61 SURGENT MCQs Flashcards by Hallie Hollenback

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements?

The names and ownership percentages of the other stockholders in the investee company

Whether the investee company is involved in any litigation

The reason for the company’s decision to invest in the investee company

The company’s accounting policy for the investment

Question #300171

The company’s accounting policy for the investment

Accounting policy disclosure includes the selection of accounting principles from existing acceptable methods. This would include the company’s use of the equity method. The equity method must be used if the company has significant influence over the company whose stock has been acquired. Generally, 20% ownership is evidence of significant influence, but it is possible that other factors would indicate otherwise. Consequently, the use of the equity is the selection of an accounting principle from existing alternatives (equity method or cost method).

error_outline First Time Score
63% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Accounting Policies
Cost Method
Equity Method

Reference
2117.01
2117.02
2117.03
2117.04
2117.05
2117.06

Authorities
FASB ASC 323-10-15-10

How well did you know this?

Not at all

Perfectly

A transaction that is unusual in nature or infrequent in occurrence should be reported as:

nonoperating income or loss, net of applicable income taxes.

nonoperating income or loss, but not net of applicable income taxes.

a component of income from continuing operations, net of applicable income taxes.

a component of income from continuing operations, but not net of applicable income taxes.

Question #300830

a component of income from continuing operations, but not net of applicable income taxes.

These items should be included in the computation of net income from continuing operations prior to income tax expense.

error_outline First Time Score
21% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Reference
2117.26

Authorities
FASB ASC 225-20-45-10

How well did you know this?

Not at all

Perfectly

Although future-oriented information requires considerable judgment and tends to not be disclosed, the FASB recommends in Statement of Financial Accounting Concepts 8 (SFAC 8) disclosure for the following two future-oriented types of information:

(1) Estimates and assumptions and (2) alternative accounting methods

(1) Common knowledge and (2) management’s plans and strategies

(1) Terms and timing of cash flows and (2) nonperformance risk

1) Estimates and assumptions and (2) management’s plans and strategies

Question #302515

1) Estimates and assumptions and (2) management’s plans and strategies

The Securities and Exchange Commission (SEC) provides protection for issuers regarding SEC-required information; however, that protection does not extend beyond SEC filings, potentially resulting in negative impacts (e.g., litigation) for entities providing information based upon predictions, projections, and forecasts about uncertain or unknown future events. Therefore, the FASB does not require entities to disclose predictions of future outcomes that could result in negative consequences. However, two types of forward-looking information are useful and should be provided: (1) estimates and assumptions, and (2) management’s existing plans and strategies for management-controlled matters.

error_outline First Time Score
48% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.25

Authorities
SFAC 8.8

How well did you know this?

Not at all

Perfectly

Contractual asset or liability disclosures identified in Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, include all of the following except:

degree of nonperformance risk.

legal terms.

method used to calculate the cash flow.

reporting segments.

Question #302518

reporting segments.

SFAC 8 provides a summary of potential additional disclosures for assets and liabilities resulting from financial instruments or other contracts: the contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.

Reporting segments are not one of the suggested disclosure items.

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

How well did you know this?

Not at all

Perfectly

Financial statement line item explanations include which of the following?

Segment reporting

Inability to maintain a qualified workforce

Potential litigation

degree of credit or nonperformance risk.

Question #302522

Degree of credit or nonperformance risk

Many financial statement line item explanations, such as local denomination demand deposits, do not require further explanatory information. However, other line items require varying degrees of disclosure. A summary of potential additional disclosures is as follows:

For assets: the nature, quality, and location; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions.
For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.
Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

How well did you know this?

Not at all

Perfectly

Financial statement line item explanations which may require additional information for full disclosure purposes include all of the following except:

potential effect related to inability to perform or pay.

line item relation to other line items.

degree of credit or nonperformance risk.

nature of primary activities.

Question #302523

nature of primary activities.

For assets: the nature, quality, and location; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions.
For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.
Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

How well did you know this?

Not at all

Perfectly

In a company’s notes to its financial statements, the first note described significant changes in accounting policies related to valuations of inventory and plant assets. Subsequent notes included a separate note detailing inventories and a separate note detailing plant assets. For which of these subsequent notes, if any, should the company duplicate a description of its changes to significant accounting policies?

Both the plant assets note and the inventory note

Neither the inventory note nor the plant assets note

The inventory note, but not the plant assets note

The plant assets note, but not the inventory note

Neither the inventory note nor the plant assets note

Question #302713

Neither the inventory note nor the plant assets note

The summary of significant accounting policies receives its own note at the beginning of the financial statements. It is admissible to cross-reference the significant accounting policy notes in other sections. However, the description itself should not be duplicated across notes to avoid redundancy.

Study Hint: You are told both the inventory and plant assets experienced a policy change. Therefore, you can immediately eliminate the options that only one of the two listed notes would experience a change. That leaves you with the choice of “both” or “neither.”

Reference: 2117.05
The following statements describe the form and content of accounting policy disclosure:

a. The disclosure encompasses important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods.
b. The disclosure encompasses principles and methods that involve the selection from among existing acceptable alternatives.
c. Principles and methods peculiar to the industry are disclosed, even if the principles and methods are predominantly followed in that industry.
d. Unusual or innovative applications of generally accepted accounting principles are disclosed.
e. Policy disclosure is particularly useful if presented in a separate summary schedule, preceding the notes to the financial statements or as the first note. This should be appropriately identified (e.g., “Summary of Significant Accounting Policies”).
f. Policy disclosure in a summary schedule should not duplicate information presented elsewhere in the financial statements.
g. In some cases, policy disclosure may need to be cross-referenced to information disclosed in other parts of the financial statements (e.g., other notes).

Relevant Terms
Notes to Financial Statements

Reference
2117.04
2117.05

How well did you know this?

Not at all

Perfectly

Mint Co.’s cash balance in its balance sheet is $1,300,000, of which $300,000 is identified as a compensating balance. In addition, Mint has classified cash of $250,000 that has been restricted for future expansion plans as “other assets.” Which of the following should Mint disclose in notes to its financial statements?

Restricted cash

Neither compensating balance nor restricted cash

Compensating balance

Both compensating balance and restricted cash

Question #300164

Both compensating balance and restricted cash

Material amounts of restricted cash must be segregated from “regular” cash for reporting purposes because it is not readily available for general use. Restricted cash is classified as current or long-term assets depending upon the date of availability for disbursement.

Compensating balances should be separately classified as being maintained as a compensating balance. It is classified as current or noncurrent based upon the terms of the agreement requiring the compensating balance, and details of the arrangement should be disclosed in the notes.

How well did you know this?

Not at all

Perfectly

Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of:

risk of measurement uncertainty.

off-balance sheet risk of accounting loss.

concentration of market risk.

concentration of credit risk.

Question #300169

concentration of credit risk.

Credit risk is the potential loss from any party to an agreement failing to perform. Credit risk must be disclosed. Off-balance sheet risk occurs when the amount of a loss exceeds the related asset. Market risk disclosure is encouraged, but not required.

How well did you know this?

Not at all

Perfectly

Note section disclosures in the financial statements for pensions do not require inclusion of which of the following?

The components of net period pension costs

The amount of net prior service cost or credit in accumulated other comprehensive income

The company’s best estimate of contributions expected to be paid into the plan in the next fiscal year

A detailed description of the plan, including employee groups covered

Question #300645

A detailed description of the plan, including employee groups covered

The FASB requires extensive disclosures regarding pensions. Among these are the components of net periodic pension cost and the estimated plan contributions for the year following the latest year reported in the statement of financial position.

The FASB requires, for each annual statement of financial position presented, “the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost, showing separately the net gain or loss, net prior service cost or credit, and net transition asset or obligation” (FASB ASC 715-20-50-1). Note that service cost is presented along with compensation expense, while the remaining items of net periodic pension cost are presented on a separate line item.

error_outline First Time Score
31% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Contributions
Pension

Reference
2117.18

Authorities
FASB ASC 715-20-50-1

How well did you know this?

Not at all

Perfectly

Numerous estimates are part of accrual accounting financial statements. Disclosures about these estimates are required in the notes to the financial statements. All but one of the following are correct statements about estimates disclosures; which statement is incorrect?

Determining whether the effect of a change in the useful life of an intangible asset will be material should be done either at the individual asset or major asset class level.

Certain significant estimates must be disclosed if there is a reasonable possibility that the estimate will change in the near term and the effect of the change will be material.

GAAP requires an explanation that the preparation of the financial statements requires the use of estimates made by management in conformance with GAAP.

Financial statement preparers can reasonably assume that users of financial statements recognize that estimates are necessary in preparing financial statements and therefore no explicit statement regarding estimates is necessary.

Question #302104

GAAP requires the disclosure of the use of estimates in financial statements. Explicit communication in the notes to the financial statements about the use of estimates is necessary and should inform readers that many of the amounts reported are approximations, not exact amounts.

“Significant estimates” refers to estimates that have a reasonable possibility of changing in the near future and whose effect will be material—such items require disclosure in the notes to the financial statements. Whether disclosure is required for changes in intangible assets’ useful lives is based on determining if such changes will be material, and this determination needs to be done either at the individual asset or major asset class level.

error_outline First Time Score
74% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Accounting Estimate
Accrual
Generally Accepted Accounting Principles (GAAP)
Notes to Financial Statements

Reference
2117.13
2117.14
2117.15
2117.19

How well did you know this?

Not at all

Perfectly

On December 31, 20X1, Date Co. awaits judgment on a lawsuit for a competitor’s infringement of Date’s patent. Legal counsel believes it is probable that Date will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Date’s 20X1 financial statements?

By accrual for the most likely award

Neither in note disclosure nor by accrual

By accrual for the lowest amount of the range of possible awards

In note disclosure only

Question #300162

In note disclosure only

If Date Co. wins the lawsuit, the award paid to Date will be a gain.

FASB ASC 450-30-50-1 provides that gain contingencies should not be reflected in the accounts (i.e., accrued) but that adequate disclosure should be made in notes to the financial statements.

A loss contingency would be reported by accrual for the most likely award or for the lowest amount of the range of possible awards if no amount can be considered most likely. (FASB ASC 450-20-25-4)

Relevant Terms
Contingency
Disclosure
Notes to Financial Statements
Patent
Probable

Reference
2117.07
2117.08
2117.09
2117.10

Authorities
FASB ASC 450-20-25-4
FASB ASC 450-30-50-1

How well did you know this?

Not at all

Perfectly

Past events and current conditions potentially impacting the entity’s future cash flow include which of the following?

Related party transactions

Subsequent events

Segment reporting

Timing of asset cash flows

Subsequent events

Question #302520

Subsequent events

Examples of past events and current conditions potentially impacting the entity’s future line items and cash flows but which have not yet been incorporated into financial statement line items include existing or potential litigation; suspected or known statute, judicial, regulatory, or contract violations; unrecognized existing commitments expected to be recognized in the future; events where significant uncertainty led to the decision to not recognize the event; and subsequent events. Items not necessarily impacting line items that may require disclosure include dependency on one or a few customers or suppliers for profitability, input or output market volatility, uncertainty regarding an entity’s access to markets for inputs or outputs or ability to maintain a qualified workforce, and other significant specific entity risk.

Segment reporting and related party transactions are considered to be reporting entity disclosures, and the timing of asset cash flows is considered a financial statement line item explanation.

error_outline First Time Score
42% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

How well did you know this?

Not at all

Perfectly

Reporting entity disclosures include which of the following?

Asset nature, location, and quality

Potential litigation

Accounting method change impact

Related party reporting

Question #302521

Related party reporting

Many reporting entity disclosures are part of separate standards (e.g., segment reporting and related party information) and therefore do not require additional disclosure requirements. Items included under this category include the nature of primary activities, special restrictions, advantages and disadvantages relative to other entities including unusual or unique regulatory or legal factors not readily available to users (e.g., one entity holds subsidiaries to sell and another integrates them into operations), related party disclosures, and disaggregated legal entity and segment information.

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

How well did you know this?

Not at all

Perfectly

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, relates to:

qualitative characteristics of financial reporting.

notes to financial statements.

objectives of financial reporting.

elements of financial statements.

notes to financial statements.

Question #302513

notes to financial statements.

The Statement of Financial Accounting Concepts (SFAC) 8, Chapter 8, Notes to Financial Statements, issued in 2018, provides guidance regarding relevant supplemental or further explanatory information provided in the notes about the information appearing on the face of the financial statements. This guidance is for the benefit of existing and potential investors, lenders, and others to help them make decisions regarding resources. The objectives of financial reporting, qualitative characteristics, and elements of financial statements are addressed in other SFAC statements.

error_outline First Time Score
38% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.24

Authorities
SFAC 8.8

How well did you know this?

Not at all

Perfectly

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, provides descriptions and examples for all of the following areas that require consideration for note disclosure except:

past events and current conditions that could impact an entity’s cash flow.

financial statement line item explanations.

the reporting entity.

non–entity specific information that is common knowledge.

Question #302516

Study These Flashcards

non–entity specific information that is common knowledge.

The FASB provides descriptions and examples for three areas that require consideration when preparing financial statement notes: financial statement line item explanations, information about the reporting entity, and information about past events and current conditions that could impact the entity’s cash flows but have not yet been incorporated into financial statement line items. The FASB also provides a list of questions to be used as a tool when considering financial statement disclosures. A “yes” response to a question means the FASB should consider disclosure but does not mean the FASB should require disclosure.

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, states that noncontractual asset disclosures could include all of the following except for:

the quality of the asset.

the nature of the asset.

the location of the asset.

the degree of nonperformance risk.

Question #302517

Study These Flashcards

the degree of nonperformance risk.

SFAC 8 provides a summary of potential additional disclosures. For assets, the following items should be disclosed: the nature, quality, and location of the asset; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions.

The degree of nonperformance risk of the asset is not one of the suggested disclosures.

error_outline First Time Score
36% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, lists all of the following examples of past events and current conditions potentially impacting the entity’s future line items and cash flows except for:

suspected regulatory violations.

dependency on a few customers or suppliers.

existing or potential litigation.

related party reporting.

Question #302519

Study These Flashcards

related party reporting.

Related party reporting is considered to be a reporting entity disclosure.

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

related party reporting.

existing or potential litigation.

suspected regulatory violations.

dependency on a few customers or suppliers.

related party reporting.

Question #302519

Study These Flashcards

related party reporting.

Related party reporting is considered to be a reporting entity disclosure.

error_outline First Time Score
42% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.26

Authorities
SFAC 8.8

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, lists four limitations/constraints to consider related to disclosure requirements. They are:

relevance, representational faithfulness, materiality, and predictive value.

cost constraint, materiality, potential adverse consequences, and historical cost.

representational faithfulness, materiality, future-oriented information, and predictive value.

cost constraint, potential adverse consequences, future-oriented information, and relevance.

Question #302514

Study These Flashcards

cost constraint, potential adverse consequences, future-oriented information, and relevance.

The FASB considers four constraints/limitations related to required financial statement note information:

Relevance: Disclosure is based upon relevance, not entity-specific materiality.
Cost constraint: The FASB has an expectation that financial statement users have awareness of accounting rules, policies, and regulations; thus, common knowledge can be excluded from the notes. Disclosure should include details of measurement if alternatives exist, methods not obvious to the user, or methods if changed since prior reporting.
Potential adverse consequences: The FASB will consider potential adverse consequences. Disclosure can have both beneficial and adverse consequences.
Future-oriented information: The FASB does not require entities to disclose predictions of future outcomes that could result in negative consequences. However, two types of forward-looking information are useful and should be provided: (1) estimates and assumptions, and (2) management’s existing plans and strategies for management-controlled matters.

Relevant Terms
Conceptual Framework
Disclosure
Notes to Financial Statements

Reference
2117.25

Authorities
SFAC 8.8

Town, Inc., is preparing its financial statements for the year ending December 31, 20X1. On December 1, 20X1, Town was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 20X2, prior to the issuance of the financial statements. What is the reporting requirement?

Neither accrual nor disclosure

Disclosure only

Accrual only

Both accrual and disclosure

Question #300555

Study These Flashcards

Both accrual and disclosure

Town, Inc., has a legally enforceable right to the settlement from the lawsuit on December 1, 20X1, so it would be reported in 20X1. The circumstances of the accrual of the gain should be disclosed in the interest of full disclosure.

Relevant Terms
Accrued
Disclosure

Reference
2117.03
2321.04

Authorities
FASB ASC 450-30-25-1

What is the purpose of information presented in notes to the financial statements?

To present management’s responses to auditor comments

To correct improper presentation in the financial statements

To provide disclosures required by generally accepted accounting principles

To provide recognition of amounts not included in the totals of the financial statements

To provide disclosures required by generally accepted accounting principles

Question #300159

Study These Flashcards

To provide disclosures required by generally accepted accounting principles

SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, addresses the subject of notes to financial statements as follows:

“Although financial statements have essentially the same objectives as financial reporting, some useful information is better provided by financial statements, and some is better provided, or can only be provided, by notes to financial statements or by supplementary information or other means of financial reporting:

“Information disclosed in notes…is essential…and…an integral part of the financial statements prepared in accordance with generally accepted accounting principles.”

This clearly indicates that notes to financial statements provide disclosures required by generally accepted accounting principles.

error_outline First Time Score
88% answered this question correctly their first time.

Video Links
FAR 1A7 - Notes to Financial Statements
FAR 1A7 - Notes to Financial Statements - Practice Questions

Relevant Terms
Conceptual Framework
Disclosure
Generally Accepted Accounting Principles (GAAP)
Notes to Financial Statements
Presentation
Recognition
Supplementary Information

Reference
2117.01
2117.02

Authorities
SFAC 5.7

What of the following statements is not a risk of using an accounting estimate?

The amount posted as an estimate of warranty liabilities is less than the firm must actually pay.

The actual amount realized when inventory is sold is less than the net realizable value estimate.

The actual amount realized when receivables are collected is less than the estimate of net receivables.

The amount posted as an estimate of pension liabilities is more than the firm must actually pay in pension payments.

Question #302524

Study These Flashcards

The amount posted as an estimate of pension liabilities is more than the firm must actually pay in pension payments.

The primary risk when using an accounting estimate is that assets are overstated or liabilities are understated. Based on the principal of conservatism, this is not an acceptable risk as the company may not have sufficient cash resulting from these issues.

The only answer choice which is not an example of this risk is that the amount posted as an estimate of pension liabilities is more than the firm must actually pay. This is an example of a liability being overstated, hence less cash than planned will be needed.

Relevant Terms
Accounting Estimate
Contingency
Inventory
Realization

Reference
2117.13
2117.14
2117.15

An entity manufactures products that are used in a wide variety of industries.

An entity has a large volume of business with one customer, supplier, lender, or contributor.

An entity operates primarily in the specific market or geographic region in which an entity conducts its operations.

An entity relies on certain available sources of raw materials, labor, services, or licenses.

An entity manufactures products that are used in a wide variety of industries.

Question #302068

Study These Flashcards

An entity manufactures products that are used in a wide variety of industries.

Categories of concentrations include a large volume of business with one customer, supplier, lender, contributor, or grantor. Categories also include when an entity operates primarily in the specific market or geographic region in which an entity conducts its operations and when an entity relies heavily on certain available sources of raw materials, labor, services, licenses, or other rights. Finally, a category exists when an entity has a concentration in revenue form particular products, services, or fundraising events.

An entity that manufactures products that are used in a wide variety of industries would have a lower, not higher, vulnerability to concentrations.

Relevant Terms
Notes to Financial Statements

Reference
2117.23

When entities face risk due to a lack of diversification, they must include disclosures in the notes to the financial statements about “vulnerability to concentrations.” Which of the following is not a necessary criterion of a “vulnerability to concentrations”? The concentration makes the entity vulnerable to the risk of a severe impact in the near term. The concentration exists at the date in the financial statements. Severe impact events are those that are catastrophic. There is a reasonable possibility that the events resulting in a severe impact related to the concentration will occur in the near term. Severe impact events are those that are catastrophic. Question #302067

Severe impact events are those that are catastrophic. When firms lack diversification, they may be exposed to risks not faced by firms with adequate diversification. This is called “vulnerability to concentrations.” Such risks need to be disclosed in the notes to the financial statements when three conditions exist: Such a concentration exists at the date of the financial statements. The concentration makes the entity vulnerable to the risk of a near-term severe impact. It is at least reasonably possible that the events that could cause the severe impact will occur in the near term. When management’s information indicates that these three conditions exist, the firm must disclose it is “vulnerable to concentrations.” The answer choice "severe impact events are those that are catastrophic" is not one of the conditions necessary to require disclosure. While a concentrated event may be catastrophic, it only meets the disclosure requirement if it is also vulnerable to concentration. error_outline First Time Score 54% answered this question correctly their first time. Video Links FAR 1A7 - Notes to Financial Statements FAR 1A7 - Notes to Financial Statements - Practice Questions Relevant Terms Notes to Financial Statements Reference 2117.20 2117.21

Where in its financial statements should a company disclose information about its concentration of credit risks? No disclosure is required. The notes to the financial statements Management's report to shareholders Supplementary information to the financial statements ## Footnote Question #300165

The notes to the financial statements FASB ASC 825-10-50-20 requires note disclosures regarding a company's concentrations of credit risks. ## Footnote Relevant Terms Credit Risk Disclosure Supplementary Information Reference 2117.20 2117.21 2117.22 2117.23 Authorities FASB ASC 825-10-50-20

Which of the following disclosures should prospective financial statements include? Summary of significant accounting policies Neither summary of significant accounting policies nor summary of significant assumptions Both summary of significant accounting policies and summary of significant assumptions Summary of significant assumptions Both summary of significant accounting policies and summary of significant assumptions Question #300163

Both summary of significant accounting policies and summary of significant assumptions The AICPA's “Statement of Standards for Accountants' Services on Prospective Financial Information” governs the preparation of prospective financial statements. It requires that accountants provide summaries of the significant accounting policies and the assumptions used to prepare these forward-looking statements. The same full disclosure principle that guides the preparation of historical financial statements applies to the reporting of prospective financial statements. error_outline First Time Score 70% answered this question correctly their first time. Video Links FAR 1A7 - Notes to Financial Statements FAR 1A7 - Notes to Financial Statements - Practice Questions Relevant Terms AICPA Code of Professional Conduct American Institute of Certified Public Accountants (AICPA) Disclosure Reference 2117.05 2117.13 2117.14 2117.15 2117.16 2117.17 2117.18 2117.19

Which of the following information should be disclosed in the summary of significant accounting policies? Adequacy of pension plan assets relative to vested benefits Refinancing of debt subsequent to the balance sheet date Criteria for determining which investments are treated as cash equivalents Guarantees of indebtedness of others Criteria for determining which investments are treated as cash equivalents Question #300160

Criteria for determining which investments are treated as cash equivalents FASB ASC 230-10-50-1, in a discussion of cash and cash equivalents, states: "An entity shall disclose its policy for determining which items are treated as cash equivalents." Note: The above requirement was embedded in a long paragraph discussing cash equivalents. The wording of the correct answer choice, particularly “criteria,” indicates a relation to policy, whereas none of the other answers imply such a relationship. ## Footnote Relevant Terms Accounting Policies Cash Equivalents Criteria Reference 2117.04 2117.05 2117.06 Authorities FASB ASC 230-10-50-1

Which of the following information should be included in Gold Corporation’s 20X7 summary of significant accounting policies? The specific amounts of the components of pension expense The specific amounts of raw material inventory, work-in-process inventory, and finished goods shown in aggregate on the balance sheet The valuation model used to determine the value of stock options granted to upper-level managers The policies regarding inventory valuation and the methods used for inventory cost determination ## Footnote Question #302065

The policies regarding inventory valuation and the methods used for inventory cost determination FASB ASC 235-10-50-4 requires a description of all significant accounting policies when financial statements are issued. A listing of required policy disclosures by this pronouncement includes basis of consolidation, depreciation methods, amortization of intangibles, inventory pricing, and several other items. Gold should include information concerning how inventory is valued and the inventory cost flow assumptions used in its summary of significant accounting policies. Note: While the other three information items in the answer choices should be disclosed in the notes to the financial statements, they should not be included in the summary of significant accounting policies. ## Footnote Relevant Terms Notes to Financial Statements Reference 2117.06 Authorities FASB ASC 235-10-50-4

Which of the following information should be included in Melay, Inc.'s, 20X1 summary of significant accounting policies? Operating segment 20X1 sales are Alay $1M, Belay $2M, and Celay $3M. Future common share dividends are expected to approximate 60% of earnings. During 20X1, the Delay segment was sold. Property, plant, and equipment are recorded at cost with depreciation computed principally by the straight-line method. Question #300161

Property, plant, and equipment are recorded at cost with depreciation computed principally by the straight-line method. FASB ASC 235-10-50-4 requires a description of all significant accounting policies when financial statements are issued. A listing of required policy disclosures by this pronouncement includes “basis of consolidation, depreciation methods, amortization of intangibles, inventory pricing” and several other items. Melay should include information concerning the cost and depreciation method(s) relating to property, plant, and equipment in its summary of significant accounting policies. Note: While the other three information items should be disclosed in the financial statements, they should not be included in the summary of significant accounting policies: During 20X1, the Delay segment was sold. Operating segment 20X1 sales are Alay $1M, Belay $2M, and Celay $3M. Future common share dividends are expected to approximate 60% of earnings. error_outline First Time Score 81% answered this question correctly their first time. Video Links FAR 1A7 - Notes to Financial Statements FAR 1A7 - Notes to Financial Statements - Practice Questions Relevant Terms Accounting Policies Business Segment Disclosure Reference 2117.04 2117.05 2117.06 Authorities FASB ASC 235-10-50-3 FASB ASC 235-10-50-4

Which of the following is correct concerning financial statement disclosure of accounting policies? Disclosures should duplicate details disclosed elsewhere in the financial statements. The format and location of accounting policy disclosures are fixed by generally accepted accounting principles. Disclosures should be limited to principles and methods peculiar to the industry in which the company operates. Disclosure of accounting policies is an integral part of the financial statements. ## Footnote Question #300167

Disclosure of accounting policies is an integral part of the financial statements. All financial statement notes are an integral part of the financial statements. FASB ASC 235-50-3 states: "Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following: "A selection from existing acceptable alternatives "Principles and methods peculiar to the industry in which the reporting entity operates, even if such principles and methods are predominantly followed in that industry "Unusual or innovative applications of GAAP [and, as applicable, of principles and methods peculiar to the industry in which the reporting entity operates]." ## Footnote Relevant Terms Accounting Policies Disclosure Reporting Entity Reference 2117.04 2117.05 Authorities FASB ASC 235-50-3

Which of the following is not an accounting estimate? Estimate of warranty claims for defective products Accounting for bad debts Depreciation expense calculation Accounts payable balances ## Footnote Question #302526

Accounts payable balances Accounting estimates are an approximation of an amount used in the financial statements where such amounts cannot be measured with precision and certainty. Accounting estimates involve judgment regarding expected future benefits and obligations pertaining to the assets and liabilities (and the income and expense pertaining to such assets and liabilities). Since they are very subjective in nature, they might need revision and re-estimation. Of the answer choices provided, only accounts payable balances are not an estimate; the balances are based on an invoice from an outside, independent party. ## Footnote Relevant Terms Accounting Estimate Bad Debt Depreciation Warranty Reference 2117.13 2117.14 2117.15

Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements? Revenue recognition policies Schedule of fixed assets Description of current-year equity transactions Summary of long-term debt outstanding Revenue recognition policies Question #300168

Revenue recognition policies The purpose of the summary of significant accounting policies is to describe the accounting policies used by an entity. The revenue recognition policies therefore would be included in this note. FASB ASC 235-10-50-6 81% answered this question correctly their first time. Video Links FAR 1A7 - Notes to Financial Statements FAR 1A7 - Notes to Financial Statements - Practice Questions Relevant Terms Accounting Policies Disclosure Reference 2117.04 2117.05 Authorities FASB ASC 235-10-50-6

Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements? Schedule of fixed assets Summary of long-term debt outstanding Description of current-year equity transactions Revenue recognition policies ## Footnote Question #302509

Revenue recognition policies The purpose of the summary of significant accounting policies is to describe the accounting policies used by an entity. The revenue recognition policies therefore would be included in this note. None of the other items listed as an answer choice is a policy, although the information may be included in the notes. error_outline First Time Score 81% answered this question correctly their first time. Video Links FAR 1A7 - Notes to Financial Statements FAR 1A7 - Notes to Financial Statements - Practice Questions Relevant Terms Disclosure Notes to Financial Statements Reference 2117.04 2117.05

Which of the following should be disclosed in a summary of significant accounting policies? Basis of consolidation Adequacy of pension plan assets in relation to vested benefits Concentration of credit risk of financial instruments Composition of plant assets Basis of consolidation ## Footnote Question #301693

**Basis of consolidation** When financial statements are issued purporting to present fairly the financial position, cash flows, and results of operations in accordance with generally accepted accounting principles, a description of all significant accounting policies of the reporting enterprise is required. Examples of accounting principles and methods for which disclosure of policy is frequently made include, but are not limited to, depreciation methods, consolidation basis, interperiod tax allocation, inventory pricing, and revenue recognition methods. The concentration of credit risk, composition of plant assets, and adequacy of pension plan assets are not disclosed in the summary of significant accounting policies. error_outline First Time Score 57% answered this question correctly their first time. Video Links FAR 1A7 - Notes to Financial Statements FAR 1A7 - Notes to Financial Statements - Practice Questions Relevant Terms Accounting Policies Consolidation Disclosure Generally Accepted Accounting Principles (GAAP) Interperiod Tax Allocation Reference 2117.04 2117.05 2117.06 Authorities FASB ASC 235-10-50-3 FASB ASC 235-10-50-4

Which of the following statements regarding footnote disclosure related to “significant estimates” is incorrect? Disclosure is required when the change in the estimate will have a material effect on the financial statements. The disclosure about significant estimates needs to include the nature of the uncertainty. Disclosure is required when it is reasonably possible that the financial statement estimate will change in the near term. Disclosures in the footnotes about significant estimates are encouraged but not required. Question #302066

Disclosures in the footnotes about significant estimates are encouraged but not required. Significant estimates” are estimates that affect the financial statements and for which there is a reasonable possibility that the estimate will change in the near term. These significant estimates are also expected to have a material effect on the financial statements. Disclosures regarding these estimates require an explanation of the nature of the uncertainty as well as specific language that it is reasonably possible that the estimate will change in the near term. ## Footnote Relevant Terms Accounting Estimate Footnote Reference 2117.15 2117.16 2117.17

Which of the following should be disclosed in a summary of significant accounting policies? Composition of sales by segment Future lease payments in the aggregate and for each of the five succeeding fiscal years Depreciation expense Basis of profit recognition on long-term construction contracts Question #301913

Basis of profit recognition on long-term construction contracts Only basis of profit recognition on long-term construction contracts is disclosure related to an accounting method. The other answer choices might be included in disclosure related to those specific expenses, but are not accounting methods that would be included in the significant accounting policies footnote. FASB ASC 235-10-05-3 requires disclosure of significant accounting policies. Paragraph 05-3 states: "The accounting policies of an entity are the specific accounting principles and the methods of applying those principles that are judged by the management of the entity to be the most appropriate in the circumstances to present fairly financial position, cash flows, and results of operations in accordance with generally accepted accounting principles (GAAP) and that, accordingly, have been adopted for preparing the financial statements." FASB ASC 235-50-3 indicates what should be disclosed: "Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following: "A selection from existing acceptable alternatives "Principles and methods peculiar to the industry in which the reporting entity operates, even if such principles and methods are predominantly followed in that industry "Unusual or innovative applications of GAAP [and, as applicable, of principles and methods peculiar to the industry in which the reporting entity operates]." error_outline First Time Score 69% answered this question correctly their first time. Video Links FAR 1A7 - Notes to Financial Statements FAR 1A7 - Notes to Financial Statements - Practice Questions Relevant Terms Accounting Policies Disclosure Long-Term Contracts Reporting Entity Reference 2117.05 2331.74 2331.75 2331.76 Authorities FASB ASC 235-10-05-3 FASB ASC 235-10-50-3

61 SURGENT MCQs Flashcards

(38 cards)