ACCT 509 Chapter 10

What are some of the key note disclosures frequently reported regarding income taxes?

An explanation of the deferred taxes resulting from differences between the fiscal year in which an expense or revenue is reported for book purposes and the fiscal year in which it is reported for tax purposes A reconciliation of the statutory income tax rate with the company's effective tax rate

In an independent auditor's report, what is the topic of the separate page that normally follows the three-paragraph financial statement audit opinion?

An internal control audit, which addresses the effectiveness of the company's internal control over financial reporting

Which of these are significant accounting policies that should be included in notes to the financial statements?

Depreciation method Basis of consolidation Inventory valuation method

The management's statement of responsibility explains that the responsibility for the financial statements lies with the external auditor, who expresses an opinion about the financial statements of the company.

False

Which of these are significant accounting policies that should be included in notes to the financial statements?

Stock option and stock purchase plans Earnings per share of common stock

Identify an example of an accounting change that is disclosed in an annual report.

Switching from the straight-line method of depreciation to the declining-balance method of depreciation

Identify the correct statements about the method used for accounting mergers and acquisitions.

The acquiring company records the acquisition of net assets at their fair value at the date of acquisition. If there is any goodwill recognized during acquisition, the goodwill needs to be evaluated annually for possible impairment losses. If the payment made for the acquisition of net assets is more than their fair value, the excess amount is recorded as goodwill.

What information about the intangible asset goodwill would be included in notes to the financial statements?

The cost of other acquisition-related intangibles and the methods used to amortize them The method of recognizing its initial cost, arising from business acquisitions Reductions in the cost of goodwill due to impairment losses

In which situations could an auditor issue a qualified opinion on a company's financial statements?

When there is a material deviation from generally accepted accounting principles that affects only a part of the financial statements When the scope of the audit is restricted, preventing the auditor from performing an essential audit work

If the payment made for the acquisition of net assets is more than the fair value of the net assets, the excess amount is recorded

as goodwill, and it is evaluated for possible impairment losses

Most corporate annual reports present a summary of financial data for at least five years; items frequently included in the summary include:

book value per share of common stock long-term debt property, plant, and equipment (net)

Segment disclosures for publicly traded companies are generally required for:

lines of business. geographic territories. major customers.

Examples of subsequent events that frequently have a material impact on the balance sheet or income statement and thus should be described in the notes to the financial statements include the:

sale of a significant part of the company's assets. issuance of a large amount of capital stock issuance of a large amount of long-term debt.

Reasons for the difference between the statutory income tax rate and the company's effective tax rate may include the effects of:

state income taxes. non-U.S. income taxed in other countries. tax benefits associated with export sales. special treatment given to certain items for tax purposes.

Common examples of accounting changes include:

switching from the FIFO to LIFO inventory cost-flow assumption. those necessitated by FASB codification updates that require companies to adopt new accounting methods.

Identify the scenarios that describe contingencies and commitments that need to be disclosed in the annual report.

A potential loss that might arise from a pending lawsuit A situation where the company has agreed to act as a guarantor of the indebtedness of another entity

A (proxy/prospectus/tender) summarizing the complete registration statement must be provided to investors prior to, or concurrently with, their purchase of a security issued by a corporation.

Prospectus

While auditing an entity's financial statements, the auditor finds that the financial statements are misrepresented, misstated, and do not present fairly

Adverse

Stockholders who do not attend the annual general meeting may return a (prospectus/tender/proxy), which gives another person (usually a director of the corporation) the right to vote the stockholder's shares in accordance with their wishes.

Proxy

Many firms include in the notes management's statement of (ethics/responsibility/accountability), which explains that the responsibility for the financial statements lies with the management of the firm, not the (internal/external/bank) auditor and certified public accountants who express an opinion about the (fairness/accuracy/precision) with which the financial statements present the financial condition and results of operations of the company.

Blank 1: responsibility Blank 2: external Blank 3: fairness

What other type of audit is conducted in conjunction with the audit of financial statements?

Internal Control Audit

In an independent auditor's report, the (introductory/scope/opinion) paragraph identifies the financial statements that were audited and briefly describes the responsibilities of both management and the auditors with respect to the financial statements.

Introductory