Ch 24 Flashcards
Full disclosure principle
Financial reporting of any financial facts significant enough to
Influence the judgement of an informed reader
In the 10 K, what is subject to FASB rules?
1 Financial statements
2 notes to financial statements
3 supplementary info
Information overload
Reporting is so detailed users have difficult time absorbing the
Info
3 reasons for increase in disclosures on 10 K’s
1 complexity of business environment
2 necessity for timely info
3 accounting as control and monitoring device
Interim data
Published financial forecasts recommended by SEC
Accounting as a control and monitoring device
The government has sought public disclosure of managment
Compensation, off balance sheet financing and related party
Transactions
Differential disclosure
Different disclosure for public companies vs. Non public
Ex. Non public companies don’t need to disclose FMV of
Financial instruments
Notes of financial statements
Means of amplifying or explaining the items presented in
Main body of financial statements
Accounting policies
Specific accounting principles and methods company
Currently uses
And considers most appropriate to present fairly its financial
Statements
Major note disclosures: inventory
Companies should report basis of amount of inventory stated
(Lower cost or market)
And method used to determine cost (FIFO, LIFO, avg. cost)
Major note disclosures: Property, Plant, Equipment. 4 disclosures companies must make
1 basis of valuation, balances of assets by nature and function
2 depreciation expense for period
3 ACC. Depreciation
4 description of depreciation method used
Major note disclosures: creditor claims
Financial statements must disclose for each following 5 years
Following date of statements, the aggregate amount of maturities
And sinking fund requirements for Longterm borrowings
Major note disclosures: Equity holders’ claims
Disclosure relates to contracts and senior securities and
restrictions involving earnings available for dividend distr.
Ex. Description of convertible debt and stock options
Major note disclosures: contingencies and commitments
Company may have Gain or loss contingencies not disclosed
In Main body of financial statements
Ex. from litigation, debt, Tax assessments, renegotiation of gov contracts, sales of receivables, recourse, dividend restrictions, purchase agreements, hedge contracts, employment contracts
Major note disclosures: Fair Values
Companies that have assets and liabilities measured at FMV
must disclose both cost and FMV of financial instruments in
Notes
Gives 3 levels on how to measure fair value on fair value hierarchy
Major note disclosures: deferred taxes, pensions and leases
Extensive disclosure on off balance sheet commitments, future financing needs and quality of companies earnings
Major note disclosures: changes in accounting principles
Companies summarize significant accounting policies
Or changes in accounting principles (as well as changes in
Estimates and corrections of errors)
Related party transactions
transactions where one of The parties has ability to significantly influence policies of The other
Ex. Parent companies and subsidiaries, company and trusts for benefit of employees, company and management, owners, immediate family and affiliates
Post balance sheet events
Notes on financial statements that explain significant financial
Events that took after formal balance sheet date but before issuance
What kinds of transactions signify related party transactions took place?4 things
1 Low interest/high interest borrowing
2 real estate sales that differ from appraised value significantly
3 exchanges of nonmonetary assets
4 transactions with entities that have no economic substance(She’ll corporations)
Errors
Unintentional mistakes
4 GAAP Requirements of related party transaction disclosures (Disclosure of Special Transactions or Events)
1 nature of relationship involved
2 description of transaction for period transacted
3 dollar amounts of transactions for each periods income statements are presented
4 amounts due from or to related parties as of date each balance Sheet presented
Fraud
Misappropriation of assets and fraudulent financial reporting
Intentional distortions of financial statements
Illegal acts
political contributions, bribes, kickbacks and violations of laws and regulations
The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?
A. All information related to an entity’s business and operating objectives is required to be disclosed in the financial statements.
B. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.
C. Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision.
D. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.
D. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.
Which of the following should be disclosed in a Summary of Significant Accounting Policies?
A. Types of executory contracts
B. Amount for cumulative effect of change in accounting principle
C. Claims of equity holders
D. Depreciation method followed
D. Depreciation method followed
If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the
A. nature of the relationship between the parties to the transactions.
B. nature of any future transactions planned between the parties and the terms involved.
C. dollar amount of the transactions for each of the periods for which an income statement is presented.
D. amounts due from or to related parties as of the date of each balance sheet presented.
B. nature of any future transactions planned between the parties and the terms involved.
Post Balance Sheet Events (Subsequent Events)
- Events that provide additional evidence about conditions that existed at the balance sheet date.
- Events that provide evidence about conditions that did not exist at the balance sheet date.
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.
adjust the financial statements
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Introduction of a new product line.
neither adjust nor disclose
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Loss of assembly plant due to fire
disclose in notes to the financial statements
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Sale of a significant portion of the company’s assets
disclose in notes to the financial statements
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Retirement of the company president
neither adjust nor disclose
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Issuance of a significant number of shares of common stock.
disclose in notes to the financial statements
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Loss of a significant customer
neither adjust nor disclose
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Prolonged employee strike.
neither adjust nor disclose
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Material loss on a year-end receivable because of a customer’s bankruptcy
adjust the financial statements
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Hiring of a new president
neither adjust nor disclose
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Settlement of prior year’s litigation
adjust the financial statements
of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose:
Merger with another company of comparable size
disclose in notes to the financial statements
