F2 - Deck 1

Question 1

When should all prior periods on FS be restated?

Answer 1

When a “change in entity” resulting from:
1. Changing companies in consolidated FS
2. Consolidated financial statements versus previous individual financial statements

Question 2

How should a change in accounting principle that is inseparable from a change in accounting estimate be treated?

Answer 2

When a change in accounting principle is inseparable from a change in accounting estimate, it is treated as a change in estimate. This means the effects are accounted for in future financial statements rather than adjusting past records. The impact is shown in the income from continuing operations going forward.

Question 3

What happens if a change in accounting estimate cannot be distinguished from a change in accounting principle?

Answer 3

If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered a change in accounting estimate. It is treated as such and accounted for prospectively, meaning the effects are reflected in future financial statements rather than adjusting past records.

Question 4

How is the cumulative effect of a change in accounting principle presented in comparative financial statements?

Answer 4

In comparative financial statements, the cumulative effect of a change in accounting principle is shown net of tax as an adjustment to the beginning retained earnings within the statement of stockholders’ equity.

Question 5

What should be done with previous financial statements in comparative financial statements if there is a change of reporting entity?

Answer 5

If there is a change of reporting entity and comparative financial statements are presented, all previous financial statements included should be restated to reflect the change consistently across all periods presented.

Question 6

Why is using the cash basis for financial reporting considered an error?

Answer 6

The cash basis for financial reporting is not recognized as a Generally Accepted Accounting Principle (GAAP), making it an error. Corrections of such errors from prior periods are reported as prior period adjustments to retained earnings.

Question 7

How should the correction of an error in prior period financial statements be reported?

Answer 7

The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.

Question 8

What should be done with financial statements for Years 1 and 2 if an error is discovered?

Answer 8

Financial statements for Years 1 and 2 should be restated to correct the carrying amounts of assets and liabilities. These corrections are shown as restated in the three-year comparative financial statements. By the beginning of Year 3, the cumulative effect of the error is corrected and reflected in the carrying amounts of the affected assets and liabilities.

Question 9

Disclosed in the summary of significant accounting policies includes what information?

Answer 9

The method of determining which assets are considered to be cash equivalents is a significant accounting policy. Ie. Determining which investments are treated as cash equivalents

Question 10

Purpose of notes in FS?

Answer 10

Provide disclosures required by generally accepted accounting principles. SFAC 5 para

Question 11

Information included in significant accounting policies?

Answer 11

Computing depreciation principally by the straight-line method is a GAAP method of depreciation that should be described in the “summary of significant accounting policies. Ie. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.

Question 12

What will be disclosed in a summary of significant accounting policies?

Answer 12

Basis of profit recognition on long-term construction contracts. The only policy in this question is the “basis” of profit recognition on long-term construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies.

Question 13

Must be included in summary of significant accounting policies in the notes to the financial statements?

Answer 13

Revenue recognition policies. The summary of significant accounting policies should include “policies.” The only policy in the choices listed is the revenue recognition policies.

Question 14

Financial statement disclosure of accounting policies include?

Answer 14

Disclosure of accounting policies is an integral part of the financial statements. Disclosure of accounting policies (and all other disclosure also) is an integral part of the financial statements.

Question 15

Disclosed in a summary of significant accounting policies?

Answer 15

Basis of consolidation. The summary of significant accounting policies is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc.

Question 16

Where is information regarding measurement bases used in preparing financial statements found, and how is it presented in later footnotes?

Answer 16

Information regarding measurement bases used in preparing financial statements is found in the first or second note, the Summary of Significant Accounting Policies. The company will not repeat this information in later footnotes but will present calculations of inventory and plant asset amounts that reflect the new policies.

Question 17

When should significant estimates be disclosed in financial statements?

Answer 17

Significant estimates should be disclosed when it is reasonably possible that the estimate will change in the near term and the effect of the change will be material. Items that are not material are not disclosed.

Question 18

What should footnote disclosures in financial statements include?

Answer 18

Footnote disclosures should include information on changes in stockholders’ equity and details about significant asset and/or liability accounts.

Question 19

How should a note payable be recognized if it was refinanced before the financial statements were issued?

Answer 19

If a note payable existed as of the balance sheet date and was refinanced before the financial statements were issued, the liability should be recognized as non-current. Additionally, a note disclosure should be added to the financial statements explaining the change in classification

Question 20

Why should concentrations in business with a particular customer be disclosed in financial statement notes?

Answer 20

Concentrations in business with a particular customer should be disclosed because they contribute to significant sales and increase the risk of loss. This information is important for financial statement users to assess the risk associated with customer concentration.

Question 21

When is disclosure of vulnerability to concentration required in financial statements?

Answer 21

Disclosure of vulnerability to concentration is required when:
1) The concentration exists as of the financial statement date,
2) It makes the entity vulnerable to the risk of a near-term severe impact, and
3) It is at least reasonably possible that events causing a severe impact will occur in the near term. This applies to concentrations in specific geographic areas, customers, suppliers, or other areas meeting these criteria.