Financial Reporting

Question 1

What is considered Relevant Financial Information

Answer 1

Predicative Value and confirmatory value

Question 2

Faithful Representation

Answer 2

Completeness, neutrality and freedom from error

Question 3

FASB Stakeholders

Answer 3

Accounting firms, Investment analysts, International standard-setting bodies.

Question 4

Deferred Tax Assets

Answer 4

Deferred tax assets are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. The loss carryforward is recognized as a deferred tax asset at the total future deductible amount multiplied by the future tax rate that will be available for the later tax deductions. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Thus, the deferred tax asset is a tax benefit (lowering of this year’s income tax expense) and will increase net income by the total amount of the expected benefit amount of $54,000 ($180,000 deduction × 0.30 (the future tax rate of 30%)).

The other gain is not recognized until the sale is finalized and agreed to by both parties.

Question 5

Change in Accounting Method

Answer 5

Reflected in Retained Earnings only (NO IMPACT ON NET INCOME REPORTING)

Question 6

Current Assets

Question 7

Long-Term Assets

Question 8

Current Liabilities

Question 9

Long-Term Assets

Question 10

SEC’s Rulemaking Procedures

Answer 10

Step: Rule Adoption

Question 11

Reporting on operating loss for discontinued operations

Answer 11

Only report loss for the applicable year + estimated loss on disposal (impairment loss)

Only report Operating loss of discontinued segment on income statement

Question 12

According to the FASB conceptual framework, which of the following correctly pairs a fundamental quali­tative characteristic of accounting information with one of its components?

Answer 12

Relevance and predictive value.

Question 13

Fundamental Qualitative Characteristics

Answer 13

Faithful representation - Neutrality
Relevance - Materiality & Confirmatory Value

Question 14

Which of the following indicates when the governmental fund balance may be reported as committed?

Answer 14

Constraints are imposed by formal action of the government’s governing body

Committed fund balances reflect amounts that can only be used for specific purposes based on constraints imposed by formal action of the government’s highest level of decision-making authority.

Question 15

According to the FASB conceptual framework, an entity’s revenue may result from

Answer 15

A decrease in a liability from primary operations.

Question 16

Reporting Foreign Exchange Loss on Income Statement

Answer 16

All Foreign Exchange Transaction Losses whether realized or unrealized would be recorded in Income Statement. Foreign Exchange Translation (not transaction) Gains and Losses are parked in Other Comprehensive Income.

• Remeasured at current exchange rate - Cash, AR, AP, Mortgage payable

-Remeasured at History Rate - Inventory

• Remeasured at Original Rate - Common Stock
• Remeasured at Average Rate - Sales

Question 17

Other Comprehensive Income (OCI)

Answer 17

includes revenues, expenses, gains, and losses that are excluded from net income. Instead, they are listed after net income on the income statement. These items have not yet been realized. In other words, the underlying transaction has not been completed or settled yet.

Examples include: foreign currency items; certain pension adjustments; unrealized gains and losses on certain investments; and gains and losses on derivatives. Comprehensive income is $10,000 ($11,000 – 3,000 + 2,000). The cumulative effect of a change in accounting principle would be applied to beginning retained earnings. Increases in common stock are not reflected in income, but rather on the balance sheet.

Has no effect on direct adjustments to equity accounts, such as capital stock transactions and transactions related to retained earnings.

Question 18

Comprehensive Income

Answer 18

• Income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
• Comprehensive income is divided into net income and other comprehensive income (OCI).
• Reporting - Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.

Question 19

Enhancing qualitative characteristics include

Answer 19

Comparability
Verifiability
Timeliness
Understandability.

These characteristics enhance the usefulness of information that is relevant and faithfully represented.

Question 20

Realization Concept (FASB conceptual framework)

Answer 20

By definition, “realization” means the process of converting a noncash resource or right into cash. The sale of equipment (a noncash resource) for a note (a claim to cash) conforms to the realization concept.

Example - Depreciated equipment was sold in exchange for a note receivable.