b) is incorrect because guarantees of indebtedness of others does not represent any accounting policies for it to be disclosed under summary of significant accounting policies. These are disclosed as part of the other notes to the financial statements.
Option (d) is incorrect because pension plan details are disclosed as other notes to the financial statements and not presented as part of the summary of significant accounting policies.
Which of the following is correct concerning financial statement disclosure of accounting policies?
a. Disclosures should be limited to principles and methods peculiar to the industry in which the company operates.
b. Disclosure of accounting policies is an integral part of the financial statements.
c. The format and location of accounting policy disclosures and fixed by generally accepted accounting principles.
d. Disclosures should duplicate details disclosed elsewhere in the financial statements.
The correct answer is (b).
The disclosure of significant accounting policies is included as an integral part of the financial statements to identify and describe accounting principles and methods, recognition criteria and measurement basis.
Options (a), (c) and (d) are incorrect because these are not the correct statements about the disclosure of significant accounting policies.
The summary of significant accounting policies should disclose the…
a. Proforma effect of retroactive application of an accounting change.
b. Basis of profit recognition on long-term construction contracts.
c. Adequacy of pension plan assets in relation to vested benefits.
d. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
The correct answer is (b).
Significant accounting policies are included as an integral part of the financial statements to identify and describe accounting principles and methods, recognition criteria, measurement bases and must include the following:-
Accounting principles especially when alternatives exist. Principles peculiar to a particular industry. Unusual or innovative application of accounting principles.
Based on the above, summary of significant accounting policies should disclose basis of profit recognition on long-term construction contracts, explaining which accounting principle whether percentage of completion method or the completed contract method is used.
Option (a), (c) and (d) are incorrect because although these will be disclosed as part of the notes to the financial statements they will not be included as part of significant accounting policies.
