FAR SU4

Question 1

Certain disclosures about policies of business entities are commonly required. These items include:

Answer 1

1. Basis of consolidation
2. Depreciation methods
3. Amortization of intangibles
4. Inventory pricing
5. Recognition of revenue from contracts with customers
6. Recognition of revenue from leasing operations

Question 2

(T/F) Disclosure of significant accounting policies is only required when GAAP have been applied in an unusual or innovative way.

Answer 2

False.

All significant accounting policies of a reporting entity must be disclosed as an integral part of its financial statements. The Codification expresses a preference for including a summary of accounting policies in a separate section preceding the notes or in the initial note.

Question 3

(T/F) A business or not-for-profit entity must disclose certain matters in its summary of accounting policies. These matters include maturity dates of noncurrent debt and details of inventory composition.

Answer 3

False.

Disclosure of accounting policies should not duplicate details presented elsewhere. For example, the summary of significant policies should not contain the composition of plant assets or inventories or the maturity dates of noncurrent debt.

Question 4

(T/F) Disclosure of accounting policies should not duplicate details presented elsewhere.

Answer 4

True. Plain and true

Question 5

(T/F) Disclosure of information is not required if it is not prepared for internal use, and reporting it would not be feasible.

Answer 5

True. Plain and true

Question 6

What are the characteristics of an operating segment?

Answer 6

1. It is a business component of the entity that may recognize revenues and incur expenses.
2. Its operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) for the purpose of resource allocation and performance assessment.
3. Its discrete financial information is available.

Question 7

How many characteristics does an operating segment have?

Answer 7

Three

Question 8

Quantitative Thresholds- Reportable segments are operating segments that must be separately disclosed if one of the following quantitative thresholds is met:

Answer 8

1. Revenue test. Reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue (external and internal) of all operating segments.
2. Asset test. Assets are at least 10% of the combined assets of all operating segments.
3. Profit (loss) test. The absolute amount of reported profit or loss is at least 10% of the greater, in absolute amount, of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss.

Question 9

What does General information disclose?

Answer 9

1. The factors used to identify reportable segments, such as the basis of organization, and
2. Revenue-generating products and services.

Question 10

What amounts should be reviewed by the CODM and disclosed when measuring profits or losses?

Answer 10

1. Revenues from external customers and other operating segments,
2. Interest revenue and expense,
3. Depreciation,
4. Depletion and amortization,
5. Unusual items,
6. Equity in the net income of equity-based investees,
7. Income tax expense or benefit, and
8. Other significant noncash items.

Question 11

(T/F) Information in segment financial statements is to be reported on the basis that is used internally for evaluating performance and making resource allocation decisions.

Answer 11

True.

Ordinarily, segment information is to be reported on the basis that is used internally for evaluating performance and making resource allocation decisions (the management approach). GAAP do not require disclosure of information that is not prepared for internal use if reporting it would not be feasible.

Question 12

(T/F) Segment disclosure guidance adopts an approach that matches internal and external reporting.

Answer 12

True.

GAAP adopt an operating-segment approach that matches external reporting with internal reporting. Segmentation is based on internal organizational structure and the availability of separate financial information.

Question 13

(T/F) In calculating whether a segment is reportable under the revenue test, intersegment sales or transfers are included in revenue.

Answer 13

True.

Under the revenue test, a segment is reportable if reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue of all operating segments.

Question 14

(T/F) If the total combined assets of the operating segments meeting the quantitative threshold are less than 90% of consolidated assets, additional operating segments are identified as reportable until the 90% level is reached.

Answer 14

False.

If the total external revenue of the operating segments meeting the quantitative threshold is less than 75% of consolidated revenue, additional operating segments are identified as reportable until the 75% level is reached.

Question 15

(T/F) The FASB’s authoritative guidance on segments reporting applies to the interim financial reports and annual financial statements of public business entities.

Answer 15

True.

Segments reporting includes interim financial reports and annual financial statements of public business entities. The objective is to provide information about the different business activities of the entity and the economic environments in which it operates.

Question 16

(T/F) No information about nonreportable activities and segments should be reported in the schedule that reconciles the significant items of the reportable segments to those of the consolidated public entity.

Answer 16

False.

Reconciliations to the consolidated amounts must be provided for the total reportable segments’ amounts for significant items of information disclosed. Information about nonreportable activities and segments is combined and disclosed in an all other category as a reconciling item.

Question 17

(T/F) A business component of an entity can be classified as an operating segment only if its operating results are regularly reviewed by the entity’s chief operating decision maker.

Answer 17

True.

Segmentation is based on internal organizational structure and the availability of separate financial information. An operating segment has the following three characteristics:

It is a business component of the entity that may earn revenues and incur expenses.
Its operating results are regularly reviewed by the chief operating decision maker (CODM) for the purpose of resources allocation and performance assessment.
Its separate financial information is available.

Question 18

(T/F) GAAP does not require reporting of interim financial information.

Answer 18

True. Plain and true

Question 19

(IFRS Difference) In GAAP, Each interim period is treated primarily as an integral part of an annual period.

Answer 19

Under IFRS, each interim period is a discrete reporting period.

Question 20

(IFRS Difference) In GAAP, an inventory loss from a write-down below cost may be deferred if no loss is reasonably anticipated for the year.

Answer 20

Under IFRS for an interim period, an inventory loss from a market decline must be recognized even if no loss is reasonably expected for the year.

Question 21

The allocation is based on the what 3 things?

Answer 21

(1) benefits received
(2) estimates of time expired
(3) activities associated with the period

Question 22

Quantity discounts are based on what?

Answer 22

Quantity discounts are based on annual sales volume should be charged to interim periods based on periodic sales.

Question 23

When should advertising costs be recognized?

Answer 23

Advertising costs may be deferred within a fiscal year if the benefits clearly extend beyond the interim period of the expenditure.

Question 24

(T/F) Costs and expenses other than product costs should be immediately charged to income in interim periods as incurred.

Answer 24

False.

Costs and expenses other than product costs should be either charged to income in interim periods as incurred or allocated among interim periods based on the benefits received, estimates of time expired, or activities associated with the period. If an item expensed for annual reporting purposes benefits more than one interim period, it should be allocated to those interim periods.

Question 25

(T/F) A company should use its prior-year actual annual tax rate to determine taxes for each interim period.

Answer 25

False.

At the end of each interim period, the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis.

Question 26

(T/F) If a change in accounting principle occurs during the year, its cumulative effect on retained earnings at the beginning of the interim period must be calculated and included in net income for the period.

Answer 26

False.

The cumulative effect of the change on periods prior to those presented is reflected in the carrying amounts of assets, liabilities, and retained earnings (or other appropriate components of equity or net assets) at the beginning of the first period presented.

Question 27

(T/F) Interim period reports for publicly traded companies are not required to include basic and diluted EPS or information about reportable operating segments.

Answer 27

False.

Publicly traded companies may report summarized financial information at interim dates that is less detailed than information in annual financial statements. Among the required minimum disclosures are sales or gross revenues, provision for income taxes, net income, and comprehensive income; and basic and diluted EPS for each period presented.

Question 28

(T/F) An unusual or infrequently occurring loss that occurred during the second quarter must be prorated over the year.

Answer 28

False.

An unusual or infrequently occurring item is included in the determination of net income for the interim period in which it occurs, not prorated over the year.

Question 29

(T/F) Some types of disclosures that should be made at the balance sheet date include the risks and uncertainties relating to the nature of operations, use of estimates in preparing the financial statements, and current vulnerability due to concentrations.

Answer 29

True.

The risks and uncertainties relating to the nature of operations, use of estimates in preparing the financial statements, and current vulnerability due to concentrations are all topics that should be disclosed on the balance sheet date.

Question 30

(T/F) Subsequent events providing evidence about conditions existing at the balance sheet date should be disclosed in the notes rather than recognized in the financial statements.

Answer 30

False.

Subsequent events that provide additional evidence about conditions at the balance sheet date, including the estimates inherent in statement preparation, must be recognized in the financial statements.

Question 31

(T/F) Subsequent events providing evidence about conditions existing at the date of the auditor’s report but not at the balance sheet date require adjustment of the financial statements.

Answer 31

False.

One type of subsequent event provides evidence about conditions that did not exist at the date of the balance sheet but that arose subsequent to that date. These events do not require recognition, but some of them do require disclosure. Examples of subsequent events requiring only disclosure include:
• Sale of a bond or capital stock issue
• Purchase of a business
• Settlement of litigation when the precipitating event occurred after the balance sheet date
• Loss of plant or inventories as a result of fire or flood
• Losses on receivables resulting from conditions (e.g., a customer’s major casualty) arising after the balance sheet date

Question 32

What is a financial instrument?

Answer 32

A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that both 1) Imposes on one entity a contractual obligation and 2) Conveys to that second entity a contractual right

Question 33

What is Credit Risk?

Answer 33

Credit risk is the risk of accounting loss from a financial instrument because of the possible failure of another party to perform.

Question 34

(T/F) An entity is encouraged, but not required, to disclose quantitative information about the market risks of instruments that is consistent with the way the entity manages those risks.

Answer 34

True. Plain and true

Question 35

(T/F) Public entities must disclose the fair value of financial instruments whether or not they are recognized on the balance sheet.

Answer 35

True.

GAAP require public entities to disclose the fair value of financial instruments, whether or not they are recognized in the balance sheet.

Question 36

(T/F) With certain specified exceptions, an entity must disclose all significant concentrations of credit risk arising from all financial instruments.

Answer 36

True.

With certain exceptions, for example, (1) instruments of pension plans, (2) certain insurance contracts, (3) warranty obligations and rights, and (4) unconditional purchase obligations, an entity must disclose all significant concentrations of credit risk arising from all financial instruments, whether from one counterparty or groups.

Question 37

The Fair Value Hierarchy

Answer 37

Level 1 inputs are the most reliable. They are unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
1. If the entity has a position in a single financial instrument that is traded in an active market, the position is measured within Level 1. The FVM equals the quantity held times the instrument’s quoted price.

Level 2 inputs are observable. But they exclude quoted prices included within Level
1. Examples are quoted prices for similar items in active markets, quoted prices in markets that are not active, and observable inputs that are not quoted prices.

Level 3 inputs are the least reliable. They are unobservable inputs that are used given no observable inputs. They should be based on the best available information in the circumstances. An example of a Level 3 input is the reporting entity’s own data.

Question 38

(T/F) Fair value is an exit price paid or received in a hypothetical transaction considered from the perspective of a market participant.

Answer 38

True.

Fair value is 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. The price is an exit price paid or received in a hypothetical transaction considered from the perspective of a market participant.