Financial 2 - Notes to Financial Statements

Question 1

Purpose of Information Disclosed in Notes

Answer 1

Information presented in the notes to the financial statements have the purpose of providing disclosures required by Generally Accepted Accounting Principles

Question 2

Summary of Significant Accounting Policies

Answer 2

• Should disclose policies
• Buzzwords = “BASIS of…”, “Revenue recognition …POLICIES”, “CRITERIA for…”, “METHOD of…”
• Examples: Measurement bases, accounting principles and methods, criteria, policies of basis of consideration, depreciation methods, revenue recognition…
  - Method of determining which assets are considered cash equivalents

Question 3

FS Disclosure of Accounting Policies

Answer 3

• This is an integral part of this financial statements
• ALL material accounting policies should be disclosed
• Should NOT duplicate details elsewhere in the FS
• Format and location of accounting policies are NOT fixed by GAAP (Accounting Policies are normally Note 1*)

Question 4

Disclosure Requirements - Related to Risks and Uncertainties

Answer 4

• Entity’s MAJOR products or services and its principle markets
• Concentrations when it is reasonably possible that a concentration could cause a SEVERE impact in the near term
• Use of estimates in the preparation of the financial statements
• IMMATERIAL items are not required for disclosure

Question 5

Required Disclosures - IFRS vs. GAAP

Answer 5

IFRS, NOT GAAP Require: 1) A statement of Compliance with applicable accounting principles, 2) disclosure of JUDGMENTS made (ex: categorizing an asset as “Held-to-Maturity” or “Available-for-Sale”
BOTH IFRS and GAAP Require: 1) Disclosure of all significant accounting policies, 2) Disclosure of estimates made in the preparation of FS

Question 6

Footnote Disclosures of FS

Answer 6

• Include information on changes in stockholders’ equity and any other information about significant asset and/or liability account
• Information NOT pertinent to a company’s FS are NOT included in the Footnotes
• DO NOT Include 1) Management’s estimate of sales for the upcoming year, 2) projection of future market conditions, 3) analysis of the company’s major competitors. These may be included in the “Management Discussion and Analysis”

Question 7

Disclosure of Vulnerability to Concentration

Answer 7

• Concentration exists as of financial statement date
• Concentration makes the entity vulnerable to the risk of near-term severe impact
• it is at least reasonably possible that the events that could cause a severe impact from vulnerability will occur in the near term

Question 8

Concentration FS Disclosures

Answer 8

• Any significant contributions to the financial statements must be disclosed in the notes
• Concentrations that can affect risk of loss must disclose relevant facts