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FAR - CPA > FAR CPA Lessons 51-61 > Flashcards

FAR CPA Lessons 51-61 Flashcards

1
Q

When was the Securities and Exchange Commission created?

A

After the stock market crash in 1929

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2
Q

What is the Securities and Exchange Commission (SEC)

A

The SEC promotes efficient allocation of capital through open, orderly, and fair securities markets
The SEC enforces compliance with US GAAP for all publicly traded companies
The SEC has the legal authority to set accounting standards but has delegated that responsibility to the FASB
The SEC regulates the initial issuance and subsequent trading of securities
Financial statement information is in SEC’s database EDGAR (Electronic Data Gathering Analysis, and Retrieval)

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3
Q

What is EDGAR?

A

Electronic Data Gathering Analysis, and Retrieval - is an automated system of collection, validation, and indexing of information filed with the SEC

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4
Q

What is the makeup of the SEC?

A

There are 5 commissioners appointed by the President of the United States and 5 divisions

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5
Q

What are the five divisions of the SEC?

A
  1. Corporate Finance
  2. Enforcement
  3. Trading and Markets
  4. Investment Management
  5. Division of Economics and Risk Analysis
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6
Q

What the responsibilities of the Corporate Finance Division of the SEC?

A
  • Oversees compliance

- Filings submitted to this division

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7
Q

What the responsibilities of the Enforcement Division of the SEC?

A
  • Investigates violations

- Makes recommendations for punishment

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8
Q

What the responsibilities of the Trading and Markets Division of the SEC?

A
  • Oversees the secondary markets and exchanges, brokers, and dealers
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9
Q

What the responsibilities of the Investment Management Division of the SEC?

A
  • Oversees investment advisors and investment companies
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10
Q

What the responsibilities of the Division of Economics and Risk Analysis Division of the SEC?

A

Integrates financial economics and data analytics

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11
Q

What is a foreign private issuer?

A
  • A foreign entity that is non governmental and has the majority of it’s securities are owned outside of the US
  • Offers and directors are not US citizens or residents
  • The majority of assets are outside of the US
  • The business is administered principally outside of the US
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12
Q

What pronouncements does the SEC issue?

A
  • FRR - Financial Reporting Releases
    • Formal pronouncements - highest-ranking authoritative source for public companies
  • SAB - Staff Accounting Bulletins
    • Reports enforcement actions
  • AAER - Accounting and Auditing Enforcement Releases
    - Reports enforcement actions
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13
Q

Identify the main reporting requirements for the 1933 Securities Acts.

A

requires publicly traded firms offering securities for sale to the public in primary and secondary markets to file a registration statement, and to provide each investor with a proxy statement before each shareholders’ meeting.

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14
Q

Identify the forms used for the registration of securities and subsequent reporting.

A

Basic Registration - Form S-1
Annual filing—Form 10-K
Quarterly filing—Form 10-Q
Report significant events affecting the company—Form 8-K
Proxy Statement—The report by which management requests the right to vote through proxy for shareholders at meetings

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15
Q

What are regulations S-X?

A

governs the form and content of financial statements and financial statement disclosures. These include:
Income statement
-Balance sheet
-Changes in shareholders equity
-Cash flow statement
-Footnotes to financial statements
-Qualification of accountants (independence rules)

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16
Q

What are regulations S-K?

A

governs the form and content of nonfinancial statement disclosures. “S-K” governs the “10-K”

  • Description of the business
  • Description of stockholder matters
  • Management’s discussion and analysis (MD&A)
  • Changes in and disagreements with accountants
  • Information on directors and management
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17
Q

Define Security

A

“Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest, or participation in any profit-sharing agreement, collateral trust certificate, reorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt of, guarantee of, or warrant or right to subscribe to or to purchase any of the foregoing.”

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18
Q

What are “smaller reporting companies” (SRC)?

A

Must have one of the following:
1. Less than $250 million in public float as of the last business day of the most recent second fiscal quarter,
or
2. No public float or public float less than $700 million AND annual revenues less than $100 million in the most recent fiscal year.

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19
Q

What is Form S-1

A

Form S-1 is the basic registration form for new securities and it includes a list of required disclosures.

  • Describes the issuing company, the business operations and risks, the financial statements, and the expected use of the proceeds.
  • Information about the cost of issuing and distributing the security
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20
Q

What is Firm Commitment?

A

The underwriter purchases the entire issue at a fixed price.

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21
Q

What are Best Efforts?

A

The underwriter sells as many shares as possible.

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22
Q

What is all or none?

A

If the underwriter is unable to sell all (or a significant portion) then the issue may be canceled.

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23
Q

What is Form 8-K

A

Form 8-K reports significant events affecting the company such as material impairment, bankruptcy, entry or termination of a definitive agreement, changes in the registrant’s CPA, changes in control etc.

24
Q

What is Form 10-Q?

A

Form 10-Q reports the quarterly information to the SEC within 45 days (nonaccelerated filer) of the end of the quarter.
The financial statements presented are:
-Balance sheet for the quarter and prior fiscal year end
-Quarterly and year-to-date income statements for this quarter and the same period in the previous year
-Cumulative year-to-date statements of cash flow for the current and prior fiscal years

25
Q

What is for 10-K?

A

Form 10-K is the required vehicle for reporting annual financial information to the SEC.

26
Q

What are Proxy Statements?

A

Proxy statements are materials sent to the shareholders for vote. Proxy materials can address things such as election of directors, changes in the corporate charter, issuance of new securities, plans for a major business combination etc.

27
Q

What is The Foreign Corrupt Practices Act of 1977

A

Prohibits bribes of foreign governmental or political officials for the purpose of securing contracts or business. It requires publicly held companies to maintain an adequate system of internal control.

28
Q

What is the The Sarbanes-Oxley Act of 2002 (SOX)

A

Contains provisions to enhance corporate governance and to mitigate financial accounting abuses.

29
Q

What are the disclosure requirements for EPS?

A
  • If the firm has any dilutive potential common stock then the basic earnings per share and diluted earnings per share must be shown on the face of the income statement - for net income and income from continuing operations
  • If the company had any discontinued operations the BEPS and DEPS can be shown on the income statement OR in the footnotes to the financial statement
30
Q

What is Earnings Per Share?

A

EPC measures profitability relative to ownership of the company

31
Q

What is basic earnings per share?

A

Computed on common shares outstanding and net income

32
Q

What is basic earnings per share?

A

EPS is computed only for common stock. It represents the amount of earnings on a per-share basis. - Computed on common shares outstanding and net income

33
Q

What is diluted earnings per share?

A

DEPS is an “as if” calculation.

Included the assumed conversion of potential common stock (PCS)

34
Q

What is the formula for Basic Earnings Per Share?

A

Net Income - Preferred stock dividends / Weighted average shares of common stock outstanding

35
Q

What is the formula for Diluted Earnings Per Share?

A

Net Income - PS dividends +/- Adjust to NI for assumed conversion of PCS / Weighted average shares of common stock outstanding + shares from assumed conversion of PCS

36
Q

Basic Earnings Per Share - Cumulative Preferred Stock - How much should be subtracted from the numerator?

A

Deduct one full year of dividends regardless of the amount declared or paid

37
Q

Basic Earnings Per Share - NonCumulative Preferred Stock - How much should be subtracted from the numerator?

A

Deduct dividends declared in the current year only regardless of the amount paid

38
Q

What are the major differences between GAAP * IFRS for EPS?

A
  1. GAAP - Diluted treasury stock method uses year to date while IFRS calculates each period separately
  2. GAAP does not allow EPS calculated for alternative measures of performance while IFRS does
  3. GAAP - Contingently convertible securities are included in DEPS unless unlikely to occur - While under IFRS they can only be included if they meet certain conditions
39
Q

Define an operating segment

A

Operating segments must have three characteristics.

  1. The segment is involved in revenue producing and expense incurring activities.
  2. The operating results of the segment are reviewed by the company’s chief operating decision maker on a regular basis.
  3. There is discrete financial information available for the segment.
40
Q

Explain how a reportable segment is identified using three quantitative tests.

A
  1. The operating segment’s revenue from all sources (internal and external) is 10% or more of the combined (internal and external) revenues of all of the company’s reported operating segments.
  2. The operating segment’s operating profit or loss (absolute value) is 10% or more of the greater of the following two amounts (absolute value). Operating profit is pretax.
    a. The combined operating profit of all operating segments that did not report an operating loss
    b. The combined loss of all operating segments that did report an operating loss
  3. The operating segment’s identifiable assets are 10% or more of the combined assets of all operating segments.
41
Q

What is the 75% rule for reporting?

A

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

42
Q

List the major items to be disclosed for a reportable segment.

A
  1. Factors used to identify operating segments
  2. General information about the products and services of the operating segments
  3. Internal and external sales revenue
  4. A measure of profit or loss, and total assets
  5. The nature of differences between the measurement of segment quantitative information such as income and assets, and the measurement of the firm’s reported quantitative information
  6. Interest revenue
  7. Interest expense
  8. Depreciation, depletion, and amortization expense
  9. Other significant noncash items
  10. Unusual or infrequent items
  11. Equity in net income of investees, in which the investment is accounted for under the equity method
  12. Income tax expense or benefit
  13. Reconciliation of the totals of segment revenues, reported profit or loss, assets, and other significant items to the total for the firm as a whole
  14. Capital expenditures
43
Q

Explain the underlying approach to interim reporting.

A

Timeliness is one of our enhancing characteristics of accounting information.

Interim reports are not audited although for SEC registrants the reports are reviewed and tend to be less accurate, subject to greater estimation error due to the shorter period involved, and are less complete.

The general reporting philosophy for interim reports is that interim periods are to be viewed as an integral part of the annual period, rather than as a separate or discrete period

In general, firms must use the same accounting methods (e.g., LIFO, straight-line depreciation) for interim reporting as they do for annual reporting.

44
Q

Describe the reporting of LIFO liquidations

A
  • If a firm uses LIFO for annual reporting, it must also use LIFO for interim reporting
  • Restoration Expected - the interim period cost of goods sold should reflect the estimated cost of the replacement - The firm recognizes an increase in cost of goods sold and recognizes a provision (liability) for the future purchase.
  • Restoration Not Expected— The interim period cost of goods sold should reflect the actual cost of the layer liquidated.
45
Q

Explain the application of interim reporting principles to accounting changes.

A
  • Purchase price variances, and volume variances expected to be absorbed by the end of the current year are deferred (not recognized in earnings) for the interim period.
46
Q

List the minimum reporting requirements for interim reports.

A
  1. Sales and other revenue, unusual or infrequent items, discontinued operations, net income
  2. Seasonal revenues and expenses allowing users to assess the impact on both the interim period and annual period
  3. Changes in estimated income tax expense
  4. Contingencies
  5. Fair value
  6. Earnings per share
  7. Changes in accounting principle and estimates
  8. Significant cash flow changes
47
Q

What is the underlying approach to interim reporting for international standards.

A

all recognized accounts for interim purposes must meet their IFRS definitions in the interim period. The same process for estimates, accruals, deferrals and allocations made at the end of an annual period apply to each interim period. This provision of the international standards reflects the preference for the discrete view, and is in contrast with U.S. standards.

48
Q

List the differences in interim reporting under the two sets of standards for specific reporting topics.

A

GAAP: Integral View
IFRS: Descrete View

GAAP: Allocation of costs over each quarter
IFRS: Must meet asset definition to allocate

GAAP: Can defer cost variance if recovery is expected
IFRS: Cannot defer cost variances

GAAP: Can defer decline in inventory value if recovery is expected
IFRS: Cannot defer decline in inventory volue.

49
Q

Explain Cash Basis Financial Statements

A

Cash basis financial statements are based solely on cash receipts and cash disbursements. In a pure cash basis of accounting, revenues are recognized only when cash is received and expenses are recognized only when cash is disbursed.

Balance Sheet - Cash = Equity
-No other assets or liabilities

50
Q

Modified Cash Basis

A

Modified cash basis financial statements result from using a combination of elements of cash basis accounting and accrual basis accounting. (Any modifications made must follow GAAP)

Typically it is modified for the long term type assets

51
Q

Explain Cash Basis Financial Statements

A

Cash basis financial statements are based solely on cash receipts and cash disbursements. In a pure cash basis of accounting, revenues are recognized only when cash is received and expenses are recognized only when cash is disbursed.

Balance Sheet - Cash = Equity
-No other assets or liabilities

52
Q

Explain Modified Cash Basis Financial Statements

A

Modified cash basis financial statements result from using a combination of elements of cash basis accounting and accrual basis accounting. (Any modifications made must follow GAAP)

Typically it is modified for the long term type assets

53
Q

Explain Income Tax Basis Financial Statements

A

Based on income tax rules and regulations
- Taxable amount = Revenue
- Deductible amount = Expenses
Possible changes due to IRS findings should be disclosed in notes

54
Q

Explain Other Regulatory Basis Financial Statements

A
  • State Insurance Regulatory Agency
  • Public Utility Regulatory Agency

Use should be restricted to the filing entity and the regulatory agency

55
Q

Describe the purpose of the PCC and its role in the standard setting process.

A

An organization that will assist in setting accounting standards for private companies. Two primary responsibilities:

  1. With with FASB to identify alternative accounting opportunities for private companies
  2. Serve on the advisory board to FASB to help consider how GAAP changes will effect private companies
56
Q

Describe the definition of a public business entity.

A

The definition excludes not-for-profit companies and employee benefit plans. A public entity is one that:

  • Is required by the SEC to file or furnish financial statements
  • Is required by the Securities Act of 1934 to file or furnish financial statements with a regulatory agency other than the SEC
  • Is required to file or furnish financial statements with foreign or domestic regulatory agencies in order to sell or issue securities
  • Has issued securities that are traded, listed, or quoted on an exchange or over-the-counter market; or
  • Has securities that are not subject to contractual restrictions and is required by law, contract, or regulation to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis.
57
Q

Identify the significant accounting differences for private companies.

A
  • A private entity can amortize goodwill on a straight-line basis over 10 years, or less than 10 years if it is more appropriate & does not have to complete annual impairment testing
  • A private entity can enter into interest rate swap to convert the variable rate debt to fixed rates
  • Private companies are not required to apply the criteria for determining whether there is a variable interest in certain leasing arrangements
  • Private companies have the option to not recognize certain intangible assets associated with a business combination. Specifically, private companies can elect to not recognize customer-related intangibles that cannot be sold or licensed independent of the business and noncompete agreements separately from goodwill.
  • Private companies must recognize other identifiable intangibles such as copyrights, trademarks, and patents, separately from goodwill.

FAR - CPA (15 decks)

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