Chapter 24: Full Disclosure in Financial Reporting

Question 1

To report financial facts significant enough to influence the judgment of an informed reader (cost-benefit principle)

Answer 1

full disclosure principle

Question 2

To report financial facts significant enough to influence the judgment of an informed reader (cost-benefit principle)

Answer 2

full disclosure principle

Question 3

• summary of significant accounting policies
• inventory
• property, plant, and equipment
• creditor claims
• equity holders’ claims
• contingencies and commitments
• fair values
• items requiring extensive disclosure
• accounting changes
• subsequent events
• related party transactions
• errors and illegal acts

Answer 3

notes to the financial statements (integral part of F/S)

Question 4

• disclose methods to prepare financial statements

- should be the first note

Answer 4

summary of significant account policies

Question 5

• basis of valuation (LCM)

- cost flow assumption (FIFO, LIFO, WT’D AVE)

Answer 5

inventory

Question 6

• basis of valuation (historical cost)
• pledges, liens, or other commitments related to these assets
• balances of major classes of depreciable assets
• current period depreciation expense

Answer 6

property, plant, and equipment

Question 7

• methods of financing

- timing of future cash outflows

Answer 7

creditor claims

Question 8

• number of shares authorized and issued; par value
• equity instruments (stock options; convertible securities)
• restrictions on the earnings available for dividends

Answer 8

equity holders’ claims

Question 9

litigation, purchase commitments, sale of receivables with recourse

Answer 9

contingencies and commitments

Question 10

• cost and faif value for tose financial instruments; methods used to determine fair value

Answer 10

fair values

Question 11

deferred taxes, pensions, and leases

Answer 11

items requiring extensife disclosure

Question 12

change in principle and change in estimate, if material

Answer 12

accounting changes

Question 13

• financial statement date through report issue date
• Type 1: affects condition existing at balance sheet date; requires adjustment to financial statements
• Type 2: does not affect condition existing at balance sheet date; disclosure only

Answer 13

subsequent events

Question 14

• transactions not at arms length
• GAAP requires disclosure of the nature of the relationship, a description of the transaction, and the dollar amounts invovled

Answer 14

related party transactions

Question 15

What are the segment information categories?

Answer 15

• identifying operating segments - a component
• tests for significance
• required disclosures for reportable segments

Question 16

• a component that earns revenues and incurs expenses
• a component whose operating results are regularly reviewed by the chief operating decision maker to assess performance
• a component that has discrete financial information availabe from the internal financial reporting system

Answer 16

identifying operating segments - A component

Question 17

A segment is classified as reportable if one or more of the following thresholds are met:

Answer 17

• segment revenue >= 10% of combined segment revenue
• segment’s absolute profit/loss >= 10% of larger of: (a) combined operating profit of all segments that did not incur a loss, (b) combined loss of all segments that did incur a loss
• segment assets >= 10% of combined segment assets

Question 18

• general information
• reconciliations of the operating segment’s revenues, profits, and assets to company totals
• product information
• major customers

Answer 18

required disclosures for reportable segments

Question 19

• sales, provision for taxes, and net income
• basic and diluted EPS
• seasonal revenue, cost, or expenses
• significant changes in estimate
• segment disposals
• contingent items
• change in accounting principle
• significant changes in financial positon

Answer 19

required disclosures in interim (temporary) reports

Question 20

• expenses subject to year-end adjustment
• income taxes
• extraordinary items

Answer 20

items to cosider in interim reports

Question 21

Should be extimated and allocated to interim periods (i.e. bad debt)

Answer 21

expenses subject to year-end adjustment

Question 22

use the estimated annual effective tax rate

Answer 22

income taxes

Question 23

recorded in the quarter it occurs

Answer 23

extraordinary items

Question 24

• provides an independent opinion on financial statements

Answer 24

auditor’s report

Question 25

- state whether financial statements are in accordance with GAAP - state those circumstances where consistency does not exist - disclosures are to be regarded as reasonably adequate, unless otherwise stated in the report - must contain an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed

Answer 25

reporting standards (GAAS)

Question 26

- unqualified opinion: financial statements presented fairly - qualified opinion: except for - adverse opinion: financial statements are NOT presented fairly - disclaimer opinion: unable to express opinion

Answer 26

types of audit opinions

Question 27

- scope of examination is limited | - lack of conformity with GAAP and/or inadequate disclosure

Answer 27

reasons for departure from unqualified opinion

Question 28

- scope of examination is limited | - lack of conformity with GAAP and/or inadequate disclosure

Answer 28

reasons for departure from unqualified opinion

Question 29

Provides a biased but informed perspective of: - liquidity - capital resources - results of operations

Answer 29

management's discussion and analysis (MD&A)

Question 30

- asserts the responsibility of a managment for the information contained in the annual reports as well as an assessment of the company's internal control systems - section 302 of Sarbanes-Oxley "Corporate Responsibilites for Financial Reports" states that "The CEO and CFO of each issuer shall prepare a statment to accompany the audit report ot certify the appropriateness of the financial statements and disclosures contained in the report adn that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issure."

Answer 30

management's responsibilites

Question 31

Current reporting issues that are reported on financial forecasts and projections

Answer 31

- financial forecast - financial projection - controversy about whether these should be required

Question 32

prospective financial statements that present expected financial positions, results of operations and cash flows.

Answer 32

financial forecast

Question 33

prospective financial statements that present expected financial position, results of operations and cash flows given one or more hypothetical assumptions

Answer 33

financial projection

Question 34

- improves the usefulness of financial reports | - disadvantage: reliability of information

Answer 34

internet financial reporting

Question 35

- communicates with more users - use internet tools to access information for analysis - increase relevance by reporting more timely data

Answer 35

improves the usefulness of financial reports

Question 36

intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements

Answer 36

fraudulent financial reporting

Question 37

- situational pressures | - opportunities

Answer 37

fraudulent financial reporting

Question 38

- sudden decreases in revenue/market share - unrealistic budget pressure - compensation tied to company performmance

Answer 38

situational pressures

Question 39

- no board of directors/audit committee - lack of or weak internal control - unusual or complex transactions - significant accounting estimates - lack of or ineffective internal audit function

Answer 39

opportunities of fraudulent financial reporting