Financial Reporting (30%-40%) - I

Question 1

What is a bond sinking fund?

Answer 1

Restricted cash set aside by an entity to retire bond debt.

Question 2

How do legal fees and registration fees effect effect the proceeds from a stock inssuance?

Answer 2

Legal fees and registration fees decrease the proceeds of the issuance of stock.

Question 3

What are examples of current assets?

Answer 3

Cash, cash equivalents, accounts receivable, inventory, and prepaid expenses. PP&E and customer deposits are not current assets. PP&E is a noncurrent assets and customer deposits are liabilities.

Question 4

How are deferred tax assets and deferred tax liabilities classifed

Answer 4

Deferred tax assets and deferred tax liabilities are noncurrent assets and liabilities respectively.

Question 5

What is meant by the term “Articulation?”

Answer 5

Elements of financial statements are fundamentally interrelated. For example: beginning balance + changes = ending balance and assets = liabilities + equity.

Question 6

Are offsetting receivables and paybles permitted?

Answer 6

Offsetting receivables and payables are permitted if a right of set-off exists. The criteria required for right of set-off include:

1. the two parities owe determinable amounts
2. the reporting entity has the right to off-set
3. the reporting party intent to off-set
4. right of off-set is enforceable by law

Question 7

What is the structure of an income statement?

Answer 7

Operating

Non-operating (other gains and losses including extraordinary items)

Tax

Discontinued operations (net of tax)

Other comprehensive income (net of tax)

Question 8

What is a strategice shift?

Answer 8

Management decision to discontinue a division or product line that represents 15% of a company’s total revenues.

Question 9

When (date) does a company classify a divison or product line as discontinued?

Answer 9

As soon as the divsion or product line is held for sale.

Question 10

During the reporting period in which a discontinued segment is sold, are gains and losses from both the sale and operating results combined?

Answer 10

Yes, gains and losses from the sale and the results of operations are net of tax and netted together.

Question 11

When are costs of one-time employment termination recorded?

Answer 11

The date employees are notified.

Question 12

How is an expense increae or decreased calculated relative to a base year?

Answer 12

(Current year expense / base year expense) - 100%

Question 13

What is comprehensive income?

Answer 13

Changes in equity (net assets) from non-owner sources that are not included in net income.

Question 14

What are the sources of other comprehensive income?

Answer 14

1. Gains and losses on foreign currency translation
2. Gains and losses from the effective portion of a cash flow hedge
3. Unrealized gains/losses from available-for-sale debt instruments
4. Pension and post retirement gains and losses

Question 15

Statement of Cash Flows - What financial statement is used to compute cash provided/used from operating activites?

Answer 15

Income statement.

Question 16

In preparing consolidated financial statements, what are the most common balance sheet eliminations?

Answer 16

1. A/P and A/R
2. Bond payables and receivables
3. Dividend payables and receivables
4. Accrued interest payables and receivables

Question 17

In preparing consolidated financial statements, what are the most common income statement eliminations?

Answer 17

1. Bond transactions
2. Non-depreciable fixed asset transactions
3. Depreciable fixed asset transactions
4. Inventory transactions

Question 18

What is goodwill?

Answer 18

The excess of the purchase price and the FV of a company’s net assets on acquisition date.

Question 19

What portion of a subs equity is reported on consolidated financial statements?

Answer 19

A subs equity if fully eliminated when preparing consolidated financial statements. On acquisition date, the acquiring company purchases the FV of net assets (Assets - Liabilities = Net Assets or Equity). Not eliminating a subs equity would be double counting equity.

Question 20

How is goodwill calculated?

Answer 20

Acquisition Price
- Net Assets
- Book value to FV adjustments
- Intangibles
———————————————-
= Goodwill

Question 21

What are the steps to eliminate intercompany depreciable fixed asset transactions?

Answer 21

1. Restore the asset
2. Restore accumulated depreciation
3. Eliminate the gain
4. Adjust depreciation expense and accumulated depreciation as if still deprecating the orginal asset

Question 22

What are the steps to eliminate intermany non-depreciable fixed asset transactions?

Answer 22

1. Restore the asset (asset is now inflated by the gain)
2. Eliminate the gain

Question 23

What are the steps to eliminate intercompany bond transactions?

Answer 23

1. Eliminate the bond payable
2. Eliminate the investment in bonds
3. Eliminate the bond premium or discount
4. Recognize the gain or loss from retirement of bonds

Question 24

What are the steps to eliminate intercompany merchandise/inventory transactions?

Answer 24

1. Eliminate the sale of merchandise/inventory
2. Eliminate the parent’s COGS
3. Eliminate the sub’s COGS attributable to the parent COGS (Sub COGS x Parent GP%)
4. Eliminate the remaining sub’s inventory related to parent’s sale (Sub Ending Inventory x Parent GP%)

Question 25

What is the purpose of SFAC 8 (Statements of Financial Accounting Topics 8)?

Answer 25

SFAC 8 provides guidance for relevant supplemental information (notes) to items appearing on the face of the financial statements.

Question 26

What are the SFAC 8 required disclosures for assets?

Answer 26

1. Nature of the asset
2. Quality of the asset
3. Location of the asset
4. Future cash flows of the asset
5. Significant contractual, statutory, regulatory and judicial restrictions

Question 27

What are the four limitations of the notes to the financial statements?

Answer 27

1. Information must be relevant
2. Cost constraints
3. Potential adverse consequences
4. Future-oriented information that could have adverse consequences on an entity

Question 28

FASB does not require entities to disclose predictions or outcomes because these outcomes could have adverse consequences. However, what forward looking disclosures may be useful?

Answer 28

1. Estimates and assumptions
2. Management plans and strategies

Question 29

What are the SFAC 8 disclosures for assets and liabilities from financial instruments and contracts?

Answer 29

1. Contractual legal terms
2. Degree of credit or non-performing risk
3. Inability to pay or perform
4. Method used to determine cash flows

Question 30

Identify the significant accounting policies that must be disclosed?

Answer 30

1. Depreciation methods
2. Conolidation basis
3. Interperiod tax allocation
4. Inventory pricing
5. Revenue recognition methods