Financial Concepts

Question 1

What should be disclosed in the summary of significant accounting policies?

Answer 1

The summary of significant accounting policies is typically the first note after the financial statements. This section includes the following items: measurement components, accounting principles and methods, and policies for consolidating entities, depreciation methods, revenue recognition, etc

Question 2

When does the subsequent event period end for a company filing with the SEC and for a company that does not file with the SEC?

Answer 2

For a company that files with the SEC, the subsequent event period ends the date the Q/Ks are published/issued. For a company that DOES not file with the SEC, the subsequent event period ends when the company has received all the approvals necessary to issue a GAAP compliant financial statements.

Question 3

How do you account for a depreciation change (i.e. straight line to double declining, etc) in the financial statements?

Answer 3

This is considered a change in estimate and only requires prospective treatment.

Question 4

The transaction price from contracts with customers generally should not be adjusted for the effect of the time value of money when…

Answer 4

1. The time between payment and delivery is less than a year.
2. The transaction is based on the discretion of the seller ( i.e. bill and hold agreement)
3. The transaction is contingent on a future event

Question 5

Is a change from the cost approach to the market approach considered a change in accounting principle or accounting estimate?

Answer 5

accounting estimate, prospectively applied

Question 6

Explain the three fair value hierarchies:

Answer 6

Level 1 inputs are quoted prices in active markets (ie stock prices) for IDENTICAL assets or liabilities. These are most reliable.

Level 2 inputs are quoted prices for SIMILAR assets or liabilities in active markets, quoted prices in markets that are not active, and observable inputs that are not quoted prices

Level 3 inputs are unobservable inputs based on entity assumptions (ie cash flow projections). These are the least reliable.

Question 7

When should an issuer report segment financial information.

Answer 7

To report segment financial information, the segment must be at least 10% of:

1. combined revenues (whether intersegment or affiliated customers), or
2. operating profit (of all segments not having an operating loss), or
3. identifiable assets (does NOT apply to liabilities)

Question 8

What is SEC regulation S-K and S-X?

Answer 8

Regulation S-K sets forth non financial reporting requirements for various filings

Regulation S-X sets forth the form and content of and requirements for interim and annual FS filed with the SEC

Question 9

How do you record in the income statement a material event or transaction that is unusual in nature, infrequent in occurrence (or both)?

Answer 9

It must be reported as a separate component of income from continued operations and should not be reported net of tax

Question 10

In order to be considered an operating segment and reported in the financials, the segment activities/financials must be reviewed by

Answer 10

the company’s chief operating decision maker

Question 11

Relating to EPS, what securities would be antidilutive?

Answer 11

The conversion of Convertible debt (needs updating)

Question 12

Footnote Disclosures: Risk and uncertainties relating to the nature of operations. What does the entity need to disclose?

Answer 12

1. major products or services
2. main operating markets
3. the locations of those markets

Question 13

What is the formula to calculate uncollectible accounts expense (relating to A/R and allowances)?

Answer 13

Beg A/R Allowance Balance:

Minus: allowance write offs
Plus: Recoveries aka write off accounts now collectible
Solve for: Uncollectible Account Expense

End A/R Allowance Balance

Question 14

Greg received a $60K, 6 month, 10% interest bearing note from customer. After holding the note for 2 months, Greg sold the note at a 12% discount to Leigh for cash. How much did Greg receive?

Answer 14

1. Calculate the maturity value of the note: $60K x (10% x 6/12 months) = $63K
2. Calculate the discount: $63K x 12% x 4/12 year = $2.52
3. Subtract the two above: $60.48 (the $0.48 is interest income)

Question 15

Define the following:

1. Large accelerated filer
2. accelerated filer
3. non accelerated filer

Answer 15

1. Over $700M market cap
2. $75 to $700 market cap and at least $100M of revenue
3. $75M or less market cap or less than $100M in revenue

Question 16

When does a large accelerated filer, accelerated filer, and non accelerated filer need to file their 10K and 10Q

Answer 16

Large accelerated filer - 10K in 60 days and 10Q in 40 days

Accelerated filer - 10K in 75 days and 10Q in 40 days

Non accelerated filer - 10K in 90 days and 10Q in 45 days

Question 17

How should comprehensive income should be reported?

Answer 17

1. In a continuous statement of comprehensive income

2. in two separate but consecutive statements (income statement and statement of OCI)

Question 18

Are periodic design changes to existing product classified as R&D?

Answer 18

no, seasonal or other periodic design changes are not R&D

Question 19

What is the total average assets & sales if:

1. AR turnover is 10 times during the year
2. Total assets turnover is 2 times during the year
3. Average AR is $200K

Answer 19

Sales is $2M ($200K x 10)

Total average assets is $1M ($2M divided by 2)

Question 20

How do you account for an inventory method change to LIFO?

Answer 20

This is considered accounting principle change but it is prospective treatment. It would be too difficult to apply retrospectively.

Question 21

How do you calculate the times interest earned ratio?

Answer 21

It is earnings before interest and taxes divided by interest expense

Question 22

What financial statements are required in 10K?

Answer 22

The 10K requires the following:

1. Balance Sheet
2. Statement of Comprehensive Income - Can be presented in a single continuous financial statement or in two separate but consecutive financial statements, composed of the income statement and a separate statement of comprehensive income
3. Statement of Cash Flows
4. Changes in Stockholders Equity

Question 23

What are the sections of the 10K?

Answer 23

The 10K is divided into 4 sections:

Part 1: Description of business, Risk Factors, Lawsuits
Part 2: Info about equity securities - number of shareholders, dividends, stock repurchases, etc; MD&A; Qualitative and Quantitative Disclosures about market risk; Financial Statements and Supplementary Data; disagreements with auditors
Part 3: Directors, Executive Officers, and Corporate governance; Executive Compensation; Related Transactions & Director Independence; Principal Accountant Fees and Services
Part 4: Exhibits, Financial Statement Schedules

Question 24

What are the key concepts of relevance and faithful representation?

Answer 24

relevance is predictability, confirmatory, and materiality

faithful representation is neutrality, free from error, completeness

Question 25

what are the three aspects of the MD&A?

Answer 25

the MD&A section pertains to liquidity, capital resources, and results of operations.

Question 26

For a long term contract, when should the zero profit margin approach be used to recognize revenue?

Answer 26

When the outcome of the contract is not reasonably measurable but the costs incurred in satisfying the performance obligation are expected to be recovered, revenue must be recognized only to the extent of the costs incurred. Revenue recognized is based on a zero profit margin until the entity can reasonably measure the outcome of the performance obligation.

Question 27

Should customers be disclosed in the notes?

Answer 27

only if revenues are 10% or more. company should disclose, the amount from each customer, the segment reporting the revenue.

Question 28

relating to a subsequent event, should the company adjust the financial statements for Uninsured loss of inventories purchased in Year 1 as a result of a flood in Year 2?

Answer 28

no do not adjust FS because the event did not exist at balance sheet date. you would have to disclose if MATERIAL

Question 29

Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?

Answer 29

income tax expense for the second quarter would be $6000

Pre Tax income ($10 + $20) = $30K
Tax Rate 25% = $7.5K
Previously reported in Q1 $1.5K, so second qtr income tax expense is $6K

Question 30

are major competitors required to be disclosed?

Answer 30

no they are not