F2 Financial Reporting And Disclosures

Question 1

Significant accounting policies

Answer 1

The criteria for determining which investments are treated as cash equivalent would be part of the summary of significant accounting policies.

Question 2

Summary of significant accounting policies in the notes to the financial statements

Answer 2

Revenue recognition policies

Question 3

Information presented in notes to the financial statements

Answer 3

Information presented in notes to the financial statements have the purpose of providing disclosures required by GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. SFAC 5 para. 7

Question 4

Quick Ratio Formula

Answer 4

= cash + cash equivalents + marketable securities + accounts receivable / total current liabilities

Question 5

Level 3 input to valuation techniques used to measure the fair value of an asset

Answer 5

Unobservable inputs for the asset. For example, An assumed discount rate

Question 6

What is fair value measurement.

Answer 6

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date. It is a market-based measure.

Question 7

Change in accounting estimates

Answer 7

It affects only the current and subsequent (future) periods, if the change affects both. It does not affect “prior periods”, nor “retained earnings”.

Question 8

Total debt ratio formula or debt-to-asset formula

Answer 8

Total debt (total liabilities) / total assets

Question 9

Days in inventory formula

Answer 9

Ending inventory / (cost of goods sold / 365)

Question 10

Current ratio formula

Answer 10

Current assets / current liabilities

Question 11

Change in reporting entity

Answer 11

If comparative financial statements are presented and a change of reporting entity has occurred, all previous financial statements that are presented in the comparative financial statements should be restated.

Question 12

Debts-to-equity ratio formula

Answer 12

Total liabilities / total equity

Question 13

Level 2 inputs

Answer 13

They are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets.

Question 14

Special purpose frameworks

Answer 14

They are non-GAAP presentations that include other bases of accounting, such as the cash basis and modified cash basis. The statement of cash receipts and disbursements is an example of a cash basis income statement.

Question 15

Accounts receivable turnover formula

Answer 15

Net sales (sales on credit - sales returns - sales allowances) / Average accounts receivable (starting and ending receivables dividing by 2)

Question 16

What is the market approach

Answer 16

The market approach uses prices and other relevant information from market transactions involving identical or comparable assets/liabilities to measure fair value. The company is using comparable securities where pricing is available to estimate the fair value of the private placement securities.

Question 17

Summary of significant accounting policies

Answer 17

It includes components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc.

Question 18

Fair value of a Nonfinancial assets

Answer 18

The fair value of a nonfinancial asset is the value at its highest and best use.

Question 19

Return on Assets (ROA)

Answer 19

Net Income / Average Total Assets

Question 20

Return on Equity (Formula)

Answer 20

(Net Income - Preferred Dividend) / Average Total Equity

Question 21

Inventory Turnover (Formula)

Answer 21

Cost of Goods Sold / Average Inventory

Question 22

Notes to Financial Statements

Answer 22

• Accounting Policies
• Detailed Information
• Financial Instruments and Risks
• Commitments and Contingencies
• Subsequent Events
• Related Party Transactions
• Changes in Accounting Principles and Estimates

Question 23

Fair value

Answer 23

Fair value is an exit price, not an entrance price (i.e., sell an asset, not acquire an asset).

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date under market conditions.

Question 24

Market participants

Answer 24

Market participants are buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability.

Example: A company purchases real estate zoned for recreational use.

Question 25

Form 10-Q

Answer 25

Part I:
Item 1 - Financial Statements
Item 2 - Management’s Discussion and Analysis
Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Question 26

Form 10-K

Answer 26

Part II:

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data

Question 27

Unrealized gains and losses

Answer 27

Rule: Unrealized gains and losses are reported as follows: trading debt securities are reported at fair value with unrealized gains and losses included in earnings (along with “realized” gains and losses, if any).

Where there are no expected credit losses, available-for-sale debt securities are reported at fair value with unrealized gains and losses reported as a separate component of other comprehensive income until realized.

Question 28

Calculate Accrual basis from Cash basis

Answer 28

Formula:
Cash basis revenue
+ Ending AR
- Beginning AR
-Ending unearned revenue
+Beginning unearned revenue
=Accrual basis, revenue

Question 29

Summary of significant accounting policies includes disclosures of:

Answer 29

1. Measurement bases used in preparing the financial statements.
2. Specific accounting principles and methods used during the period, including:
   -Basis of consolidation
   -Depreciation methods
   -Amortization of intangibles
   -Inventory pricing
   -Use of estimates
   -Fiscal year definition
   -Special revenue recognition issues (e.g. long-term construction contracts, franchising, leasing operations, etc)
   Criteria for determining which investments are treated as cash equivalents.

Question 30

Output Method

Answer 30

Milestone achieved (Whether production or distribution) are an example of an output method used to recognize revenue.

Question 31

Input Method

Answer 31

Resource consumption, labor hours expended, and costs incurred relative to total expected costs are all examples of input methods.

Question 32

For purpose of determining the period over which subsequent events must be evaluated, financial statements are considered issued:

Answer 32

Financial statement are considered issued when:

-Financial statements are in a form and format that comply with GAAP.
-Financial statements have been widely distributed to financial statement users

Question 33

Times Interest Earned

Answer 33

= Income before interest and taxes / Interest expense

or

= Earnings before interest and taxes / Interest expense

Question 34

Special purpose framework

Answer 34

Balance sheet is called Statement of Financial Condition