SS 7. FR&A: Introduction

Question 1

Give 6 examples of a Liability:

Answer 1

• Accounts payable and trade payables.
• Financial liabilities such as short-term notes payable.

• Unearned revenue. Items that will show up on future income statements as
revenues.

• Income taxes payable. The taxes accrued during the past year but not yet paid.
• Long-term debt such as bonds payable.
• Deferred tax liabilities.

Question 2

A disclaimer of opinion is:

Answer 2

where the auditor has been prevented from carrying out their function properly or if they have determined they lack independence

Question 3

The form for issue of new securities is:

Answer 3

Form S-1

Question 4

A coherent financial reporting framework is one that fits together logically. Such a framework should be (3):

Answer 4

Transparent

Comprehensive

Consistent

Question 5

Accruals fall into 4 categories:

Answer 5

1. Unearned Revenue
2. Accrued Revenue
3. Prepaid Expenses
4. Accrued Expenses

Question 6

Expanded Accounting Equation:

Answer 6

assets = liabilities
\+ contributed capital
\+ beginning retained earnings
\+ revenue
- expenses
- dividends

Question 7

The general features for preparing financial statements are stated in IAS No. 1 (9):

Answer 7

• Fair presentation, faithfully representing the effects of the entity’s transactions and events.
• Going concern basis, assuming that the firm will continue to exist unless its management in tends to (or must) liquidate it.
• Accrual basis of accounting is used to prepare the financial statements other than the statement of cash flows.
• Consistency between periods in how items are presented and classified.
• Materiality, meaning the financial statements should be free of misstatements or significant omissions.
• Aggregation of similar items and separation of dissimilar items.
• No offsetting of assets against liabilities or income against expenses unless a specific standard permits or requires it.
• Reporting .frequency must be at least annually.
• Comparative information for prior periods should be included unless a specific standard states otherwise.

Question 8

A coherent framework for financial reporting would be most likely to be:

Answer 8

Transparent

Question 9

List the 4 stated goals of the IASB:

Answer 9

1. Develop global accounting standards requiring transparency, comparability, and high quality in financial statements.
2. Promote the use of global accounting standards.
3. Account for the needs of emerging markets and small firms when implementing global accounting standards.
4. Achieve convergence between various national accounting standards and global accounting standards.

Question 10

Claude owns 100 shares of MCD stock. Prior to a shareholders’ meeting, what form is MCD required to send to Claude?

Answer 10

Proxy statement form def-14A

Question 11

6 Steps of the Financial Statement Analysis Framework:

Answer 11

1. State the objective and context
2. Gather data
3. Processing the data
4. Analyze and interpret the data
5. Report the conclusions or recommendations
6. Update the analysis

Question 12

An unqualified opinion is issued when:

Answer 12

an auditor believes the financial statements are free from errors and material omissions.

Question 13

Susan is evaluating the profitability for the last quarter of ZNZ Company. Which financial statement would help her most?

Answer 13

Income statement

Question 14

List 4 details about footnotes:

Answer 14

• Provide information about accounting methods and the assumptions and estimates used by management.

• Are audited, whereas other disclosures, such as supplementary schedules, are not
audited.

• Provide additional information on such items as fixed assets, inventory, income taxes, pensions, debt, contingencies and commitments, marketable securities, significant customers, sales to related parties, and export sales.
• Often contain disclosures relating to contingent losses.

Question 15

Owners’ Equity includes (4):

Answer 15

• Capital. Par value of common stock.

• Additional paid-in capital. Proceeds from common stock sales above par value.
(Share repurchases that the company has made are represented in the contra account Treasury stock.)

• Retained earnings. Cumulative income that has not been distributed as dividends.
• Other comprehensive income. Changes in carrying amounts of assets and liabilities.

Question 16

Expenses include (6):

Answer 16

• Cost of goods sold.
• Selling, general and administrative expenses. These include such expenses as advertising, salaries, rent, and utilities.
• Depreciation and amortization
• Tax expense
• Interest expense
• Losses. Decreases in assets or equity from transactions incidental to the firm’s day-to-day activities.

Question 17

For publicly held companies in the United States, the MD&A is required to discuss (5):

Answer 17

• Trends, significant events, and uncertainties that affect the firm.
• Effects of inflation and changing prices, if material.
• Impact of off-blance-sheet and contractual obligations.
• Accounting policies that require significant judgment by management.
• Forward-looking expenditures and divestitures.

Question 18

A company’s annual report is found in which form?

Answer 18

Form 10-K

Question 19

What are the 4 steps in a transaction’s information flow through an accounting system?

Answer 19

1. Journal entries
2. General ledger
3. Trial balance
4. Financial Statements

Question 20

Supplementary schedules contain additional information. Examples of such disclosures are (3):

Answer 20

• Operating income or sales by region or business segment.
• Reserves for an oil and gas company.
• Information about hedging activities and financial instruments.

Question 21

Internal Accounting Standard (IAS) No. 1 defines which financial statements are required and how they must be presented. The required financial statements are:

Answer 21

1. Balance sheet
2. Statement of comprehensive income
3. Cash flow statement
4. Statement of changes in equity
5. Explanatory notes, including a summary of accounting policies

Proxy statements are required to be disclosed by the SEC.

Question 22

‘The form that will report beneficial ownership of securities’ is:

Answer 22

Form S-3

Question 23

Quarterly financial statements are filed in which SEC form?

Answer 23

10-Q

Question 24

GAAP stands for:

Answer 24

Generally Accepted Accounting Principles

Question 25

A listing of all the journal entries in order by date is called the:

Answer 25

General Journal

Question 26

A Qualified opinion is:

Answer 26

when there is some limitation or exception to accounting standards

Question 27

What are the four parts of a standard auditor’s report?

Answer 27

1. The financial statements are prepared by management and are their responsibility; the auditor confirms that he has performed an independent review.
2. The audit was conducted using generally accepted auditing standards, which provide reasonable assurance that there are no material errors in the financial statements.
3. The auditor is satisfied the statements were prepared in accordance with accepted accounting principles, and that the principles chosen and estimates are reasonable.
4. Under GAAP, the auditor is required to state an opinion on the company’s internal controls. The auditor may add this opinion as a fourth element of the auditor’s report or provide it separately.

Question 28

The 4 characteristics that enhance relevance and faithful representation are:

Answer 28

Comparability

Verifiability

Timeliness

Understandability

Question 29

‘A Memorandum of Understanding signed in September 2002 between the Financial Accounting Standards Board (FASB), the US standard setter,and the International Accounting Standards Board (IASB)’ was called:

Answer 29

The Norwalk Agreement

Question 30

Disagreements (barriers) that inhibit the development of a single framework often arise around (3):

Answer 30

Measurement

Valuation

Standards-setting

Question 31

Give 9 examples of an asset:

Answer 31

• Cash and cash equivalents. Risk-free securities with original maturities of 90 days
or less.

• Accounts receivable. Accounts receivable often have an allowance for bad debt expense as a contra account.
• Inventories.
• Financial assets such as marketable securities.
• Prepaid expenses. Items that will show up on future income statements as expenses.
• Property, plant, and equipment. Includes a contra-asset account for accumulated depreciation.
• Investment in affiliates accounted for using the equity method.
• Deferred tax assets.
• Intangible assets. Economic resources of the firm that do not have a physical form, such as patents, trademarks, licenses, and goodwill.

Question 32

Which form would an analyst use to identify whether there had been any acquisitions of major assets within a company?

Answer 32

Form 8-K