Conceptual Framework And Financial Reporting

Question 1

What is the American Institute of Certified Public Accountants (AICPA)?

Answer 1

The professional organization for participating CPAs.

Question 2

What does the Securities and Exchange Commission (SEC) do?

Answer 2

It administers the U.S. securities laws, most notably the Securities Act of 1993 and the Securities Exchange Act of 1934 as well as others.

Question 3

What is the main purpose of the SEC?

Answer 3

The main purpose of the SEC is to promote efficient allocation of capital by maintaining open, orderly, and fair securities markets.

Question 4

What comprises United States generally accepted accounting principles (GAAP)?

Answer 4

The Financial Acctg. Standards Board (FASB) Acctg. Standards Codification comprise authoritative U.S. GAAP for publicly traded companies. SEC pronouncements are also GAAP for publicly traded entities.

Question 5

What is the role of the Financial Acctg. Foundation (FAF)?

Answer 5

The FAF exercise oversight of the FASB, appoints the members of the FASB and ensures funding.

Question 6

What is the Financial Acctg. Standards Board (FASB)?

Answer 6

Establishes financial acctg. Standards for business entities.

Question 7

What is the role of the Financial Acctg. Advisory Council (FASAC)?

Answer 7

Provides guidance on major policy issues, project priorities, and the formation of task forces.

Question 8

What are the 1st, 3 steps in the FASB uses when issuing a new acctg. Standard?

Answer 8

1. Considers whether to add a project to its agenda in consultation with the FAF.
2. Conducts research.
3. Holds a public hearing on the topic.

Question 9

What are the final 3 steps in the standard-setting process?

Answer 9

1. Evaluate research and comments from interested parties and issue an exposure draft.
2. Solicit additional comments.
3. Finalize new acctg. guidance and issue Acctg. Standards Updates (ASUs).

Question 10

How do user groups influence the outcome of the FASB standards?

Answer 10

Users influence standards by providing input during the due process procedures.

Question 11

What does GAAP address?

Answer 11

Recognition, measurement, and disclosure

Question 12

When are expense recognized under accrual acctg?

Answer 12

When incurred, regardless of the period of cash payment.

Question 13

What are the 7 key components of the general-purpose external financial report?

Answer 13

1. Income Statement
2. Balance Sheet
3. Statement of cash flows
4. Statement of retained earnings
5. Statement of comprehensive income
6. Footnote disclosures
7. Auditor’s opinion

Question 14

What purpose does the FASB Accounting Standards Codification serve?

Answer 14

Is the compilation of authoritative US GAAP for nongovernmental entities.

Question 15

What topic does the FASB Accounting Standards Codification not include?

Answer 15

• Other comprehensive basis fo accounting
• Cash basis
• Income tax basis
• Regulatory accounting principles

Question 16

How are changes to the FASB Acctg Standards Codification accomplished?

Answer 16

Through Acctg. Standards Updates (ASU).

Question 17

What is the highest structure of the FASB Acctg. Standards Codification?

Answer 17

Areas.

Question 18

What is the reason for the FASB Acctg Standards Codification?

Answer 18

To put all acctg guidance in one place.

Question 19

What are the major areas in the FASB Acctg. Standards Codification?

Answer 19

• General Principles (100)
• Presentation (200)
• Assets (300)
• Liabilities (400)
• Equity (500)
• Revenue (600)
• Expenses (700)
• Broad Transactions (800)
• Industry (900)

Question 20

What are the primary qualitative characteristics of financial information?

Answer 20

Faithful representation and relevance (FARR)

Question 21

What are the ingredient of relevance?

Answer 21

• Predictive Value
• Confirmatory Value
• Materiality

Question 22

List the enhancing qualitative characteristics of financial information.

Answer 22

• Comparability
• Verifiability
• Timeliness
• Understandability

Question 23

What does it mean to be free from error?

Answer 23

Info is free from error if it is truthful

Question 24

What is neutrality?

Answer 24

To be neutral, acctg info must be free of bias.

Question 25

What are the ingredients of faithful representation?

Answer 25

• Completeness
• Free from material error
• Neutrality

Question 26

Who is the target audience of financial statements?

Answer 26

Decision makers; mainly potential investors, creditors, and regulators.

Question 27

What is confirmatory value?

Answer 27

To be relevant, acctg info should assist decision makers in confirming past predictions.

Question 28

What is understandability?

Answer 28

Info is understandable if the user comprehends it with reasonable effort and diligence.

Question 29

What are objectives of financial reporting?

Answer 29

To provide info about the entity to current and future users of the financial statements who are making credit and investment decision.

Question 30

What is predictive value?

Answer 30

To be relevant, acctg info should assist financial statement users in making prediction about future events.

Question 31

What is comparability?

Answer 31

The quality of information that enables users to identify similarities and differences between sets of information.

Question 32

What is timeliness?

Answer 32

To be relevant, acctg info must be received in time to make a difference to the decision maker.

Question 33

What is verifiability?

Answer 33

Info is verifiable if different knowledgeable and independent observers can reach similar conclusions.

Question 34

What is completeness?

Answer 34

Info is complete if it includes all data necessary to be faithfully representative.

Question 35

What are revenues?

Answer 35

Revenues are increases in assets or extinguishment of liabilities stemming rom delivery of goods or from providing services - the main activities of the firm.

Question 36

When should a company recognize revenues?

Answer 36

Revenues are recognized when they are earned and collectibility is reasonably assured.

Question 37

What is the full disclosure principle?

Answer 37

Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.

Question 38

What is the entity assumption?

Answer 38

We assume there is a separate acctg entity for each business organization.

Question 39

What is the time period assumption?

Answer 39

The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.

Question 40

What is the going-concern assumption?

Answer 40

In the abscesses of information to the contrary, a business is assumed to have an indefinite life.

Question 41

List the elements included in a full set of financial statements.

Answer 41

• Balance Sheet
• Income Statement
• Statement of Comprehensive Income
• Statement of Cash Flows
• Statement of Owner’s Equity

Question 42

What is the constraint in setting accounting standards?

Answer 42

Cost effectiveness (or cost-benefit)

Question 43

What does a fresh start measurement do?

Answer 43

Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark to market accounting and recognition of asset impairments)

Question 44

Define “fair value” (for acctg purposes).

Answer 44

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 45

For purposes of the fair value definition, what are the assumed characteristics of market participants?

Answer 45

Buyers and sellers that are:

• independent of the reporting entity
• acting in their economic best interest
• knowledgeable of the asset or liability and the transaction involved
• able and willing, but not compelled, to transact for the asset or liability

Question 46

What is the major purpose of the fair value framework?

Answer 46

To provide a framework for the use of FV in GAAP so as to:

• Achieve increased consistency and comparability in FV measurements; and
• Expand disclosure when FV measurements are used

Question 47

List the items that entities may elect to measure and report at fair value.

Answer 47

• Recognized financial assets or financial liabilities (some exceptions)
• Firm Commitments
• Written loan commitments
• Rights and obligations under insurance contracts and warranties
• Other financial instruments embedded in non financial derivative instruments

Question 48

List the financial assets and financial liabilities that entities may NOT us fair value to measure and report.

Answer 48

• An investment in a subsidiary or variable interest to be consolidated
• Employers’ and plan’ obligations for pension benefits, other post retirement benefits, post employment benefits
• Financial assets and liabilities under lease acctg
• Demand deposit liabilities of financial institutions
• Financial instruments classified by the issuer as a component of shareholders’ equity

Question 49

Define “entry price.”

Answer 49

The price paid to acquire an asset or the price received to assume a liability.

Question 50

Define “exit price.”

Answer 50

The price that would be receive to sell an asset or paid to transfer a liability.

Question 51

List the situations where the entry price may not be the exit price.

Answer 51

• The transaction is between related parties
• The transaction occurs when the seller is under duress
• The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value
• The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred

Question 52

What are the 3 valuation techniques ( or approaches) that should be used in determining fair value for the purposes of GAAP?

Answer 52

1. Market approach
2. Income approach
3. Cost approach

Question 53

Describe the market approach for determining fair value for the purpose of GAAP.

Answer 53

This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.

Question 54

Describe the income approach for determining fair value for the purpose of GAAP.

Answer 54

This approach converts future amounts to a single present amount.

Question 55

Describe the cost approach for determining fair value for the purposes of GAAP.

Answer 55

This approach uses the amount currently required to replace the service capacity of an asset.

Question 56

List the dates when an entity may elect to use fair value option for an eligible item.

Answer 56

• When the item is first recognized
• When the firm commitment occurs
• When financial, an asset previously reported at fair value with unrealized gain/loss in earnings no longer qualifies for that fair value treatment
• When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation
• When an item is measured at fair value at the time of an event but does not require fair measurement at subsequent reporting dates

Question 57

Describe fair value measurement inputs.

Answer 57

Inputs can be observable or unobservable. Observable inputs are based on mkt. data from independent sources. Unobservable inputs are the entity’s assumptions about the factors that impact determination of fair value.

Question 58

What purpose does the fair value hierarchy serve?

Answer 58

To prioritize the inputs to valuation techniques used to measure fair value.

Question 59

What are the 3 levels of the fair value hierarchy and what does each consist of?

Answer 59

Level 1: highest level, are unadjusted quoted prices in active markets for assets and liabilities identical to those being valued

Level 2: are observable for assets or liabilities, either directly or indirectly, other than quoted prices described in Level 1

Level 3: lowest level, are unobservable and used to determine fair value only if observable inputs are not available

Question 60

What types of comparisons are fair value option disclosures intended to facilitate?

Answer 60

• Between entities that choose different measurement methods for similar assets and liabilities
• Between assets and liabilities in the financial statements of an entity that selects different measurement for similar assets and liabilities

Question 61

What significant fair value disclosures are required only in annual statements?

Answer 61

The methods and significant assumptions used to estimate fair value.

Question 62

Distinguish between assets and liabilities measured at fair value on a recurring basis and non recurring basis.

Answer 62

Assets and liabilities measured at fair value on recurring basis are adjusted to fair value period after a period. Assets and liabilities measured at fair value on a non recurring basis are adjusted to fair value only at the time of a particular even (e.g., significant modification of debt).

Question 63

What are the special disclosures required for fair value measurements (on a recurring basis) that are based on unobservable inputs (i.e., Level 3 inputs)?

Answer 63

• Narrative description of the uncertainty of fair value to changes in unobservable inputs
• Unrealized gains/losses for the period and where reported

Question 64

What is simplified for small and medium-sized entities (SMEs) in International Financial Reporting Standards (IFRS)?

Answer 64

• Topics that are irrelevant are eliminated
• Recognition and measurement aspects are simplified
• Disclosures reduced to 10% of those in regular IFRS

Question 65

What did the SEC eliminate for foreign companies listed in the United States?

Answer 65

A reconciliation of earnings and equity to US GAAP (Form 20-F) in their financial statements.

Question 66

List the steps of developing International Acctg Standards.

Answer 66

• Add the item to the agenda
• Discuss the issue
• Publish a discussion paper if the topic is difficult
• Prepare and vote on the exposure draft
• Issue the exposure draft
• Analyze comments on the exposure draft
• Debate the issue at hand

Question 67

List some examples of simplified recognition and measurement for SMEs in IFRS.

Answer 67

• Goodwill is amortized
• All research and development is expensed
• Categories of investments are reduced
• Less prior-yr data is required for first time adoption

Question 68

Are IFRS more rules based or principle based?

Answer 68

Principle based

Question 69

What are some omitted topics for SMEs in IFRS?

Answer 69

• Earnings per share
• Interim financial reporting
• Segment reporting

Question 70

When can revisions happen for SMEs in IFRS?

Answer 70

Revisions for SMEs standards happen every 3 years at most

Question 71

Under IFRS, if no standards exist on an acctg issue, what should companies use?

Answer 71

The definitions, recognition criteria, an measurement concepts for assets, liabilities, income, and expenses in the Framework.

Question 72

What is the highest level of international GAAP?

Answer 72

The International Financial Reporting Standards

Question 73

Does the IASB framework include losses for the term “expense”?

Answer 73

Yes

Question 74

What elements of the FASB framework are not included int he IASB framework?

Answer 74

• Investment by owners
• Distributions to owners
• Comprehensive income
• Gains
• Losses

Question 75

What elements are considered income under the FASB framework?

Answer 75

“Revenue” and “gains” as separate elements.

Question 76

What will be the underlying conceptual support for future principles-based acctg standards?

Answer 76

Developing a common framework.

Question 77

When do you recognize an element in the IASB framework?

Answer 77

When it is probable that there is a future economic benefit and the item has a cost or value that can be measure with reliability

Question 78

What are the underlying assumptions of the IASB framework?

Answer 78

• The financial statements are prepared on the accrual basis

- The entity is a going concern

Question 79

What is meant by a “reliable measurement”?

Answer 79

It is a measurement in which a reasonable estimate is made.

Question 80

True or False: Income may be realized or unrealized.

Answer 80

True

Question 81

True or False: The IASB framework should apply only to public companies, not private corporations.

Answer 81

False. The IASB framework should apply to both public and private companies.

Question 82

What are some of the purposes of the IASB framework?

Answer 82

• Assist the board to develop new IAS
• Promote harmonization of standards
• Assist and provide info to interested parties

Question 83

What are the 5 elements in the IASB framework?

Answer 83

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

Question 84

What comprises income under the IASB framework?

Answer 84

It includes both revenues and gains.

Question 85

What are the various types of GAAP which may be used by a U.S entity?

Answer 85

Depending on the entity, the following types of GAAP may be used

1. US GAAP
2. US Other Comprehensive Basis of Acctg (OCBOA)
3. IFRS
4. IFRS for Small and Medium - sized Entities (SMEs)

Question 86

Identify the types of entities that are not eligible to use IFRS for SMEs.

Answer 86

1. Entities that are required to file financial statements with a regulatory body (e.g., SEC) for the purpose of issuing securities in a public market; or
2. Entities that hold assets in a fiduciary capacity for a broad group of outsiders (e.g., banks, insurance companies, pension funds, etc.)

Question 87

Identify some of the possible advantages of using IFRS for SMEs, instead of U.S. GAAP, by eligible entities.

Answer 87

• More relevant standards
• Less complicated and voluminous standards
• Less costly standards to implement
• Less frequent changes in standards

Question 88

What should financial statements do according to IFRS?

Answer 88

Fairly present the underlying financial position and financial performance of the entity by faithfully representing the underlying economic reality the firm faced during the period.

Question 89

What is the overall objective of financial statements under IFRS?

Answer 89

To provide info about he financial position, financial performance, and cash flows of an entity that is useful to a wide rant of users in making economic decisions.

Question 90

What type of balance sheet is required under IFRS?

Answer 90

Statement of financial position items must be classified as current and non current.

Question 91

Do IFRS allow the term “reserve” on the balance sheet?

Answer 91

Yes

Question 92

What 2 formats are accepted under IFRS for income statement presentation?

Answer 92

1. Single-step statements

2. Multiple-step income statements

Question 93

Is a separate statement of other comprehensive income one of the formats permitted under IFRS?

Answer 93

Yes

Question 94

Do IFRS have a required minimum list of items to be reported on the income statement?

Answer 94

Yes.

Question 95

How are expenses classified under IFRS?

Answer 95

Classified by business function or nature of expense.

Question 96

Do IFRS allow revaluation of plant assets and intangible to fair value as a other comprehensive income item?

Answer 96

Yes

Question 97

What approach is used when financial statements are prepared?

Answer 97

The all inclusive approach.

Question 98

Where and how are prior period adjustments shown?

Answer 98

They are shown on the statement of retained earnings as adjustments to the beginning balance of retained earnings in the year that the error is discovered.

Question 99

What are the items in other comprehensive income?

Answer 99

Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, foreign currency translation adjustments, and unrealized gains and losses on certain hedging activities.

Question 100

Name the 2 different formats of presentation for the balance sheet.

Answer 100

1. Account form

2. Report form

Question 101

How are assets presented on the balance sheet?

Answer 101

Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as PPE)

Question 102

How are liabilities presented on the balance sheet?

Answer 102

Liabilities are shown in order of maturity. Current liabilities are presented first, and then long term liabilities are presented.

Question 103

How is owner’s equity presented on the balance sheet?

Answer 103

In order of permanence.

Question 104

What are current liabilities?

Answer 104

Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer, and which will be met through the transfer of a current asset or the creation of another current liability.

Question 105

How are long term assets and liabilities defined?

Answer 105

By exclusion from current assets and current liabilities.

Question 106

What is the purpose of the statement of cash flows?

Answer 106

To explain the change in cash and cash equivalents that has occurred during the past acctg yr.

Question 107

What are cash equivalents?

Answer 107

Short-term investments that are convertible into a known and fixed amount of cash and have an original maturity to the the purchaser of 3 months or less.

Question 108

What are the categories that are listed on the statement of cash flows?

Answer 108

1. Operating
2. Investing
3. Financing

Question 109

Define “expenses”.

Answer 109

Decreases in net assets or incurrent of liabilities through the provision of goods or services.

Question 110

Define “gains.”

Answer 110

Increases in equity or net assets from peripheral or incidental transactions.

Question 111

What is operating margin?

Answer 111

The excess of operating revenues over operating expenses.

Question 112

What does the single step income statement present?

Answer 112

Total revenues and gains less total expenses and losses.

Question 113

What does the multiple step income statement present?

Answer 113

Includes multiple sub totals of revenues, expenses, gains, and losses Sales - COGS = Gross profit

Gross Profit - Operating expenses = Income from Operations

Income from Operations +/- Other income
Divided
Expenses
= income before taxes

Income before taxes - taxes = NI

Question 114

Define “losses.”

Answer 114

Decreases in equity or net assets from peripheral of incidental transactions

Question 115

What represent increases in net assets or settlements of liabilities by providing goods and services?

Answer 115

Revenues

Question 116

What item are not shown on the income statement?

Answer 116

• Prior period adjustments
• Foreign currency translation adjustments
• Unrealized gains and losses on AFS securities
• Unrecognized pension items
• Cumulative effect of changes in acctg principle
• Unrealized gains and losses on cash flow hedges

Question 117

What is the order of income statement presentation?

Answer 117

• Income from continuing operations
• Income from discontinued operations (net of tax)
• Net income

Question 118

What is the classification of assets that are in the form of cash, or will be converted into cash, or will be consumed within 1 year or the operating cycle of the business, whichever is longer?

Answer 118

Current Assets

Question 119

How are current assets listed on the balance sheet?

Answer 119

Declining order of liquidity.

Question 120

What is another name for the balance sheet?

Answer 120

The statement of financial position

Question 121

Define “net realizable value.”

Answer 121

The amount the firm expects to receive from the sale or collection of an item.

Question 122

What is the operating cycle?

Answer 122

The period of time from the purchase of inventory, to payment of the payable on inventory purchase, to the sale of goods, to the collection of receivable, and then to purchasing inventory all over again

Question 123

What is a valuation account used for?

Answer 123

Used to increase or decrease the book value of an item to a measure of current value

Question 124

Define “current liability.”

Answer 124

A liability expected to be extinguished through the use of current assets or by the incurrence of current liabilities.

Question 125

Describe the formula for quick or acid test ratio

Answer 125

(Cash + Short Term Investments + Accts Receivable)

Divided

Current Liabilities

Question 126

What are the forms of the statement of comprehensive income?

Answer 126

• Single statement

- 2 statements

Question 127

What is the main purpose of disclosing comprehensive income?

Answer 127

To report the net change in equity in a single amount.

Question 128

What is comprehensive income?

Answer 128

Net income +/- unrealized gains and losses on securities available for sale, unrealized pension cost, certain unrealized gains and losses on derivatives, and foreign currency translation adjustments

Question 129

What are the 2 ways of reporting comprehensive income?

Answer 129

1. As a separate statement of comprehensive income

2. As part of the income statement

Question 130

What is NI +/- other components of comprehensive income?

Answer 130

Comprehensive Income

Question 131

What are OCI items?

Answer 131

• Unrealized gains and losses on debt securities available for sale
• Unrecognized pension gains and losses
• Foreign currency translation adjustments
• Certain derivative gains and losses

Question 132

What type of account is AOCI?

Answer 132

Owner’s equity

Question 133

What is another OCI reclassification adjustment?

Answer 133

When an OCI item from a previous year is removed from AOCI.

Question 134

What are the types of statements of OCI?

Answer 134

• Single statement of NI and comprehensive income

- 2 separate statements: a statement of NI and statement of comprehensive income

Question 135

Does AOCI have is own column in the vertical format?

Answer 135

Yes

Question 136

How are accts listed in the vertical format?

Answer 136

Listed in separate columns

Question 137

In what type of format does the statement of changes in equity appear?

Answer 137

The format is vertical and horizontal.

Question 138

How many years of OE must be reported by SEC registrants?

Answer 138

3 years of OE statements.

Question 139

List the other names for statement of changes in equity.

Answer 139

• Statements of changes in owners’ equity
• Owner’s equity statement
• Statement of shareholder’s equity
• Statement of owners’ equity

Question 140

What do vertical format statements allow accountants to do?

Answer 140

Check accuracy by comparing total OE computed as (1) the sum of each transaction affecting OE and (2) the sum of individual OE account balances

Question 141

Is the statement of changes in equity required under IFRS?

Answer 141

Yes

Question 142

What is the basic purpose of the statement of cash flows?

Answer 142

Is to provide info about the cash receipts and cash payments for an entity to help investors, creditors, and others.

Question 143

When is a statement of cash flows required?

Answer 143

For all business enterprises that report both financial position (balance sheet) and results of operations (income statement) for a period.

Question 144

What is reported on the statement of cash flows?

Answer 144

• Info about the cash receipts and cash payments for an entity
• The difference between net income and net operating cash flows
• Information about investing and financing activities that do not involve cash inflows or outflows

Question 145

What is the reporting basis of the statement of cash flows?

Answer 145

The reporting basis is cash and cash equivalents

Question 146

List the required categories for the statement of cash flows.

Answer 146

• Net cash inflow or outflow from operating activities
• Net cash inflow or outflow from investing activities
• Net cash inflow or outflow from financing activities
• Effects of foreign currency translation
• Reconciliation of net cash inflows/outflows with the reported change in cash and cash equivalents on the balance sheet
• Noncash investing and financing activities

Question 147

Name the 4 major sections in the direct method cash flow statement.

Answer 147

1. Operating cash flows
2. Investing cash flows
3. Financing cash flows
4. Reconciliation of net income and net operating cash flows

Question 148

What is the cash flow category for collections of principal amounts on loans made to other entities?

Answer 148

Investing

Question 149

Name the 2 formats permitted for the statement of cash flows.

Answer 149

1. Indirect

2. Direct

Question 150

What is the indirect method on the statement of cash flows?

Answer 150

It reconciles net income to cash flows from operating activities.

Question 151

What is the direct method on the statement of cash flows?

Answer 151

This method presents actual inflows and outflows from cash operations. It must also disclose the indirect method (reconciliation of net income to cash flows from operations) as a supporting schedule.

Question 152

What is the cash flow category for interest paid and received?

Answer 152

Operating activities

Question 153

Where is the cash effect on foreign currency translation reported?

Answer 153

It is reported as a separate part of the reconciliation of the change in cash and cash equivalents during the period.

Question 154

Where are noncash investing and financing activities reported?

Answer 154

They are reported on the face of the statement of cash flows or as a separate disclosure.

Question 155

What are some examples of cash inflows classified as investing activities?

Answer 155

• Sale of long term assets
• Collection of loan principal
• Disposal of debt securities classified as held to maturity and available for sale and equity securities that will not be sold in the near term
• Sale of productive assets (not inventory)

Question 156

What are some examples of cash outflows classified as financing activities?

Answer 156

• Sale of own stock

- Proceeds from borrowing

Question 157

What are some example of cash outflows classified as financing activities?

Answer 157

• Repurchase of own stock
• Paying back lenders (principal only)
• Payment of dividends

Question 158

What is the cash flow category for purchases of securities that will be sole in the near term?

Answer 158

Operating

Question 159

What is the cash flow category for purchases of debt securities classified as available for sale?

Answer 159

Investing

Question 160

What is the cash flow category for dividends paid?

Answer 160

Financing

Question 161

What is the cash flow category for loans made to other entities?

Answer 161

Investing

Question 162

What is the cash flow category for principal payments on short term and long term loans from suppliers made to acquire inventory for resale?

Answer 162

Operating

Question 163

What is the cash flow category for principal payments on short term and long term loans from financial institutions made to acquire inventory for resale?

Answer 163

Financing

Question 164

What is the cash flow category for principal payments on short term and long term loans (from financial institutions or dealers) made to acquire plant assets?

Answer 164

Financing

Question 165

What is the purpose of the operating section of the statement of cash flows under the indirect method?

Answer 165

Purpose is to adjust accrual net income to net cash flow from operating activities.

Question 166

What is the purpose of the operating section of the statement of cash flows under the direct method?

Answer 166

Purpose is the show all cash inflows and outflows for operating activities.

Question 167

Using the indirect method for reporting cash flows from operations, should an increase in AR be + or - from accrual based NI?

Answer 167

An increase in AR should be subtracted.

Question 168

Using the indirect method for reporting cash flows from operations, should a decrease in inventory be + to or _ from accrual based NI?

Answer 168

A decrease in inventory should be added.

Question 169

Using the indirect method for reporting cash flows from operations, should an increase in AP be + to or - from accrual based NI?

Answer 169

An increase in AP should be added.

Question 170

Using the indirect method for reporting cash flows from operations, should a decrease in unearned revenue be + to or - from accrual based NI?

Answer 170

A decreased in unearned revenue should be subtracted.

Question 171

Define “general prices.”

Answer 171

Refers to a market basket of items that the typical consumer purchases.

Question 172

Define “specific price change.”

Answer 172

The change in the price of a specific good or service over a period of time.

Question 173

Define “purchasing power loss.”

Answer 173

Losses that result from holding monetary assets during inflationary times or having monetary liability during deflationary times.

Question 174

Define “purchasing power.”

Answer 174

The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.

Question 175

Define “nonmonetary items.”

Answer 175

The specific price of nonmonetary items can change.

Question 176

Define “constant dollars.”

Answer 176

Measurements in the general price level as of a specific date.

Question 177

What is the management discussion & analysis (MD&A) section?

Answer 177

It is a narrative written by management that is an integral part of the disclosure of the financial statements.

Question 178

What are the disclosure requirements for non current liabilities?

Answer 178

• Combined aggregate amount of maturities on borrowing 5+ years after balance sheet, sinking fund requirements
• The aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services
• The fair value of each financial debt instrument in the financial statement or in the notes
• The nature of the firm’s liabilities, interest rates and maturity dates, conversion options, assets pledged as collateral, and restrictions

Question 179

Under IFRS, what should the summary of significant accounting policies include?

Answer 179

• Judgements and key assumptions made in applying those policies
• Measurement bases used for recognition (eg, historical cost, fair value)
• Information enabling an assessment of the estimation uncertainty that could result in a material adjustment to the balances of assets and liabilities, which are pint estimates in many cases

Question 180

Define “inflation.”

Answer 180

It is the increase in general prices for a period of time; deflation is the decrease in general prices.

Question 181

What is included in illegal acts for companies?

Answer 181

Illegal contributions and bribes

Question 182

What is the difference between error and irregularities?

Answer 182

Errors are unintentional. Irregularities are intentional.

Question 183

Define “nominal dollars.”

Answer 183

Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.

Question 184

What is presented in the related party transaction disclosures?

Answer 184

• Nature of relationship
• Description of all transactions for years presented
• Dollar amounts of transactions
• Receivables to or from parties

Question 185

What does the first footnote typically cover?

Answer 185

Summary of significant accounting policies.

Question 186

Define “monetary items.”

Answer 186

The specific price of monetary items cannot change.

Question 187

What disclosure is required by firms in hyper inflationary economies under IFRS?

Answer 187

Disclosure of the impact of inflation on the financial statements is required.

Question 188

Define “purchasing power gain.”

Answer 188

Gains that result from holding monetary assets during deflationary times or having monetary liabilities during inflationary times.

Question 189

Define “severe impact.”

Answer 189

Significant financial disruption due to vulnerability to significant concentration.

Question 190

When are disclosures required about certain significant estimates?

Answer 190

When it is reasonably possible an estimate will change within 1 year of the date the financial statements are issue, and effect of the change will be material.

Question 191

List the aspects of risk due to a firm’s operations.

Answer 191

• Products and services
• Geographical locations
• Principal Markets

Question 192

Which item should be included in disclosures about risk due to certain significant estimates?

Answer 192

• Estimate affected
• Nature of uncertainty
• Effect of change in estimate on financial statements

Question 193

List the areas of risks and uncertainties that need to be disclosed.

Answer 193

• Volume of business with a specific customer
• Revenue from a specific product or service
• Source of supply
• Geographical market
• Any information related to the entity’s ability to continue as a going concern

Question 194

List the aspects of risk due to use of estimates.

Answer 194

• Estimates are unavoidable in preparing financial statements
• Estimates are not exact
• Estimates involve assumption about the future

Question 195

A subsequent event existing at the balance sheet date requires what kind of disclosure?

Answer 195

Recognition in the financial statements.

Question 196

When can refinancing current debt be classified as noncurrent?

Answer 196

When the following are issued:

• Issue stock to extinguish the debt
• Refinance the current liability with a noncurrent liability
• Enter into an irrevocable agreement to refinance the current liability with a noncurrent liability

Question 197

A subsequent event that did not exist at the balance sheet date requires what kind of disclosure?

Answer 197

Footnote disclosure

Question 198

What are two categories of subsequent events?

Answer 198

1. Existed at the balance sheet date

2. Did no exist at the balance sheet date

Question 199

What amount of disposal gain from a discontinued operation is disclosed in the income statement?

Answer 199

The actual amount for the period.

Question 200

Where is the gain/loss on disposal shown?

Answer 200

In a separate line item in the DOP section of the income statement or netted against the discontinued component’s operating income with a footnote disclosure showing both.

Question 201

List the 2 values to report for discontinued operations.

Answer 201

1. Income from discontinued operations

2. Gain or loss on disposal

Question 202

What is the amount of operating income from a discontinued operation that must be disclosed in the income statement?

Answer 202

The actual amount for the period.

Question 203

Define “loss on disposal.”

Answer 203

Actual losses and estimated losses when book value > fair value less cost to sell.

Question 204

Under IFRS, how are discontinued operations identified?

Answer 204

A component with operations at that are a separate major line of business or geographical area, part of a coordinated plan to sell or and subsidiaries acquired with the intent to resell.

Question 205

What are the general types of ratios?

Answer 205

• Liquidity/Solvency
• Operational activity
• Profitability
• Equity/Investment leverage

Question 206

Working Capital Formula

Answer 206

CA - CL

Question 207

Acid Test or Quick Ratio Formual

Answer 207

(Cash + NR + Mkt. Securities)

Divided

CL

Question 208

Times Interest Earned Formula

Answer 208

(NI + Interest Expense + Income Tax Expense)

Divided

Interest Expense

Question 209

Time Preferred Dividend Formula

Answer 209

NI

Divided

Annual Preferred Dividend Obligation

Question 210

What do liquidity (or solvency) ratios measure?

Answer 210

They measure the ability of the firm to pay its debts as they come due.

Question 211

What is financial statement ratio analysis?

Answer 211

The development of quantitative relationships between various elements of a firm’s financial statements.

Question 212

Number of Days Sales in AR Formula

Answer 212

365

Divided

AR Turnover

Question 213

Inventory Turnover Formula

Answer 213

COGS

Divided

Average Inventory

Question 214

Number of Days Supply in Inventory Formula

Answer 214

365

Divided

Inventory Turnover

Question 215

What do operational activity ratios measure?

Answer 215

They measure the efficiency with which a firm carries out its operating activities.

Question 216

Determine Operating Cycle Length Formula

Answer 216

Days Sales in AR + Days Supply in Inventory

Question 217

Working Capital Ratio Formula

Answer 217

CA

Divided

CL

Question 218

AR Turnover Ratio Formula

Answer 218

Net Credit Sales

Divided

Average Net AR

Question 219

Cash Availability or Interval Ratio Formula

Answer 219

(Cash + NR + Mkt. Securities)

Divided

Average Daily Cash Expenditures

Question 220

What do equity/investment leverage ratios measure?

Answer 220

Measure relative sources of equity and equity value.

Question 221

Debt to Equity Ratio Formula

Answer 221

Total Liabilities

Divided

Total Shareholders’ Equity

Question 222

Owner’s Equity Ratio Formula

Answer 222

Shareholders’ Equity

Divided

Total Assets

Question 223

Debt Ratio Formula

Answer 223

Total Liabilities

Divided

Total Assets

Question 224

Book Value per Common Stock Ratio Formula

Answer 224

Common Shareholders’ Equity

Divided

of Outstanding Common Shares

Question 225

Book Value per Preferred Share Ratio Formula

Answer 225

Preferred Shareholders’ Equity (including dividends in arrears)

Divided

of Outstanding Preferred Stock

Question 226

Price to Earnings Ratio Formula

Answer 226

Market Price for a Common Share

Divided

Earnings Per Share (EPS)

Question 227

Total Common Stock Dividend Payout Rate Formula

Answer 227

Cash Dividends to Common Shareholders

Divided

Net Income to Common Shareholders

Question 228

Per Share Common Stock Dividend Pay Out Rate Formula

Answer 228

Cash Dividends per Common Share

Divided

Earnings Per Share (EPS)

Question 229

Common Stock Yield Formula

Answer 229

Dividend per Common Share

Divided

Market Price per Common Share

Question 230

Profit Margin Formula

Answer 230

Net Income

Divided

Net Sales

Question 231

Return on Total Assets Formula

Answer 231

(Net Income + Interest Expense (net of tax))

Divided

Average Total Assets

Question 232

Return on Common Stockholders’ Equity Formula

Answer 232

(Net Income - Current Period Preferred Dividend Obligation)

Divided

Average Common Stockholders’ Equity

Question 233

What do profitability ratios measure?

Answer 233

Aspects of a firm’s operating (income/loss) results on a relative basis.

Question 234

Where is the consolidating process carried out?

Answer 234

On a consolidating worksheet, not on the books of any entity.

Question 235

Define “consolidated financial statements.”

Answer 235

Consolidated financial statements present the financial information of 2 or more separate legal entities, usually a parent company and 1 or more of its subsidiaries, as though they were a single economic entity.

Question 236

List the methods a parent may use to carry investment in subsidiary to be consolidated.

Answer 236

• Cost
• Equity
• Any other method it chooses

Question 237

What are the kinds of information needed to prepare consolidated financial statements?

Answer 237

• Financial statements/adjusted trial balances of affiliated entities
• Date as of date of acquisition, including:
  1. Book values of subsidiary’s assets and liabilities
  2. Fair value of subsidiary’s assets and liabilities
  3. Fair value of non controlling interest, if any
  4. Fair value of recombination equity interest, if any
• Intercompany transaction data and balances

Question 238

What is the requirement and justification for the use of consolidated financial statements?

Answer 238

Consolidated financial statements are required when one entity has effective control of another entity. Because the entities are under common control, GAAP require that consolidated financial statements be the primary form of financial reporting for the affiliated entities. In form the entities may be separate legal entities, b/c of the common control, in substance they are a single economic entity. The financial statements s/b presented as a single economic entity.

Question 239

Identify the general kinds of eliminating entries made in the consolidating process.

Answer 239

• Investment eliminating entry (always)
• Intercompany receivable/payables elimination(s)
• Intercompany revenues/expenses elimination(s)
• Intercompany profit elimination(s)

Question 240

Under US GAAP, what process must be followed to determine if an entity should be consolidated?

Answer 240

First, it must be determined if the entity is a variable-interest entity (VIE).

• If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE
• If the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).

Question 241

What is the basic sequence of steps in the consolidating process?

Answer 241

1. Record trial balances on consolidating worksheet.
2. Record adjusting entries, if any.
3. Record eliminating entries.
4. Complete consolidating worksheet.
5. Prepare consolidated financial statements.

Question 242

How does a parent company record a subsidiary?

Answer 242

An an investment.

Question 243

How is an in transit intercompany transaction handled?

Answer 243

Make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company.

Question 244

What is the effect on an investment in subsidiary account when the parent accounts for its investment using the equity method?

Answer 244

The carrying amount of the investment would change with changes in the equity accounts of the subsidiary, including:

• Increasing with reported subsidiary profits/decreasing with reported subsidiary losses
• Decreasing with the payment of dividends by the subsidiary
• Decreasing for “depreciation/amortization” of the excess of fair value over book value at the date of investment

Question 245

What will be the difference(s) in the consolidated statements resulting from the parent using the cost method or the equity method to account for an investment in a subsidiary to be consolidated?

Answer 245

There will be no difference in the final consolidated statements based on which method the parent uses to account for its investment in a subsidiary. The consolidated statements will be the same regardless of which method is used; on the consolidating process will be different.

Question 246

What steps should be followed to make adjusting entries to help derive the consolidated financial statements?

Answer 246

1. Determine if any transactions are in transit between the affiliated entities
2. Record an entry on the consolidating worksheet to treat in transit transactions as though they were completed

Question 247

What is the amount at which any non controlling interest is recognized in the eliminating entry at the date of business combination?

Answer 247

Fair value of non controlling interest % claim to consolidated net assets attributable to the subsidiary. This would include its claim to the subsidiary’s net assets at fair value and any goodwill recognized in the combination.

Question 248

List some examples of Intercompany amounts to be eliminated during a consolidation.

Answer 248

• Receivables/payables
• Interest
• Dividends
• Bonds

Question 249

Where will a non controlling account show in consolidated financial statements?

Answer 249

On the consolidated balance sheet as a separate item within shareholders equity.

Question 250

What are the possible accounting methods a parent can use to carry on its books an investment in a subsidiary that will be consolidated?

Answer 250

The parent can use:

• Cost Method
• Equity Method
• Any other method it chooses

Whatever method it uses, the investment account will be eliminated on the consolidating worksheet. (Only the cost and equity methods have been used on prior exams.)

Question 251

When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?

Answer 251

After recording the investment in the subsidiary on its books, in normal circumstances, the parent will only recognize its share of the subsidiary’s dividends declared/paid as dividend income. It will not recognize on its books its share of the subsidiary’s reported net income/loss, nor will it adjust its investment account for the subsidiary’s income/loss or dividends.

Question 252

What does the investment eliminating entry on the consolidating worksheet accomplish?

Answer 252

1. It eliminates the investment account (in the subsidiary) brought on to the worksheet by the parent against the shareholders equity accounts (of the subsidiary) brought on to the worksheet by the subsidiary
2. In the process, it adjusts the subsidiary’s identifiable assets and liabilities to fair value at the date of acquisition and recognized goodwill, if any

Question 253

When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what is the purpose of the reciprocity entry made on the consolidating worksheet?

Answer 253

The reciprocity entry adjusts the parent’s investment account for changes in the subsidiary’s retained earnings since the business combination up to the beginning of the period being consolidated that have not been recognized in the parent’s investment account because it is using the cost method of accounting.

Question 254

How is NCI Equity calculated if you have information about S’s net book value (NBV) and the acquisition premium?

Answer 254

NCI Equity is calculated by:

1. Adding any acquisition premium (revaluations of identifiable assets including goodwill) to S’s (NBV)
2. Deducting any depreciation or amortization of the acquisition premium since the of acquisitions, and
3. Multiplying S’s adjusted NBV by the NCI % ownership

Question 255

How is the ending balance of NCI Equity calculated if you have the beginning balance of NCI Equity and the current year performance of S?

Answer 255

The beginning balance of NCI Equity is rolled forward by adjusting for the NCI % of the following:

1. Add S’s current year net income
2. Deduct S’s current year dividends
3. Deduct current year impairment loss
4. Deduct current year depreciation or amortization of the acquisition premium

Question 256

Where does the noncontrollling interest in a subsidiary’s income/loss and assets/liabilities get reported in consolidated financial statements?

Answer 256

• Non-controlling interest in a subsidiary’s net income or net loss gets reported as a separate line item in the consolidated income statement
• Noncontrolling interest in a subsidiary’s assets and liabilities get reported as a separate line item in shareholders’ equity in the consolidated balance sheet

Question 257

When a parent uses the equity method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?

Answer 257

Adjusts on its books the carrying value of its investment in the subsidiary to reflect:

• The parent’s share of the subsidiary’s income or loss
• The parent’s share of dividends declared by the subsidiary
• The amortization/depreciation of the difference between fair market value of identifiable assets (but not goodwill) and the book value of those assets

Question 258

What is the effect on consolidated values when the fair values of a subsidiary’s identifiable assets are less than the subsidiary’s book values for those assets at the date of a business combination?

Answer 258

On the consolidating worksheet:

• The identifiable assets are written down to fair value at the date of the business combination
• Any depreciation/amortization expense on those assets taken by the subsidiary will be reduced on the consolidating worksheet to an amount based on the lower fair values

Question 259

What amount of intercompany revenues and expenses must be eliminated on the consolidating worksheet?

Answer 259

The full amount (100%) of revenues and expenses that resulted form intercompany transactions must be eliminated, even if the transaction did not result in a profit to the “selling” affiliate.

Question 260

What is the treatment of intercompany transactions and balances on the consolidating worksheet?

Answer 260

Eliminate all intercompany transactions and balances.

Question 261

What are the only types of transactions recognized for consolidation?

Answer 261

Transactions with non-affiliates.

Question 262

List the main types of intercompany transactions and intercompany balances.

Answer 262

• Receivables/payables
• Revenues/expenses
• Inventory
• Fixed assets
• Bonds

Question 263

What amount of intercompany receivables and payables must be eliminated on the consolidating worksheet?

Answer 263

The full amount (100%) of receivables and payables that resulted from intercompany transactions must be eliminated on the consolidating worksheet.

Question 264

What is an intercompany inventory transaction?

Answer 264

When on affiliated entity sells goods to be resold (merchandise inventory) or used (raw materials inventory) by the the buying affiliate, an intercompany inventory transaction has occurred.

Question 265

What are the accounts (on a consolidating worksheet) that may be affected by an intercompany inventory transaction?

Answer 265

• Sales/purchases
• Net income/loss
• Ending inventory
• Beginning inventory

Question 266

What amount of intercompany inventory sales and intercompany inventory purchases must be eliminated?

Answer 266

The full amount (100%) of intercompany inventory sales and intercompany inventory purchases must be eliminated (against each other) on the consolidating worksheet, even if the sale was at no profit to the selling affiliate.

Question 267

Since intercompany inventory sales and intercompany inventory purchases exactly offset each other, resulting in no net effect on consolidated income, why must they be eliminated?

Answer 267

Intercompany inventory sales and intercompany inventory purchases must be eliminated so that the absolute amount of sales and purchases will not be overstated on the consolidated income statement. Such overstatements would misrepresent the level of operating activity for the firms.

Question 268

What is the entry to eliminate intercompany inventory sales and intercompany inventory purchases on the consolidating worksheet?

Answer 268

DR Intercompany Sales 
      CR Purchase (Inventory) 

The entry would be for the full amount of intercompany sales/purchases during the period

Question 269

What is the entry on the consolidating worksheet to eliminate intercompany inventory profit that is in ending inventory?

Answer 269

DR: COGS (or inventory) - I/S
CR: Ending Inventory - B/S

The entry eliminates the profit brought on the worksheet by the selling affiliate and reduces the ending inventory brought on the worksheet by the buying affiliate to cost from an outsider.

Question 270

What are the differences between when a 100% owned subsidiary sells goods for a profit to a parent and when a less than 100% owned subsidiary sells goods for a profit to a parent?

Answer 270

In both cases, the full amounts of the intercompany sales and purchases have to be reversed. The full amount of profit in ending inventory has to be eliminated (by reducing profit and reducing inventory carrying value). When the subsidiary is 100% owned, the parent (and parent shareholders) absorb the entire effect of the reductions. When the subsidiary is less than 100% owned, the reductions (in profit and asset value) are allocated between the parent and the non controlling interest based on % ownership….

Question 271

List the consolidation accounts affected by intercompany fixed asset transactions.

Answer 271

• Net income
• Fixed asset
• Accumulated depreciation
• Depreciation expense/Accumulated depreciation

Question 272

If not eliminated, what effect will the intercompany sale of a fixed asset at a gain have on the reported value of the fixed asset for consolidated statement purposes?

Answer 272

Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a gain will result in an overstatement of the value of the fixed asset on consolidated financial statements.

Question 273

What is the eliminating entry for consolidating purposes that would be necessary immediately following an intercompany sale of a fixed asset at a gain?

Answer 273

DR: Fixed Asset (to reestablish original cost from non affiliate)

DR: Gain (to elimate intercompany gain on sale)

   CR: Accumulated Depreciation ( to reestablish accumulated depreciation written off by selling affiliate)

Question 274

How is a gain or loss on an intercompany sale of a fixed asset confirmed (recognized) for consolidated statement purposes?

Answer 274

A gain or loss on an intercompany sale of a fixed asset is confirmed through the depreciation expense taken each period by the buying affiliate on the intercompany profit or loss. When the sale was at a gain (loss), the buying affiliate will take more (less) depreciation than the selling affiliate would have taken. That difference (each period) confirms a part of the gain or loss each period.

Question 275

What effect does an intercompany sale of a fixed asset by a less than 100% owned subsidiary to a parent have on the consolidated financial statements that is different from the sale by a parent to a subsidiary or by a 100% owned subsidiary to a parent?

Answer 275

In all cases the full amount of any intercompany gain or loss will be eliminated; however, if the sale is from a less than 100% owned subsidiary, the gain or loss ( and subsequent elimination adjustments of depreciation expense) will be allocated on the worksheet between the parent and the noncontrolling interest in proportion to their ownership %.

Question 276

If not eliminated, what effect will the intercompany sale of a fixed asset at a loss have on the reported value fo the fixed asset for consolidated statement purposes?

Answer 276

Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a loss will result in an understatement of the value fo the fixed asset on consolidated financial statements.

Question 277

For consolidated purposes, what accounts can be affected by intercompany bonds?

Answer 277

• Bonds payable
• Premium or discount on bonds payable
• Investment in bonds
• Premium or discount on investment in bonds
• Interest income/interest expense
• Interest payable/interest receivable

Question 278

How does the gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies?

Answer 278

The gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies through the amortization on their separate books of the premiums and/or discounts on the bond investment and/or the bonds payable.

Question 279

When do intercompany bonds exist?

Answer 279

When one affiliate owns (as an investment) the bonds issued by another affiliate (a liability).

Question 280

What determines the amount of any net gain or loss resulting from bonds becoming intercompany?

Answer 280

The sum or difference between the premium or discount on the bond investment (of the buying affiliate) and the premium or discount on the bonds payable (of the issuing affiliate).

Gain would result from eliminating:

• Premium on bond payable or
• Discount on investment

Loss would result from eliminating:

• Discount on bond payable or
• Premium on investment

Question 281

What eliminating entry would be required for consolidating purposes immediately following an intercompany bond purchase that involved a discount on bonds payable and a premium on bond investment?

Answer 281

DR: Bonds payable at face amount
Loss on constructive retirement
- sum of premium on B/I + Discount on B/P

CR: investing in I/C Bonds at face amount
CR: Premium on I/C bond invest - for full amount
CR: Discount on I/C bonds payable - for I/C amount

Question 282

What are 2 objective differences between US GAAP and IFRS determining control?

Answer 282

1. Under US GAAP, only outstanding voting rights are used to measure control. Under IFRS, securities currently exercisable or convertible into voting rights are used in assessing control.
2. Under US GAAP, only if an entity has more than 50% voting ownership can it have control. Under IFRS, an entity may have control even when it does not have more than 50% voting control.

Question 283

What is the main difference in the preparation of financial statements between consolidating financial statements and combining financial statements?

Answer 283

In consolidating financial statements, the investment accounts of the parent company in the other companies being consolidated are eliminated against the parents % ownership of the equity of those companies. In combining financial statements, any investment one combining company has in another combining company is eliminated against the owned company’s equity in the amount of the investment, not in the amount of % ownership.

Question 284

What is the main different between when combined financial statements would be appropriate and when consolidated financial statements would be appropriate?

Answer 284

Consolidated financial statements must be prepared only when one of the companies being consolidated (a parent company) has controlling interest, either directly or indirectly, in the other companies being consolidated. Combined financial statements can be prepared when there is no single company (parent company) that has control of the companies being combined.

Question 285

What is the only legal form of business combination requiring consolidated statements?

Answer 285

Business combination resulting from a legal acquisition.

Question 286

What is a majority owned subsidiary that is not consolidated called and how is it accounted for?

Answer 286

A majority owned subsidiary that is not consolidated is an unconsolidated subsidiary and would be accounted for as an investment assets by the parent, using either fair value or the equity method of accounting.

Question 287

What are the differences between a legal merger or legal consolidation and a legal acquisition that determine whether or not consolidated statements will be required?

Answer 287

In a legal merger or legal consolidation only one entity exists after the combination; therefore, there is no need for a consolidated statement. In a legal acquisition, 2 separate legal entities survive, but under common control. Their financial statements must be consolidated.

Question 288

When are consolidated statements required?

Answer 288

Under 2 major circumstances:

1. When a firm is the primary beneficiary of a variable interest entity (VIE), the VIE must be consolidated with the primary beneficiary
2. When a firm has a majority owned (>50% of voting stock) subsidiary, the subsidiary must be consolidated with its parent unless the parent lacks actual effective operating or financial control

Question 289

Which agency enforces GAAP?

Answer 289

The SEC

Question 290

Does the SEC have legal authority to prescribe acctg standards to public companies?

Answer 290

Yes

Question 291

What does the SEC strive to do?

Answer 291

Ensure that there is adequate information in the public domain before a company issues or trade securities.

Question 292

How many divisions does the SEC have?

Answer 292

5

1. The Division of Corporation Finance
2. The Division of Enforcement
3. The Division of Trading and Markets
4. The Division of Investment Management
5. Division of Economic and Risk Analysis

Question 293

Does the SEC have the authority to penalize firms when financial statements are not in accordance with GAAP?

Answer 293

Yes, it may penalize firms.

Question 294

When the SEC finds and acctg. Irregularity, what happens?

Answer 294

The SEC sends a “deficiency” letter to a registrant when and accounting irregularity is found.

Question 295

Define “Financial Reporting Releases (FRR).”

Answer 295

Formal pronouncements that rank the highest in authority for public companies.

Question 296

Define “Staff Accounting Bulletins (SAB).”

Answer 296

Bulletins that provide the SEC current position on technical issues.

Question 297

What purpose do Accounting and Auditing Enforcement Releases (AAER) serve?

Answer 297

They report the enforcement actions taken against accountants.

Question 298

What does the Securities Act of 1934 do?

Answer 298

It regulates the trading of securities after they are issued and requires periodic reporting.

Question 299

Where are the formal rules of the SEC found?

Answer 299

In the Code of Federal Regulations

Question 300

What does registration with the SEC require?

Answer 300

Extensive disclosures about the company, management, and the intended use of the proceeds from the issue.

Question 301

How many years of balance sheet data are required by the SEC?

Answer 301

2 years

Question 302

How many years of the income statement data are required by the SEC?

Answer 302

3 Years

Question 303

How many years of cash flow data are required by the SEC?

Answer 303

3 Years

Question 304

How many years of selected financial data are required by the SEC?

Answer 304

5 Years

Question 305

What are the steps in the offering process?

Answer 305

1. Issuer
2. Underwriter
3. Dealer
4. Public

Question 306

Within how many days after the fiscal year end of a large accelerated filer does a 10-K need to be filed?

Answer 306

60 days

Question 307

What information does MD&A provide?

Answer 307

A discussion of important aspects of the firm from the viewpoint of management.

Question 308

Within how many days after the end of the quarter does a company need to file the 10-Q?

Answer 308

• 40 days for large accelerated filers and accelerated filers
• 45 days for non accelerated filers

Question 309

What information does the 8-K provide?

Answer 309

Significant events affecting the company.

Question 310

What law prohibits the bribing of foreign officials?

Answer 310

The Foreign Corrupt Practices Act of 1977

Question 311

Does the Sarbanes-Oxley Act allow auditors to complete non-audit services for clients?

Answer 311

No.

Question 312

Where must earnings per share (EPS) be disclosed?

Answer 312

On the face of the financial statements.

Question 313

What is the term that refers to the following concept?

If a year’s preferred dividend is not paid (skipped), no other dividends may be paid before the skipped dividends (dividends in arrears) are paid.

Answer 313

Cumulative

Question 314

What does a complex capital structure include?

Answer 314

Typically includes common stock, along with equity contracts and convertible securities.

Question 315

What is a simple capital structure?

Answer 315

One in which the corporation has outstanding only:

• Common stock or
• Common stock and nonconvertible preferred stock

Question 316

What amount of preferred dividend is subtracted for cumulative preferred stock?

Answer 316

One full year’s dividends regardless of the amount declared or paid.

Question 317

What amount of preferred dividends is subtracted for noncumulative preferred stock?

Answer 317

Amount declared.

Question 318

How is basic earnings per share calculated?

Answer 318

(Net Income - Preferred Dividends)

Divided

Weighted average common shares outstanding

Question 319

How is diluted EPS calculated?

Answer 319

Net income available to common adjusted for effected of potential common stock

Divided

Weighted average common shares + Shares issuable from potential common stock

Question 320

What is the tax effect for preferred stock dividends?

Answer 320

There is no tax effect.

Question 321

List the 2 types of EPS.

Answer 321

1. Basic

2. Diluted

Question 322

How is BEPS calculated if common stock and nonconvertible preferred stock are outstanding?

Answer 322

(Net Income - Preferred Dividends)

Divided

Weighted Average Common Shares Outstanding

Question 323

When are contingent shares considered outstanding?

Answer 323

When their conditions have been met.

Question 324

Define “contingent shares.”

Answer 324

Shares issuable for little or no cash consideration upon satisfaction of certain conditions.

Question 325

What is the accounting effect of a stock split dividend between balance sheet date and issuance?

Answer 325

Adjustment of all EPS amounts for stock split or dividend.

Question 326

What is the general rule for stock splits and dividends in the weighted average share calculation?

Answer 326

Treat as outstanding from inception of firm (“AS IF”)

Question 327

Which potential common stock is the most dilutive when there are multiple PCSs?

Answer 327

The one with the lowest ratio of numerator effect/denominator effect.

Question 328

What is the order of inclusion of preferred common stock into diluted EPS?

Answer 328

In order of most dilutive first.

Question 329

What is the treatment of antidilutive preferred common stock in EPS?

Answer 329

It is ignored.

Question 330

What is an antidilutive potential common stock?

Answer 330

One that increases EPS when added into basic EPS.

Question 331

Describe the diluted EPS formula.

Answer 331

Net Income available to common adjusted for effects of potential common shares

Divided

Weighted average common shares plus shares issuable from potential common shares

Question 332

What does diluted EPS include?

Answer 332

Includes securities that may become common stock in the future, such as convertible stock and stock options, in addition to actual shares of common outstanding.

Question 333

Are diluted potential common stock incorporated into diluted EPS?

Answer 333

Yes, they are incorporated.

Question 334

When are options antidilutive?

Answer 334

When the option price exceeds the market price.

Question 335

When bonds are sold at premiums, what will interest expense reflect?

Answer 335

It will reflect periodic amortization.

Question 336

When is the dilution potential of diluted EPS determined for ordinary shares under the IFRS?

Answer 336

They are determined independently each year.

Question 337

Describe the operating profit or loss test for operating segments.

Answer 337

The operating segment’s operating profit or loss (absolute value) is 10% or more of the greater of the next 2 amounts (absolute value):

1. Combined operating profit of all segments not reporting losses
2. Combined loss of all segments that reported operating losses

Question 338

Describe the identifiable asset test for operating segments.

Answer 338

The operating segment’s identifiable assets are 10% or more of the combined assets of all reported operating segments.

Question 339

List the requirements for aggregation of segments.

Answer 339

Similar in each of these areas:

• The nature of products and services
• The nature of the production processes
• Customer type or class
• Distribution methods for products and services
• The nature of the regulatory environment

Question 340

List the 3 characteristics of operating segments.

Answer 340

1. The segment is involved in revenue producing and expense incurring activities
2. The operating results of the operating segment are reviewed by the company’s chief operating decision maker on a regular basis
3. There is discrete financial information available for the operating segment

Question 341

List the quantitative tests for operating segments.

Answer 341

• Revenue
• Operating profit or loss
• Identifiable assets

Question 342

Describe the 75% rule for segments.

Answer 342

The total external revenue reported by reportable segments must be at least 75% of the company’s total consolidated revenues.

Question 343

Describe the revenue test for operating segments.

Answer 343

The operating segment’s revenue from all sources (internal and external) is 10% more of the combined (internal and external) revenues of all of the company’s operating segments.

Question 344

When are revenues recognized in interim reporting?

Answer 344

Revenues are recognized in each interim period as they would be in an annual period.

Question 345

Describe the general rule for expense recognition in interim reporting when an expense is not directly related to revenue.

Answer 345

• If the cost or expense has no relationship to other quarters, recognize the entire expense in the quarter in which the cost was incurred.
• If the cost or expense benefits other quarters, allocate the cost to those other quarters and recognize the appropriate amount of expense in those quarters

Question 346

Describe the general rule for expense recognition in interim reporting when an expense is directly related to revenue.

Answer 346

The expense is recognized in the same period as the related revenue.

Question 347

List the steps in estimating income tax for interim reporting.

Answer 347

1. Annual rate is reestimated
2. Rate is applied to the total interim income through the end of the current period
3. The income tax reported in previous periods is subtracted from the results in step 2 to yield the income tax expense for the current period

Question 348

What are temporary declines in inventory?

Answer 348

Inventory declines that are expected to reverse by year end.

Question 349

How are temporary declines reported at interim?

Answer 349

They are not recognized as losses in the interim period in which they occur.

Question 350

What are permanent declines in inventory?

Answer 350

Inventory declines that are not expected to reverse in the current year.

Question 351

How are permanent declines in inventory value accounted for?

Answer 351

• They are recognized as losses in the interim periods in which they occur
• Later recoveries are recognized as gains only to the extent of previous losses
• They cannot be written up above cost

Question 352

When is the gross margin method for inventory permitted?

Answer 352

• it is permitted for interim reporting but not annual reporting
• use must be disclosed in footnote

Question 353

How is a change in estimate accounted for during an interim period?

Answer 353

It is accounted for in the interim period in which it is made.

Question 354

List the required interim information that must be reported for segments.

Answer 354

• External revenues (other than from intersegment sales)
• intersegment revenues
• Segment profit or loss

Question 355

How are cost accounting variances accounted for in interim reporting?

Answer 355

Those expected to be absorbed by the end of the current year are deferred.

Question 356

Is the gross margin method acceptable for annual reporting?

Answer 356

The gross margin method is acceptable for interim reporting but not for annual reporting.

Question 357

How is LIFO liquidation in an interim period accounted for when restoration is expected?

Answer 357

The interim period COGS should reflect the estimated cost of the replacement.

Question 358

How is LIFO liquidation in an interim period accounted for when restoration is not expected?

Answer 358

The interim period COGS should reflect the actual cost of the layer liquidated.

Question 359

How are accounting principle changes accounted for in interim reporting?

Answer 359

Accounting is the same as for an annual period. Disclosures are required for the interim period of change and for subsequent interim periods.

Question 360

Describe the overall guideline for interim reporting under U.S. acctg standards.

Answer 360

Integral view. Interim periods are an integral part of the annual period.

Question 361

Describe the overall guidelines for interim reporting under international accounting standards.

Answer 361

Discrete view, interim periods are stand along periods.

Question 362

Describe a modified cash basis of accounting.

Answer 362

A modified cash basis of acctg results from adjustments made to cash basis accounting. Specifically, while most items continue to be accounted for using the cash basis, some items are accounted for using the accruals basis. As a consequence, the financial statements reflect accounts and amounts based on a combination of the cash basis and the accrual basis.

Question 363

What does the Private Company Council do?

Answer 363

It works with the FASB to set acctg standards for private companies.

Question 364

What is a private company?

Answer 364

A private company is on that is not a public company. The PCC provides a definition of a public company as one that is required to file or furnish financial statements with a regulatory agency related any type of securities (debt and equity), whether those securities are traded on exchanges or over the counter.

Question 365

What modification is allowed for private companies related to accounting for goodwill?

Answer 365

The goodwill can be amortized over a period not to exceed 10 years.

Question 366

What modification is allowed for private companies related to accounting for interest rate swaps?

Answer 366

The hedge accounting for a receive variable/pay fixed interest rate swap is simplified. The private company can assume 100% effectiveness and can use settlement value as a practical expedient for fair value.