Notes to Financial Stmts (not a major emphasis)

Question 1

From the CPAexcel textbook:

“Our recommendation is to have a familiarity with the terms and general disclosures. We do not recommend memorizing all the disclosure requirements because disclosure is not a major emphasis of the exam. Try to find similarities across different disclosure areas.”

Question 2

Financial Report Disclosures:

• 1. Summary of Significant Accounting Policies - this is the 1st footnote disclosure. Companies must disclose the following information:
     * 1. depreciation method.
     * 2. inventory valuation method.
     * 3. securities classified as cash & cash equivalents.
     * 4. the basis for consolidation:
     
     • 1. amortization policies.
     • 2.revenue recognition policies.
       * This summary must include information about all significant accounting policies but is not required in interim statements if the policies have not changed.
• 2. Related Party Transactions - companies must disclose the following information:
     * 1. the nature of the relationship between the related entities; (related parties include a parent and its subsidiaries, a firm and its principal owners and management and members of their immediate families, a firm and its equity-method investees, and others.)
     * 2. a description of all related party transactions for the accounting years in which an income statement is presented in the financial report.
     * 3. the dollar amounts of the related party transactions for the accounting years in which an income statement is presented in the financial report.
     * 4. any receivables from or payables to related parties as of the date of each balance sheet presented in the financial report.

Answer 2

Financial Report Disclosures:

• 1. What are the two Financial Report disclosures in the notes?
     * 1. summary of significant accounting policies.
     * 2. related party transactions.

Question 3

Noncurrent Liability Disclosures:

• companies must disclose the following about liabilities:
  
  • 1. aggregate amount of maturities on borrowings for each of the five years following the balance sheet.
  • 2. sinking fund requirements.
  • 3. aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services.
  • 4. fair value of each financial debt instrument in the financial stmts or in the notes.
  • 5. the nature of the firm’s liabilities, interest rates, maturity dates, conversion options, assets pledged as collateral, and restrictions.

Answer 3

Noncurrent Liability Disclosures:

• 1. What are the five Noncurrent Liability disclosures in the notes?

Question 4

Capital Structure Disclosures:

• 1. companies must disclose the following information:
     * 1. rights and privileges of outstanding securities.
     * 2. number of shares issued during the annual fiscal period and any subsequent interim period presented.
     * 3. liquidation preference of preferred stock.
     * 4. if the liquidation value of preferred stock is considerably in excess of par value or stated value of preferred stock, this information should be disclosed in the equity section of the balance sheet.
     * 5. other preferred stock disclosures: the following info can be disclosed in the footnotes or in the equity section of balance sheet:
     
     • 1. aggregate or per-share amounts at which preferred stock can be called or is subject to redemption through sinking fund operations.
     • 2. aggregate or per-share amounts of arrearages for cumulative preferred stock.
          
          • 6. redeemable preferred stock: for each of the five years following the balance sheet date, the amount of redemption requirements for all types of redeemable capital stock must be disclosed in the notes to the financial stmts.

Answer 4

Capital Structure Disclosures:

• 1. What are the Capital Structure Disclosures?

Question 5

Errors and Irregularities Disclosures (a later lesson discusses the accounting for these items):

• 1. Errors are unintentional.
• 2. Irregularities are intentional.
• NOTE - both Errors and Irregularities require footnote disclosure. If prior year income is affected, a PPA is recorded which corrects the beginning balance of RE and any other account affected in the year of discovery.

Question 6

Illegal Acts Disclosures:

• 1. examples include illegal contributions and bribes. The Foreign Corrupt Practices Act of 1977 was passed by the US Congress to discourage such acts; the nature and impact of illegal acts on the financial stmts should be disclosed fully in the notes.

Question 7

Management’s Discussion and Analysis (MD&A):

• 1. this is a narrative written by management and, although not considered part of the footnotes, is nonetheless an important disclosure supplementing the financial stmts.
     * 1. public companies are required to include the MD&A in the annual report. It provides management’s discussion about the operations of the firm, its liquidity, and capital resources.
     * 2. additional discussion involves management’s view of the firm’s financial condition, changes in financial condition, and results of operations through analysis of the financial stmts. Explanations of the reasons for major changes in financial performance and financial position are examples. Discussion of the effects of significant and unusual events provides further insight.
     * 3. forward-looking information is provided that is not reflected in the financial stmts. This includes management’s general prognosis about future sales, effects of competition, and expected effects of general macroeconomic conditions. An example is a discussion of the effect of inflation or specific price-level changes on future sales and earnings. Another is a discussion of the possible effects of uncertainties on the firm’s financial stmts.

Question 8

Disclosures for the Effects of Changing Prices:

• 1. Background:
     * 1. During times of price instability, financial reporting can be distorted, especially for items measured using historical cost. Both the balance sheet and income statement items (e.g., depreciation expense) are affected. Both inflation (general price- levels) and specific price changes affect the interpretation of reported amounts.
     * 2. In the past, large firms were required to provide extensive footnote disclosure about the effects of price changes on the financial stmts. Because inflation has subsided, there currently is no such requirement although disclosure of information on the effects of changing prices continues to be encouraged.
• 2. Price level changes (It is expected that this section will have a lower probability of being tested than other material in this lesson).
     * 1. General Price-Level Changes
     * ……

Question 9

Notes to Financial Stmts - CPAexcel Flashcards:

• 1. Define “inflation” and “delfation.”
• 2. Define “monetary items”.
• 3. What is a development stage enterprise?
• 4. What is presented in the related party transaction disclosures?
• 5. Define “nonmonetary items”.
• 6. Define “nominal dollars”.
• 7. Define “purchasing power gain”.
• 8. Define “purchasing power loss”.
• 9. What is the MD&A section?
• 10. Define “constant dollars”.
• 11. What does the first footnote typically cover?
• 12. Define “purchasing power”.
• 13. Define “general prices”.
• 14. What is the difference between errors and irregularities?
• 15. What is included in illegal acts for companies?
• 16. Define “specific price change”.

Answer 9

Notes to Financial Stmts - CPAexcel Flashcards:

• 1. It is the increase in general prices for a period of time; deflation is the decrease in general prices.
• 2. The specific price of monetary items cannot change.
• 3. An enterprise placing substantially all its efforts into the establishment of a new business.
• 4.
  
  • 1. nature of relationship.
  • 2. description of all transactions for years presented.
  • 3. dollar amounts of transactions.
  • 4. payables to and receivables from parties.
• 5. The specific price of nonmonetary items can change.
• 6. Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.
• 7. Gains that result from:
     * holding monetary assets during deflationary times; or
     * having monetary liabilities during inflationary times.
• 8. Losses that result from:
     * holding monetary assets during inflationary times; or
     * having monetary liabilities during deflationary times.
• 9. A narrative written by management that is an integral part of the disclosure of the financial statements.
• 10. Measurements in the general price level as of a specific date.
• 11. Summary of significant accounting policies.
• 12. The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.
• 13. General prices refers to a market basket of items that the typical consumer purchases.
• 14. Errors are unintentional, irregularities are intentional.
• 15. Illegal contributions and bribes.
• 16. The change in the price of a specific good or service over a period of time.