F2 Financial Reporting and Disclosures Flashcards
Identify the contents of the summary of significant accounting policies note to the financial statements
Identify and describe:
- Measurement bases used in preparing the financial
statements
- Specific accounting principles and methods used
What are the U.S. GAAP disclosure requirements for risks and uncertainties?
- Nature of operations.
- Use of estimates in preparing the financial statements.
- Significant estimates.
- Current vulnerability due to certain concentrations.
What is a subsequent event and what are the two categories of subsequent events?
An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.
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.
Define fair value.
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.
What income tax rate is used in interim financial reporting?
Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements.
Describe the valuation techniques that can be used to measure the fair value of an asset or liability.
- Market approach- Uses prices and other relevant
information from market transactions involving
identical or comparable assets or liabilities to
measure fair value. - Income approach- Converts future amounts,
including cash flows or earnings, to a single
discounted amount to measure the fair value of
assets or liabilities. - Cost approach- Uses current replacement cost to
measure the fair value of assets.
Describe the hierarchy of fair value inputs.
Which inputs have the highest priority?
- Level 1 inputs- Quotes prices in active markets for
identical assets or liabilities.- Level 2 inputs- Inputs other than quoted market
prices that are directly or indirectly observable for an
asset or liability. - Level 3 inputs- 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.
- Level 2 inputs- Inputs other than quoted market
What are the general guidelines for OCBOA (Other Comprehensive Basis of Accounting) financial statement presentation?
- Different titles from accrual basis financial statements.
- Required financial statements are the equivalent of the
accrual basis balance sheet and income statement. - Financial statements should explain changes in equity
accounts. - A statement of cash flows is not required.
- Disclosures should be similar to GAAP financial
statement disclosures.
Name the four required disclosures for segments of an enterprise.
- Operating segments
- Products and services
- Geographic areas
- Major customers
Define working capital
Working Capital:
Current assets-Current Liabilities
What are the characteristics of an operating segment?
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).
Name two quantitative thresholds used in identify reportable operating segments.
- 10 percent “size” test
- 75 percent “reporting sufficiency” test
How is the current ratio computed?
Current Assets/ Current Liabilities
Describe the 10 percent test for identifying reportable segments.
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.
What is the 75 percent test for identifying reportable segments?
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.
How is the quick ratio computed?
(Cash and cash equivilants + Short-term marketable securities+ Receivables (net)) / Current Liabilities
In creating a new partnership interest with an investment of additional capital, what three methods can be used?
- Exact method
- Bonus method
- Goodwill method
Describe the exact method of creating a new partnership interest with an investment of additional capital.
The purchase price equals the book value of the capital account purchased.
- No adjustment to the existing partners’ capital
accounts
- No goodwill or bonus
What are the disclosure requirements for reportable operating segments?
For each reportable segment, the entity must report:
- Identifying factors
- Products or services
- Profit or loss details
- Asset details
- Measurement criteria
- Reconciliations
Describe the bonus method of creating a new partnership interest with an investment of additional capital.
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.
Describe the goodwill method of creating a new partnership interest with an investment of additional capital.
- 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.
Describe the bonus method of withdrawal of a partner.
- 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.
Describe the goodwill method of withdrawal of a partner.
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.
Describe Form 10-K and Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?
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.
What are the guidelines for interim reporting?
- 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.
