61 SURGENT MCQs Flashcards
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements?
The names and ownership percentages of the other stockholders in the investee company
Whether the investee company is involved in any litigation
The reason for the company’s decision to invest in the investee company
The company’s accounting policy for the investment
Question #300171
The company’s accounting policy for the investment
Accounting policy disclosure includes the selection of accounting principles from existing acceptable methods. This would include the company’s use of the equity method. The equity method must be used if the company has significant influence over the company whose stock has been acquired. Generally, 20% ownership is evidence of significant influence, but it is possible that other factors would indicate otherwise. Consequently, the use of the equity is the selection of an accounting principle from existing alternatives (equity method or cost method).
error_outline First Time Score
63% answered this question correctly their first time.
Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions
Relevant Terms
Accounting Policies
Cost Method
Equity Method
Reference
2117.01
2117.02
2117.03
2117.04
2117.05
2117.06
Authorities
FASB ASC 323-10-15-10
A transaction that is unusual in nature or infrequent in occurrence should be reported as:
nonoperating income or loss, net of applicable income taxes.
nonoperating income or loss, but not net of applicable income taxes.
a component of income from continuing operations, net of applicable income taxes.
a component of income from continuing operations, but not net of applicable income taxes.
Question #300830
a component of income from continuing operations, but not net of applicable income taxes.
These items should be included in the computation of net income from continuing operations prior to income tax expense.
error_outline First Time Score
21% answered this question correctly their first time.
Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions
Reference
2117.26
Authorities
FASB ASC 225-20-45-10
Although future-oriented information requires considerable judgment and tends to not be disclosed, the FASB recommends in Statement of Financial Accounting Concepts 8 (SFAC 8) disclosure for the following two future-oriented types of information:
(1) Estimates and assumptions and (2) alternative accounting methods
(1) Common knowledge and (2) management’s plans and strategies
(1) Terms and timing of cash flows and (2) nonperformance risk
1) Estimates and assumptions and (2) management’s plans and strategies
Question #302515
1) Estimates and assumptions and (2) management’s plans and strategies
The Securities and Exchange Commission (SEC) provides protection for issuers regarding SEC-required information; however, that protection does not extend beyond SEC filings, potentially resulting in negative impacts (e.g., litigation) for entities providing information based upon predictions, projections, and forecasts about uncertain or unknown future events. Therefore, the FASB does not require entities to disclose predictions of future outcomes that could result in negative consequences. However, two types of forward-looking information are useful and should be provided: (1) estimates and assumptions, and (2) management’s existing plans and strategies for management-controlled matters.
error_outline First Time Score
48% answered this question correctly their first time.
Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions
Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements
Reference
2117.25
Authorities
SFAC 8.8
Contractual asset or liability disclosures identified in Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, include all of the following except:
degree of nonperformance risk.
legal terms.
method used to calculate the cash flow.
reporting segments.
Question #302518
reporting segments.
SFAC 8 provides a summary of potential additional disclosures for assets and liabilities resulting from financial instruments or other contracts: the contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.
Reporting segments are not one of the suggested disclosure items.
Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements
Reference
2117.26
Authorities
SFAC 8.8
Financial statement line item explanations include which of the following?
Segment reporting
Inability to maintain a qualified workforce
Potential litigation
degree of credit or nonperformance risk.
Question #302522
Degree of credit or nonperformance risk
Many financial statement line item explanations, such as local denomination demand deposits, do not require further explanatory information. However, other line items require varying degrees of disclosure. A summary of potential additional disclosures is as follows:
- For assets: the nature, quality, and location; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions.
- For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.
- Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.
Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements
Reference
2117.26
Authorities
SFAC 8.8
Financial statement line item explanations which may require additional information for full disclosure purposes include all of the following except:
potential effect related to inability to perform or pay.
line item relation to other line items.
degree of credit or nonperformance risk.
nature of primary activities.
Question #302523
nature of primary activities.
Many financial statement line item explanations, such as local denomination demand deposits, do not require further explanatory information. However, other line items require varying degrees of disclosure. A summary of potential additional disclosures is as follows:
- For assets: the nature, quality, and location; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions.
- For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.
- Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.
Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements
Reference
2117.26
Authorities
SFAC 8.8
In a company’s notes to its financial statements, the first note described significant changes in accounting policies related to valuations of inventory and plant assets. Subsequent notes included a separate note detailing inventories and a separate note detailing plant assets. For which of these subsequent notes, if any, should the company duplicate a description of its changes to significant accounting policies?
Both the plant assets note and the inventory note
Neither the inventory note nor the plant assets note
The inventory note, but not the plant assets note
The plant assets note, but not the inventory note
Neither the inventory note nor the plant assets note
Question #302713
Neither the inventory note nor the plant assets note
The summary of significant accounting policies receives its own note at the beginning of the financial statements. It is admissible to cross-reference the significant accounting policy notes in other sections. However, the description itself should not be duplicated across notes to avoid redundancy.
Study Hint: You are told both the inventory and plant assets experienced a policy change. Therefore, you can immediately eliminate the options that only one of the two listed notes would experience a change. That leaves you with the choice of “both” or “neither.”
Reference: 2117.05
The following statements describe the form and content of accounting policy disclosure:
a. The disclosure encompasses important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods.
b. The disclosure encompasses principles and methods that involve the selection from among existing acceptable alternatives.
c. Principles and methods peculiar to the industry are disclosed, even if the principles and methods are predominantly followed in that industry.
d. Unusual or innovative applications of generally accepted accounting principles are disclosed.
e. Policy disclosure is particularly useful if presented in a separate summary schedule, preceding the notes to the financial statements or as the first note. This should be appropriately identified (e.g., “Summary of Significant Accounting Policies”).
f. Policy disclosure in a summary schedule should not duplicate information presented elsewhere in the financial statements.
g. In some cases, policy disclosure may need to be cross-referenced to information disclosed in other parts of the financial statements (e.g., other notes).
Relevant Terms
Notes to Financial Statements
Reference
2117.04
2117.05
Mint Co.’s cash balance in its balance sheet is $1,300,000, of which $300,000 is identified as a compensating balance. In addition, Mint has classified cash of $250,000 that has been restricted for future expansion plans as “other assets.” Which of the following should Mint disclose in notes to its financial statements?
Restricted cash
Neither compensating balance nor restricted cash
Compensating balance
Both compensating balance and restricted cash
Question #300164
Question #300164
Both compensating balance and restricted cash
Material amounts of restricted cash must be segregated from “regular” cash for reporting purposes because it is not readily available for general use. Restricted cash is classified as current or long-term assets depending upon the date of availability for disbursement.
Compensating balances should be separately classified as being maintained as a compensating balance. It is classified as current or noncurrent based upon the terms of the agreement requiring the compensating balance, and details of the arrangement should be disclosed in the notes.
Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of:
risk of measurement uncertainty.
off-balance sheet risk of accounting loss.
concentration of market risk.
concentration of credit risk.
Question #300169
concentration of credit risk.
Credit risk is the potential loss from any party to an agreement failing to perform. Credit risk must be disclosed. Off-balance sheet risk occurs when the amount of a loss exceeds the related asset. Market risk disclosure is encouraged, but not required.
Note section disclosures in the financial statements for pensions do not require inclusion of which of the following?
The components of net period pension costs
The amount of net prior service cost or credit in accumulated other comprehensive income
The company’s best estimate of contributions expected to be paid into the plan in the next fiscal year
A detailed description of the plan, including employee groups covered
Question #300645
A detailed description of the plan, including employee groups covered
The FASB requires extensive disclosures regarding pensions. Among these are the components of net periodic pension cost and the estimated plan contributions for the year following the latest year reported in the statement of financial position.
The FASB requires, for each annual statement of financial position presented, “the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost, showing separately the net gain or loss, net prior service cost or credit, and net transition asset or obligation” (FASB ASC 715-20-50-1). Note that service cost is presented along with compensation expense, while the remaining items of net periodic pension cost are presented on a separate line item.
error_outline First Time Score
31% answered this question correctly their first time.
Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions
Relevant Terms
Contributions
Pension
Reference
2117.18
Authorities
FASB ASC 715-20-50-1
Numerous estimates are part of accrual accounting financial statements. Disclosures about these estimates are required in the notes to the financial statements. All but one of the following are correct statements about estimates disclosures; which statement is incorrect?
Determining whether the effect of a change in the useful life of an intangible asset will be material should be done either at the individual asset or major asset class level.
Certain significant estimates must be disclosed if there is a reasonable possibility that the estimate will change in the near term and the effect of the change will be material.
GAAP requires an explanation that the preparation of the financial statements requires the use of estimates made by management in conformance with GAAP.
Financial statement preparers can reasonably assume that users of financial statements recognize that estimates are necessary in preparing financial statements and therefore no explicit statement regarding estimates is necessary.
Question #302104
Financial statement preparers can reasonably assume that users of financial statements recognize that estimates are necessary in preparing financial statements and therefore no explicit statement regarding estimates is necessary.
GAAP requires the disclosure of the use of estimates in financial statements. Explicit communication in the notes to the financial statements about the use of estimates is necessary and should inform readers that many of the amounts reported are approximations, not exact amounts.
“Significant estimates” refers to estimates that have a reasonable possibility of changing in the near future and whose effect will be material—such items require disclosure in the notes to the financial statements. Whether disclosure is required for changes in intangible assets’ useful lives is based on determining if such changes will be material, and this determination needs to be done either at the individual asset or major asset class level.
error_outline First Time Score
74% answered this question correctly their first time.
Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions
Relevant Terms
Accounting Estimate
Accrual
Generally Accepted Accounting Principles (GAAP)
Notes to Financial Statements
Reference
2117.13
2117.14
2117.15
2117.19
On December 31, 20X1, Date Co. awaits judgment on a lawsuit for a competitor’s infringement of Date’s patent. Legal counsel believes it is probable that Date will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Date’s 20X1 financial statements?
By accrual for the most likely award
Neither in note disclosure nor by accrual
By accrual for the lowest amount of the range of possible awards
In note disclosure only
Question #300162
In note disclosure only
If Date Co. wins the lawsuit, the award paid to Date will be a gain.
FASB ASC 450-30-50-1 provides that gain contingencies should not be reflected in the accounts (i.e., accrued) but that adequate disclosure should be made in notes to the financial statements.
A loss contingency would be reported by accrual for the most likely award or for the lowest amount of the range of possible awards if no amount can be considered most likely. (FASB ASC 450-20-25-4)
Relevant Terms
Contingency
Disclosure
Notes to Financial Statements
Patent
Probable
Reference
2117.07
2117.08
2117.09
2117.10
Authorities
FASB ASC 450-20-25-4
FASB ASC 450-30-50-1
Past events and current conditions potentially impacting the entity’s future cash flow include which of the following?
Related party transactions
Subsequent events
Segment reporting
Timing of asset cash flows
Subsequent events
Question #302520
Subsequent events
Examples of past events and current conditions potentially impacting the entity’s future line items and cash flows but which have not yet been incorporated into financial statement line items include existing or potential litigation; suspected or known statute, judicial, regulatory, or contract violations; unrecognized existing commitments expected to be recognized in the future; events where significant uncertainty led to the decision to not recognize the event; and subsequent events. Items not necessarily impacting line items that may require disclosure include dependency on one or a few customers or suppliers for profitability, input or output market volatility, uncertainty regarding an entity’s access to markets for inputs or outputs or ability to maintain a qualified workforce, and other significant specific entity risk.
Segment reporting and related party transactions are considered to be reporting entity disclosures, and the timing of asset cash flows is considered a financial statement line item explanation.
error_outline First Time Score
42% answered this question correctly their first time.
Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions
Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements
Reference
2117.26
Authorities
SFAC 8.8
Reporting entity disclosures include which of the following?
Asset nature, location, and quality
Potential litigation
Accounting method change impact
Related party reporting
Question #302521
Related party reporting
Many reporting entity disclosures are part of separate standards (e.g., segment reporting and related party information) and therefore do not require additional disclosure requirements. Items included under this category include the nature of primary activities, special restrictions, advantages and disadvantages relative to other entities including unusual or unique regulatory or legal factors not readily available to users (e.g., one entity holds subsidiaries to sell and another integrates them into operations), related party disclosures, and disaggregated legal entity and segment information.
Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements
Reference
2117.26
Authorities
SFAC 8.8
Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, relates to:
qualitative characteristics of financial reporting.
notes to financial statements.
objectives of financial reporting.
elements of financial statements.
notes to financial statements.
Question #302513
notes to financial statements.
The Statement of Financial Accounting Concepts (SFAC) 8, Chapter 8, Notes to Financial Statements, issued in 2018, provides guidance regarding relevant supplemental or further explanatory information provided in the notes about the information appearing on the face of the financial statements. This guidance is for the benefit of existing and potential investors, lenders, and others to help them make decisions regarding resources. The objectives of financial reporting, qualitative characteristics, and elements of financial statements are addressed in other SFAC statements.
error_outline First Time Score
38% answered this question correctly their first time.
Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions
Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements
Reference
2117.24
Authorities
SFAC 8.8
