Financial Reporting

Question 0

According to US GAAP, how should firms report OCI?

Answer 0

Firms have the option for presenting the calculation of OCI either as part of an income statement or as a separate statement of comprehensive income

Question 1

Cash Inflow from amortization arises because of what?

Answer 1

The tax shield. In a tax-free environment, a change in amortization will not affect the flows from operations.

Question 2

How does the balance sheet help users?

Answer 2

The balance sheet assesses an entity’s liquidity, solvency, financial flexibility, and operating capability.

Question 3

Most asset accounts of a non financial nature are reported at historical cost. Historical cost measures are considered reliable because the amounts can be verified. Why are they considered less relevant?

Answer 3

Historical cost measures are considered less relevant than fair value or current market value in assessing a firm’s current financial position

Question 4

When is it necessary to recognize loss or gain contingencies on the financial statements?

Answer 4

It is necessary to recognize loss contingencies when it is BOTH probable that a loss has been incurred and the amount of the loss is reasonably estimable. Accounting recognition is not given to gain contingencies to avoid premature recognition of income before its realization.

Question 5

What are extraordinary items?

Answer 5

Material items that are both unusual in nature and infrequent in occurance.

Question 6

When will cash, set aside to fulfill terms of an agreement, be determined as a long-term asset?

Answer 6

When it is used to pay liabilities beyond the operating cycle or year, whichever is longer, or for the retirement of a specific long-term debt. Restricted cash is a asset if it will be used to pay liabilities within a year of the operating cycle, whichever is longer.

Question 7

Who are indirect users of financial statements?

Answer 7

• Regulatory agencies
• Markets
• Financial Analysts
• Planners and advisors

Question 8

How does US GAAP provide relevant financial valuation guidance?

Answer 8

GAAP provides guidance reflecting fair value, attributes of value, and validity of a value estimate. This validity is based on he quality of the assumptions and inputs use, the appropriateness of the measurement tachniques, and teh judgement of the estimator.

Question 9

What are the sources of cash flows?

Answer 9

Operating - related to the normal course of business
Investing - Changes in long-term asset accounts
Financing - Changes in long-term liability or equity accounts

Question 10

Describe level 1 of the GAAP-based guidance for valuation.

Answer 10

Level 1 is the highest quality estimation level. It includes inputs based on unadjusted quoted prices in active markets for assets or liabilities identical to those being valued at eh measurement date. This level reflects the most reliable evidence of fair value.

Question 11

Who are direct users of financial statements?

Answer 11

• Investors and owners
• Management
• Suppliers
• Creditors
• Employees
• Customers

Question 12

describe level 3 of the GAAP-based guidance for valuation.

Answer 12

Level 3 assumes the lowest quality estimation level and includes unobservable inputs that are reflective of the entities assumptions.

Question 13

Name the three items the income statement measures.

Answer 13

1. Sources of revenue
2. Causes of expenses
3. Net Income (Loss)

Question 14

Who are the external users of financial statements?

Answer 14

• Investors
• Suppliers
• Customers
• Stock exchanges
• Regulatory agencies

Question 15

How will dividends paid to owners appear in financial statements?

Answer 15

• Balance Sheet: As a reduction in retained earnings
• Cash Flow Statement: Cash flow from financing activity
• Statement of owner’s equity: Reduction in retained earnings

Question 16

Name the two key disadvantages of the income statement.

Answer 16

1. Many income statement item rely on management judgments and estimates
2. Income statements provide an estimate of cash generation, but the accrual method of accounting requires organizations also to prepare a statement of cash flows to reconcile sources an uses of cash

Question 17

List six items that the Statement of Owner’s Equity tracks.

Answer 17

1. The amount of new share capital issued
2. The amount of dividends paid during the year to shareholders
3. The amount by which PPE is values up or valued down
4. The amount of net income earned during the year
5. The amount of net income retained during the year
6. Any movement in the unrealized loss or gain reserve and reserve for changes in foreign exhange gain or loss, etc

Question 18

Who are the internal users of financial statements?

Answer 18

• Board of Directors
• Company Management
• Employees

Question 19

List four key disclosures commonly found in financial statements.

Answer 19

Significant accounting policies include:

1. Related party transactions
2. Whether the business is in the development stage
3. Amounts and nature of maturing debt for the financial statement period
4. Sinking fund provisions