F2 Financial Reporting and Disclosures

Question 1

Identify the contents of the summary of significant accounting policies note to the financial statements

Answer 1

Identify and describe:
- Measurement bases used in preparing the financial
statements
- Specific accounting principles and methods used

Question 2

What are the U.S. GAAP disclosure requirements for risks and uncertainties?

Answer 2

• Nature of operations.
• Use of estimates in preparing the financial statements.
• Significant estimates.
• Current vulnerability due to certain concentrations.

Question 3

What is a subsequent event and what are the two categories of subsequent events?

Answer 3

An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.
1. Recognized subsequent events - Provide
additional information about conditions that
existed at the balance sheet date.
2. Nonrecognized subsequent events- Provide
information about conditions that occured after
the balance sheet date and did not exist on the
balance sheet date.

Question 4

Define fair value.

Answer 4

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.

Question 5

What income tax rate is used in interim financial reporting?

Answer 5

Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements.

Question 6

Describe the valuation techniques that can be used to measure the fair value of an asset or liability.

Answer 6

1. Market approach- Uses prices and other relevant
   information from market transactions involving
   identical or comparable assets or liabilities to
   measure fair value.
2. Income approach- Converts future amounts,
   including cash flows or earnings, to a single
   discounted amount to measure the fair value of
   assets or liabilities.
3. Cost approach- Uses current replacement cost to
   measure the fair value of assets.

Question 7

Describe the hierarchy of fair value inputs.
Which inputs have the highest priority?

Answer 7

1. Level 1 inputs- Quotes prices in active markets for
   identical assets or liabilities.
   
   2. Level 2 inputs- Inputs other than quoted market
      prices that are directly or indirectly observable for an
      asset or liability.
   3. Level 3 inputs- Unobservable 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.

Question 8

What are the general guidelines for OCBOA (Other Comprehensive Basis of Accounting) financial statement presentation?

Answer 8

• 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.

Question 9

Name the four required disclosures for segments of an enterprise.

Answer 9

• Operating segments
• Products and services
• Geographic areas
• Major customers

Question 10

Define working capital

Answer 10

Working Capital:
Current assets-Current Liabilities

Question 11

What are the characteristics of an operating segment?

Answer 11

Common characteristics of an operating segment include:
- the nature of the products and services;
- the nature of the production processes
- the type or class of customer for the products and
services
- the methods used to distribute the products or
provide the services; and
- if applicable, the nature of the regulatory
enviornment (e.g., banking, insurance, or public
utilities).

Question 12

Name two quantitative thresholds used in identify reportable operating segments.

Answer 12

• 10 percent “size” test
• 75 percent “reporting sufficiency” test

Question 13

How is the current ratio computed?

Answer 13

Current Assets/ Current Liabilities

Question 14

Describe the 10 percent test for identifying reportable segments.

Answer 14

Revenue: Reported revenue, including both sales
to external customers and intersegment sales or
transfers, is a 10 percent or more of the combined
revenue, internal and external, of all operating
segments.
Reported profit or loss: The absolute amount of its
reported profit or loss is 10 percent or more of the
greater, in absolute amount, of:
- The combined reported 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 percent or more of the
combined assets of all operating segments.
Note: Must meet only one of the above.

Question 15

What is the 75 percent test for identifying reportable segments?

Answer 15

Combined external (consolidated) revenue of all reportable segments must be at least 75 percent of the total consolidated revenue of the entity.

The practical limit is 10 segments, but this is not a precise limit.

Question 16

How is the quick ratio computed?

Answer 16

(Cash and cash equivilants + Short-term marketable securities+ Receivables (net)) / Current Liabilities

Question 17

In creating a new partnership interest with an investment of additional capital, what three methods can be used?

Answer 17

• Exact method
• Bonus method
• Goodwill method

Question 18

Describe the exact method of creating a new partnership interest with an investment of additional capital.

Answer 18

The purchase price equals the book value of the capital account purchased.
- No adjustment to the existing partners’ capital
accounts
- No goodwill or bonus

Question 19

What are the disclosure requirements for reportable operating segments?

Answer 19

For each reportable segment, the entity must report:
- Identifying factors
- Products or services
- Profit or loss details
- Asset details
- Measurement criteria
- Reconciliations

Question 20

Describe the bonus method of creating a new partnership interest with an investment of additional capital.

Answer 20

New partner’s capital account = (A+B+C) x C’s % ownership

Excess of new partner’s contribution over capital interest received is a bonus to the old partners.

Excess of capital interest received over new partner’s contribution is a bonus to the new partner.

Question 21

Describe the goodwill method of creating a new partnership interest with an investment of additional capital.

Answer 21

• Goodwill is recognized based on the total value of the
  partnership implied by the new partner’s contribution.
• Goodwill is shared by the existing partners using the
  agreed profit/loss ratio.

Question 22

Describe the bonus method of withdrawal of a partner.

Answer 22

• The difference between the balance of the withdrawing
  partner’s capital account and the amount that person is
  paid is the amount of the bonus.
• The bonus is allocated among the remaining partners’
  capital accounts in accordance with their remaining
  profit and loss ratios.

Question 23

Describe the goodwill method of withdrawal of a partner.

Answer 23

The partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios.

After allocating goodwill, the balance in the withdrawing partner’s capital account should equal the final distribution to the withdrawing partner.

Question 24

Describe Form 10-K and Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Answer 24

Form 10-K: Filed annually by U.S. registered
companies. Includes a summary of financial data,
MD&A, and audited financial statements prepared
using U.S. GAAP.

Form 10-Q: Filed quarterly by U.S. registered
companies. Includes an unaudited financial
statements, interim MD&A, and certain disclosures.

Question 25

What are the guidelines for interim reporting?

Answer 25

• Use the same accounting 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.