Unit 1 - Financial Reporting Environment

Question 1

How does FASB make changes to the Accounting Standards Codification (ASC)?

Answer 1

By issuing Accounting Standards Update (ASU) approved by FASB. ASU is not authoritative until incorporated in ASC. ASC is the single source of U.S. GAAP. 4 out of 7 FASB members (majority vote) for new standard as an ASU.

Question 2

What are the 2 primary fundamental qualitative characteristics for financial reporting (including components for each)?

Answer 2

FAITHFUL REPRESENTATION
- Completeness: Are all facts included in necessary info?
- Neutral - Info is free from bias
- Free from error
RELEVANCE
- Predictive value - does it help make predictions about future events?
- Confirmatory value - does it provide info about earlier expectations/predictions?
- Material - does information matter to user?

Question 3

According to FASB, there are 4 enhancing characteristics that enhance information that is RELEVANT and FAITHFUL PRESENTATION

Answer 3

1 - Comparability - Can info be used to compare to other companies?
2 - Verifiability - Independent observers would reach same conclusion
3 - Timeliness - Info is recent enough for decision making
4 - Understandability - User with reasonable understanding of business can understand and draw conclusions from information

Question 4

According to FASB conceptual framework, asset valuation accounts are…

Answer 4

Neither assets or liabilities. They reduce or increase the carrying amount of an assets, but they are not considered to be assets or liabilities in their own right.

Question 5

Comprehensive income of a business entity is the periodic change in equity of a business from nonowner sources and thus would EXCLUDE

Answer 5

Dividends paid (distributions to owners) are excluded from comprehensive income

Question 6

How should inventory be measured according to FASB’s conceptual framework?

Answer 6

Historical cost
Replacement cost
Net realizable value
and NOT PRESENT VALUE OF FUTURE CASH FLOWS

Question 7

MD&A section of an annual report (Form 10-K) included in SEC filings covers…

Answer 7

Covers 3 financial aspects of a firm’s business - liquidity, capital resources and results of operations

Question 8

What is required to be reported on Form 8-K?

Answer 8

1 - Creation of obligation under an off- BS arrangement
2 - Unregistered sale of equity securities
3 - Change in a registrant’s certifying accountant
Material events must be disclosed within 4 business days.

Question 9

SEC regulations for the financial statement presentation and disclosure requirements of SEC filings can be found in

Answer 9

Regulation S-X

Question 10

What is the annual report that is filed with US Securities and Exchange Commission?

Answer 10

Form 10-K
Must be reported as follows:
(1) 60 days of the last day of the fiscal year by large accelerated filers (with $700 million or more in publicly held stock),
(2) 75 days by accelerated filers (with $75 million to $700 million in public stock and annual revenues of $100 million or more), and
(3) 90 days by non-accelerated filers.