Chapter 2 Flashcards
Identify the contents of the summary of significant accounting principles note to the financial statements
Summary of significant accounting policies
Identify and describe:
Measurement bases used in preparing the financial statements
Specific accounting principles and methods used
What are the U.S GAAP disclosure requirements for risks and uncertainties?
Nature of operations, use of estimates in preparing the financial statements, significant estimates, and current vulnerability due to certain concentrations
Under what circumstances is an entity considered a going concern
An entity is considered to be a going concern if it is reasonably expected to remain in existence and to be able to settle all its obligations for the foreseeable future
What management’s responsibility to evaluate a companys ability to continue as a going concern
Management must evaluate whether there is substantial doubt about an entity ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements
Under what conditions would substantial doubt exist?
Substantial doubt exists when relevant conditions and events considered in the aggregate, indicate it is probably (defined as “likely to occur”) that the entity will not be able to meet its obligations as they become due within one year from the financial statement issuance date (in contrast to the balance sheet date)
What factors should management consider in evaluating whether there is substantial doubt an entity ability to continue as a going concern?
The entity current financial condition, the entitys obligations due or anticipated in then next year, the funds necessary to maintain operations in the next year, both internal and external matters indicating financial difficulties for the entity.
If there is substantial doubt about an entity ability to continue as a going concern, management should then consider whether the entity has plans to mitigate these conditions and alleviate the substantial doubt. The mitigating effect should be evaluated on the basis of what 2 conditions?
Whether it is probably that the plans will be effectively implemented
Whether it is probable that the implemented plans will be successful in mitigating the adverse conditions
What are the three possible outcomes of management’s evaluation of the analysis of mitigating factors?
No substantial doubt exists, in which case no disclosures are required and financial statements are prepared using the going concern basis of accounting?
Substantial doubt is alleviated in which case the financial statements are prepared using going concern basis, with certain disclosures required
Substantial doubt is not alleviated, in which case the financial statements are prepared using the going concern basis, with certain disclosures required.
What disclosure are required when substantial doubt is alleviated?
- the primary conditions or events that initially raised substantial doubt about the entitys ability to continue as a going concern
- Managements evaluation of the significance of those conditions or events in relation to the entitys ability to meet its obligations
- Managements plans that alleviated the substantial doubt
What disclosures are required when substantial doubt is not alleviated?
The fact that there is substantial doubt about the entitys ability to continue as a going concern within one year of the financial statement issuance date
The primary conditions or events that raise substantial doubt about the entitys ability to continue as a going concern
Management’s evaluation of the significance of the those conditions or events in relation to the ability to meet its obligations
Management’s plans that are intended to mitigate the adverse conditions or events
What is a subsequent event and what are the two categories of subsequent events?
An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued
- Recognized subsequent events- provide additional information about conditions that existed at the balance sheet date
- Nonrecognized subsequent events- provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date
Define fair value
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date
Describe the valuation techniques that can be used to measure the fair value of an asset or liability
- market approach- uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value
- income approach- converts future amounts, include cash flow or earnings, to a single discounted
- Cost Approach- uses current replacement cost to measure the fair value of assets
Describe the hierarchy of fair value inputs. Which inputs have the highest priority?
Level 1 inputs- Quoted prices in active markets for identical assets or liabilities
Level 2 inputs- Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability
Level 3 inputs- Unobversable inputs for the asset or liability that reflect the entities’ assumptions and are based on the best available information
Note: Level 1 inputs have the highest priority
Name the four required disclosures for segments of an enterprise
Operating segments, products and services, geographic areas, major customers
What are the characteristics of an operating segment?
Common characteristics of an operating segment include:
the nature of the product or service
the nature of the production process
the type or class of customer for their products and services
the methods used to distribute their products or provide their services
if applicable, the nature of the regulatory environment (banking, insurance, public utilities)
Name two quantitative thresholds used in identifying reportable operating segments
10% size test, 75% reporting sufficiency test
Describe the 10% test for identifying reportable segments
Revenue- reported revenue, including both sales to external customers and intersegment sales or transfers is 10% or more of the combined revenue, internal and external, of all operating segments
Reported profit/loss: the absolute amount of its reported profit or loss is 10% or more of the greater,in absolute of: the combined report profit of all operating segments that did not report a loss, the combined reported loss of all operating segments that did report a loss
Assets- assets are 10% or more of the combined assets of all operating segments
Note: Must meet only one of the above
What is the 75% test for identifying reportable segments?
Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity
The practical limit is 10 segments, but this is not a precise limit
What are the disclosure requirements for reportable operating segments?
For each reportable segment, the entity must report:
identifying factors, products or services, profit or loss details, asset details, liability details, measurement criteria, reconciliations
Describe form 10-k and form 10-Q. what level of assurance must be provided with the financial statements submitted in these forms?
10-K filed annually by U.S registered companies including a summary of financial data, MD&A, and audited financial statements prepared using U.S GAAP
10-Q filed quarterly by U.S registered companoies includes unaudited financial statements, interim MD&A, and certain disclosures
What are the guidelines for interim reporting?
use the same accy principles that were used in the most recent annual report
allocate expenses to the interim period benefited
revenues are recognized in the period in which they are earned and realized or realizable
a total for comprehensive income in condensed financial statements of interim periods
What income tax rate is used in interim financial reporting?
Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements
What are the general guidelines for OCBOA financial statements presentation?
different titles from accrual basis financial statements
required financial statements are the equivalent of the accrual basis balance sheet and income statement
financial statements should explain changes in equity accounts
a statement of cash flows is not required
disclosures should be similar to GAAP financial statement disclosures
Define working capital
current assets - current liabilities
how is the current ratio computed?
current assets/
current liabilities
How is the acid-test (quick) ratio computed?
(cash + market securities + net receivables) / current liabilities
