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C249 CH24
Full Disclosure
| Question | Answer |
|---|---|
| Which of the following BEST describes all types of financial information that are regulated by FASB rules? | Financial statements, notes to financial statements, and the supplementary information are directly affected by FASB rules. |
| Which of the following BEST describes why the FASB has established an advisory committee to revisit its traditional stance on GAAP disclosure requirements? | to increase the cost-effectiveness of GAAP reporting for companies of all sizes |
| What criteria are currently used to determine whether a company must adhere to GAAP requirements related to fair value of financial instruments and segment reporting? | whether a company is public or nonpublic |
| Which of the following most accurately summarizes critical arguments related to the detail and amount of information required under expanded disclosure requirements? | Requirements are becoming so substantial that users have difficulty abso |
| How much benefit do most companies receive as a result of increased disclosure requirements and their associated costs? | It is difficult to determine whether an additional benefit is received as a result of increased requirements and costs. |
| In what way have recent and current developments in the business world impacted the amount of information companies must disclose about their finances? | Large-scale financial disasters at high-profile companies have prompted an increase in disclosure requirements. |
| Large-scale financial disasters at high-profile companies have prompted an increase in disclosure requirements. | Small and nonpublic companies should not have to follow complex GAAP requirements for items like deferred income taxes, leases, or pensions. |
| Which of the following information might a company voluntarily disclose primarily to provide useful information to potential investors? | |
| Which two types of disclosures may be of particular interest to an investor who is attempting to obtain information about a company’s long-lived assets and any major impairments to those assets? | property, plant, and equipment and fair value |
| Which of the following pairs of items may be disclosed either as a note to the financial statements or reported within the financial statements? | inventory composition and valuation of property, plant, and equipment |
| Why is the information on the disclosure of accounting policies important to financial statement readers? | It is helpful for determining whether the company is using conservative or liberal accounting practices. |
| Which of the following scenarios is most appropriately included in a property, plant, and equipment disclosure note to the financial statements? | the pledge of a company facility as collateral on a loan to purchase equipment |
| Which of the following statements about the proper presentation of equity securities in the financial statements is true? | Information about the number of shares authorized, issued, and outstanding may be included in either the body of the balance sheet or in the notes to the financial statements. |
| Which of the following would be MOST appropriately placed in the notes to the financial statements as a contingencies and commitments disclosure? | information about dividend restrictions associated with a bond indentures |
| Which of the following types of information would NOT be found in a note to the financial statements disclosing creditor claims? information about possible future tax assessments information about the costs the company will bear in future periods | information about possible future tax assessments |
| Luis is interested in investing in JT Engineering. Before doing so, he would like to know about any off-balance-sheet commitments JT has, as well as the quality of JT’s earnings. Where would he be most likely to find this type of information? | in disclosures related to deferred taxes, pensions, and leases |
| Which of the following statements about errors and irregularities is TRUE? Errors are defined as intentional distortions of facts while irregularities are not. Irregularities are defined as intentional distortions of facts while errors are not. | Irregularities are defined as intentional distortions of facts while errors are not. |
| Billings Industries has identified five potential segments, two of which pass at least one of the 10% tests. In addition, the total revenues for these two segments pass the 75% combined sales test. What can you infer about these two potential segments? | They account for a significant portion of Billings’ business and warrant disclosure. |
| U.S. GAAP does not require general purpose financial statements to include information about operating segmentation. | False |
| What is the 10% rule for significant segments | segment is 10% or more of combined revenue, of combined loss or profit, or of combined assets. |
| What is the 75% rule for significant segments? | segment must account for at least 75% of combined sales |
| What is the upper limit of number of segments? | 10 |
| Why are subsequent events such as legislation, management changes, strikes, and unionization NOT disclosed in the financial statements? | They are nonaccounting events or conditions communicated to the public by other means. |
| Martin Co. and Smith Co. are subsidiaries of Houten Tech. they offer basically the same products and use the same production processes and means of distribution. They rely on the same regulatory environment. Whats true in order to aggregate information? | Martin and Smith must serve the same type or class of customer. |
| RL Enterprises uses the FIFO method for inventory pricing on an annual basis. How should RL handle its inventory pricing on an interim basis? RL should use LIFO on an interim basis. RL should also use FIFO on an interim basis. | RL should also use FIFO on an interim basis. |
| In February, Wells pays $4,000 for maintenance on its factory equipment. In the interim report, Wells charges a quarter of the cost to the period. What can you assume about the maintenance? | An anticipated event that benefits the entire year. |
| Riley Inc. uses the LIFO method of inventory pricing. There has been a partial liquidation of the base period inventory level. The partial liquidation will be replaced by year end. How should the amount of inventory at the interim reporting date? | It should be shown at the actual level, and cost of sales for the interim reporting period should include the expected cost of replacement of the liquidated LIFO base. |
| Billings Industries favors a discrete approach to interim reports. Based on this information, how would Billings report its expenses and revenues? | It would report both expenses and revenues as they occur. |
| At the beginning of the year, Industries estimates its expenses for the year and assigns them to parts of the year based on anticipated sales volume. Based on this information, which of the following general approach does Ahrens take to interim reports? | Integral approach |
| True or False: Advertising costs may be accrued or deferred to provide an appropriate expense in each period for both interim financial reporting and year-end financial reporting. | True |
| Houlihan Industries is preparing its interim report. For advertising costs, extraordinary items, and earnings per share, they report all transactions as they occur. For other costs, they estimate expenses to parts of the year. What method are they using? | Houlihan follows both the discrete approach and the integral approach in preparing its interim report. |
| What is the required approach for handling extraordinary items in interim reports? The charge or credit for the associated loss or gain should be made in the quarter that it occurs. The loss or gain should be disclosed only in the notes. | The charge or credit for the associated loss or gain should be made in the quarter that it occurs. |
| Which of the following items does NOT need to be disclosed in a company’s interim report? Basic and diluted earnings per share Seasonal revenue, cost, or expenses Post-balance-sheet events Changes in accounting principles | Post-balance-sheet events |
| In January, Benning Mills pays $275,000 to repair one of its machines. In the Q1 interim report, Benning charges the entire loss to the period. Based on this information, what can you assume about this repair? | It is considered an unanticipated repair. |
| JT Engineering uses the installment-sales method as the basis for recognizing revenue on an annual basis. Based on this information, which of the following statements is true? | JT should also use the installment basis for its interim reports |
| During Q1, Marten Converting embarks on a campaign involving print and television ads, which run until March 31. In Marten’s Q1 report, the costs associated with this campaign are deferred. What can you assume about the campaign? | The benefits of the campaign extend beyond Q1. |
| Which of the following most accurately describes the viewpoint of supporters of the integral approach to interim reporting? | Interim reports are an essential part of the annual report. |
| Milner Manufacturing anticipates a planned volume variance during the first quarter. The variance is expected to be absorbed by the end of the fiscal year. If Milner employs a standard cost system, how should the variance be handled in the interim report? | It should be deferred at the end of the first quarter, regardless of whether it is favorable or unfavorable. |
| The retail inventory method can be used at both interim dates and at year end but the gross profit method can only be used at interim dates. True or False? | True |
| How should an extraordinary gain occurring in the second quarter be handled in interim financial reports? | Recognized in the period it happened |
| Wilton Company favors an integral approach to interim reports. Based on this information, how would Wilton approach expenses? | It would estimate expenses and assign them to parts of the year based on sales volume. |
| To compute the year-to-date tax, companies apply the lower rate of tax to the first amount of income earned, gradually increasing it as income increases. True or False | False |
| Which of the following items is typically estimated and allocated across interim periods in interim reports? extraordinary items sales revenue seasonality expenses subject to year-end adjustment | expenses subject to year-end adjustment |
| Which of the following does not need to be disclosed in an interim report? basic and diluted earnings per share seasonal revenue, cost, or expenses data about major customers significant changes in financial position | data about major customers |
| For which of the following items are companies required to charge or credit any associated loss or gain to the quarter in which it occurs on the interim report? Extraordinary items Advertising and similar costs Income taxes | Extraordinary items |
| Companies report extraordinary items in interim reports by charging or crediting the loss or gain in the quarter in which it occurs. True or False | True |
| Companies should generally use the discrete approach for interim reports, regardless of the approach used for annual reports. True or False | False |
| Under the discrete approach, companies should report accounting transactions as they occur and expense recognition should not change with the period of time covered. True or Fals | True |
| True or False: Many auditors readily express opinions based on interim financial information, believing it to be as complete and accurate as annual information. | False |
| How often does the Securities and Exchange Commission require companies to file interim financial reports? Semi-annualyl Triannually Quarterly Bi-monthly | Quarterly |
| Which of the following items is typically annualized in interim reports? income taxes earnings per share sales revenue extraordinary items | income taxes |
| Which of the following should be disclosed in an interim report? general information about segments disposal of a component of a business information about products, services, and geographic areas data about major customers | disposal of a component of a business |
| True or False: The retail inventory method can be used at both interim dates and at year end but the gross profit method can only be used at interim dates. | True |
| Seasonality of sales pose particular problems for companies preparing interim reports? Off-season sales do not absorb fixed costs, creating large profit fluctuations . Selling price per unit does not remain constant, profits difficult to estimate. | Off-season sales do not absorb fixed costs, creating large profit fluctuations . |
| Under which of the following circumstances would an auditor be justified in issuing a qualified opinion? | When he or she feels the statements do not fairly represent results of operations due to inadequate disclosure, but the statements as a whole are still valid. |
| What should an auditor do if he or she has gathered so little information that no opinion about financial statements can be expressed? | A disclaimer of opinion |
| How are qualified opinions and adverse opinions expressed in the auditor’s report similar to one another? | Both qualified and adverse opinions indicate that the financial statements vary from reporting standards to some degree. |
| True or False: A qualified opinion is issued when exceptions to the standard opinion are material to the point that they invalidate the statements as a whole. | False, that is an adverse opinion |
| What type of opinion is issued if the auditor includes an exception that is not of sufficient magnitude to invalidate the financial statements as a whole? | A qualified opinion |
| How do unqualified opinions and qualified opinions expressed in the auditor’s report differ from one another? | Both opinions suggest that the statements are a fair representation of financials, but only qualified opinions highlight minor variances from standard reporting within the statements. |
| What should the auditor do if his or her examination of financial statements is limited or affected by conditions or restrictions? | A qualified opinion |
| What type of auditor’s report is MOST useful to investors and potential investors? | All reports are useful because all of them provide important information about the company’s financial position. |
| Peyton is auditing the 2017 financial statements of Ellis Industries. Peyton notes that the company has changed accounting principles between 2016 and 2017. How should Peyton address this in her auditor’s report? | She should issue an unqualified opinion that includes an explanation of the change. |
| True or False: In most situations, an auditor issues an unqualified opinion about a company’s financial statements. | True |
| Under which of the following circumstances would an auditor need to include additional explanatory information along with an unqualified opinion? | When the statements are accurate but do not clearly emphasize a company’s subsidiary relationship to a parent. |
| Gwen is an auditor reviewing the financial statements of JT Engineering. Gwen has substantial doubt about JT’s ability to remain in business beyond the next six months. How should Gwen address this concern in her auditor’s report? | She should issue an unqualified opinion that includes an explanation of her concerns. |
| Archie believes the statements do not fairly present the results of RL’s operations because of several inadequate disclosures. He does not think this issue is of sufficient magnitude to invalidate the statements. What report should be issued? | He should issue a qualified opinion about the financial statements. |
| Under which of the following circumstances would an auditor issue a disclaimer of opinion? | When the auditor has gathered so little information on the financial statements that no opinion can be expressed. |
| The most common form of report issued by auditors is the | unqualified opinion. |
| True or False: A qualified opinion is issued when exceptions to the standard opinion are material to the point that they invalidate the statements as a whole. | False |
| What type of opinion is issued if the auditor includes an exception that is not of sufficient magnitude to invalidate the financial statements as a whole? | A qualified opinion |
| How are qualified opinions and adverse opinions expressed in the auditor’s report different from one another? | Qualified opinions confirm the veracity of the financial statements while highlighting minor exceptions to the standard Adverse reports indicate exceptions that are so material that veracity cannot be confirmed. |
| How are unqualified opinions and qualified opinions expressed in the auditor’s report similar to one another? | Both convey that the financial statements accurately reflect the financial position of a company. |
| In the MD&A, favorable and unfavorable financial trends should be highlighted if they are expected to impact which of the following? | liquidity, capital resources, and results of operations |
| LIQUIDITY RATIOS | short-run ability to pay its maturing obligations |
| ACTIVITY RATIOS. | how effectively the company is using the assets employed. |
| PROFITABILITY RATIOS | degree of success or failure of a given company or division for a given period of time. |
| COVERAGE RATIOS | degree of protection for long-term creditors and investors. |
| Financial forecast | Information on what is expected to happen |
| Financial projection | Information on what my happen in a given situation |
| Alpha assumes it might see a 10% decrease in sales during the third quarter. This would create a shortfall in Alpha’s revenue and Alpha would need to take cost-cutting measures such as decreasing its workforce. This statement is an example of a | Financial Projection |
| Which of the following requires accountants preparing financial forecasts or projections to provide a summary of significant assumptions used? AICPA SEC EDGAR IDEA | AICPA |
| Internal environment influences that may contribute to fraudulent financial reporting include the overall business environment. changes in regulatory requirements. industry conditions. management’s poor attitude toward ethics. | management’s poor attitude toward ethics. |
| Situational pressures that may lead to fraudulent financial reporting do not include a recent increase in stock price. unrealistic budget pressures. financial pressures resulting from bonus plans. sudden decreases in revenues. | a recent increase in stock price. |
| True or False: Fraudulent financial reporting is intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements | True |
Created by:
tbeeche