FAR SU4
Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of
Concentration of credit risk. Credit risk is the risk of accounting loss from a financial instrument because of the possible failure of another party to perform. An entity must disclose most significant concentrations of credit risk arising from instruments. Group concentrations arise when multiple counterparties have similar characteristics that cause their ability to meet obligations to be similarly affected by change in conditions. An example of such a group is an industry.
A company that issues quarterly financial statements incurs a material unusual loss in one of the first three quarters. In which of the following ways would the company report this loss?
Entirely in the quarter that the loss occurs. Unusual or infrequently occurring items should be separately disclosed, included in interim-period net income, and not prorated over the year.
Which of the following should be disclosed in a summary of significant accounting policies? Composition of plant assets. Concentration of credit risk of financial instruments. Basis of consolidation. Adequacy of pension plan assets in relation to vested benefits.
Basis of consolidation. Accounting policies are the specific principles and the methods of applying them used by the reporting entity. Certain disclosures about policies of business entities are commonly required. These items include the following: Basis of consolidation Depreciation methods Amortization of intangibles Inventory pricing Recognition of revenue from contracts with customers Recognition of revenue from leasing operations
Which of the following should be disclosed in a summary of significant accounting policies? Composition of sales by segment. Depreciation expense. A maturity analysis of the operating lease liability for each of the first 5 years. Basis of profit recognition on long-term construction contracts.
Basis of profit recognition on long-term construction contracts. Certain items are commonly required disclosures in a summary of significant accounting policies. These items include (1) the basis of consolidation, (2) depreciation methods, (3) amortization of intangibles, (4) inventory pricing, (5) recognition of revenue from contracts with customers, and (6) recognition of revenue from leasing operations.
For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated
The estimated annual effective tax rate should be based upon the statutory rate adjusted for the current year's expected conditions. These conditions include anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other tax planning alternatives. The rate should also include "the effect of any valuation allowance expected to be necessary at year end for deferred tax assets related to originating deductible temporary differences and carryforwards during the year."
Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, the sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?
$81 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 at the measurement date. The transaction is assumed to occur in the reporting entity's principal market for the asset or liability. In the absence of such a market, it is assumed to occur in the most advantageous market. This market is the one in which the specific reporting entity can maximize the amount received for selling the asset. However, given a principal (or most advantageous) market, the FMV is the price in that market without adjustment for transaction costs. Here, there is not a principal market; instead, there are two non-principal markets. The second market is the most advantageous because Crossroads would maximize the net proceeds from selling the asset ($80 compared to $76 in the first market). Therefore, fair value should be measured using the second market. Crossroads should report $81 as the fair value of the asset because the FMV is the price without adjustments for transaction costs.
Which of the following material events occurring after the December 31, Year 6, end of the reporting period does not ordinarily result in adjustment of the financial statements before they are issued on February 28, Year 7? Write-off of a receivable from a debtor who had suffered from a deteriorating financial condition for the past 6 years. The debtor filed for bankruptcy on January 20, Year 7. A major business combination completed on January 20, Year 7. Negotiations had begun in December of Year 6. A 3-for-5 reverse stock split consummated on January 20, Year 7. Settlement of extended litigation on January 20, Year 7, in excess of the recorded year-end liability.
A major business combination completed on January 20, Year 7. Negotiations had begun in December of Year 6. An entity recognizes in the financial statements adjusting events after the reporting period. These provide evidence about conditions existing at the end of the reporting period. However, the business combination did not occur until after year end. Hence, it required only disclosure, not recognition in the statements.
Multinational Entity has 10 divisions, and its operations are overseen by a board and an executive committee. This committee includes the CEO, COO, CFO, and the heads of the marketing, logistics, and research functions. Which of the following most likely qualifies as a separate reportable operating segment? South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the entity's assets, 9% of its revenues, and 8% of its profits. North American segment, whose assets are 12% of the entity's assets of all segments, and management reports to the chief operating officer. Eastern Europe segment has 20% of the European division's assets, 12% of its revenues, and 11% of its profits. Its manager reports to the divisional manager. Corporate headquarters, which oversees $1 billion in sales for the entire entity.
North American segment, whose assets are 12% of the entity's assets of all segments, and management reports to the chief operating officer. An operating segment (1) engages in business activities from which it may earn revenues or incur expenses, (2) has operating results that are regularly reviewed by the entity's chief operating decision maker, and (3) has discrete financial information available. For an operating segment to be reportable, it must meet one or more of the following quantitative thresholds: (1) Reported revenue is at least 10% of the combined revenue of all operating segments; (2) reported profit or loss is at least 10% of the greater (in absolute amount) of the combined reported profit of all operating segments that did not incur a loss, or the combined reported loss of all operating segments that did report a loss; or (3) its assets are at least 10% of the combined assets of all operating segments. The North American segment holds 12% of the company's assets and reports to the chief operating officer, so it meets the requirements of an operating segment.
Which of the following information is not required to be disclosed in the notes to the financial statements? A strong earthquake destroyed the company's main factories, which raised substantial doubt regarding the company's ability to continue as a going concern. The company's principal markets are located in Australia, China, Canada, and Japan. The company's financial ratios in comparison with the industry average. The company has only one supplier. The supplier is forced to shut down for 6 months after food safety violations. The company is unable to find another supplier within 6 months.
The company's financial ratios in comparison with the industry average. Information relating to the nature of operations, use of estimates, and concentrations is required to be disclosed at the balance sheet date. The company's financial ratios in comparison with the industry average does not belong to the above categories.
What information should a public entity present about geographic areas, if feasible?
The following information about geographic areas is reported if feasible: (1) external revenues attributed to the home country, (2) external revenues attributed to all foreign countries, (3) material external revenues attributed to an individual foreign country, (4) the basis for attributing revenues from external customers, and (5) certain information about assets.
Under ASC 606, which of the following, if any, determines the transaction price of a contract with a significant financing component?
The revenue recognized must reflect the price that a customer would have paid for the promised goods or services if the cash payment had been made when the goods or services were transferred to the customer (the cash selling price). Thus, the transaction price should be adjusted for the effect of the time value of money (discounted cash flows) when the contract includes a significant financing component.
A presentation of financial assets and financial liabilities is required to be disaggregated only by
Form of financial asset and measurement category in the balance sheet or the notes to the financial statements On the balance sheet or in the notes to the financial statements, financial assets and financial liabilities are separately presented (disaggregated) by (1) measurement category (i.e., amortized cost, fair value through net income, and fair value through OCI) and (2) form of financial asset (i.e., loans, securities, and receivables).
In financial reporting for operating segments of a public business entity, the revenue of a reportable segment must include
GAAP do not specifically define the reported revenue of an operating segment. However, the information reported includes (1) revenues from external customers, (2) revenues from transactions with other operating segments of the same entity, and (3) interest revenue. The amount of a reported segment item, such as revenue, is the measure reported to the chief operating decision maker for purposes of making resource allocation and performance evaluation decisions regarding the segment. Disclosures are required about measurements of segment profit or loss (including revenue) and segment assets, but GAAP do not stipulate how those measurements are to be made.
Where in its financial statements should a company disclose information about its concentration of credit risks?
An entity must disclose significant concentrations of risk arising from most instruments. These disclosures should be made in the basic financial statements, either in the body of the statements or in the notes
Martin Corporation has the following data related to its operating segments. Unaffiliated Intersegment Operating Identifiable Segment Revenues Revenues Profit (Loss) Assets A $ 90 $10 $(100) $ 600 B 70 15 50 600 C 40 -0- (20) 150 D 250 30 180 1,500 E 300 20 130 800 Totals $750 $75 $ 240 $3,650 Based on the revenue criterion only, which of Martin's segments is (are) reportable?
An operating segment of a business is considered reportable if its reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue of all operating segments. Unaffiliated Intersegment Combined Segment Revenues Revenues Revenues Percentage A $ 90 $10 $100 12.1% B 70 15 85 10.3% C 40 0 40 4.8% D 250 30 280 33.9% E 300 20 320 38.8% Totals $750 $75 $825 100.0% Accordingly, only Segment C is not reportable based on the revenue criterion.
Subsequent events for reporting purposes are defined as events that occur subsequent to the
Balance sheet date but before the issuance (or availability for issuance) of the financial statements. Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance (or availability for issuance) of the financial statements. Certain subsequent events or transactions provide evidence about conditions at the date of the balance sheet, including the estimates inherent in statement preparation. Other subsequent events or transactions provide evidence about conditions that did not exist at the date of the balance sheet.
A corporation issues quarterly interim financial statements and uses the lower of cost or market method to measure its LIFO inventory in its annual financial statements. The corporation accounts for its inventory using the LIFO method. Which of the following statements is correct regarding how the corporation should measure its inventory in its interim financial statements? Inventory losses generally should be recognized in the interim statements. Only the cost method of inventory measurement should be used. Gains from measurements in previous interim periods should be fully recognized. Temporary market declines should be recognized in the interim statements.
Inventory losses generally should be recognized in the interim statements. An inventory loss from a market decline may be deferred if no loss is anticipated for the year. Inventory losses from nontemporary market declines, however, must be recognized at the interim date. If the loss is recovered during the fiscal year (in another quarter), it is treated as a change in estimate. The price recovery recognized is limited to the losses previously recognized.
Disclosures about the fair value of financial instruments of public business entities
Public business entities must disclose, either in the body of the financial statements or in the notes, the (1) fair value of financial instruments, regardless of whether they are recognized in the balance sheet, and (2) level of the fair value hierarchy (Level 1, 2, or 3) in which the fair value measurements of the financial instruments are categorized.
Assuming that disclosure is practicable, it is required by publicly held companies regarding the following items only if 10% or more of total revenues are derived from
Information about a major external customer must be disclosed if sales to that customer are 10% or more of total revenue. However, no percentage threshold is established for practicable disclosures of geographic information. Instead, an entity must disclose revenues attributable to all foreign countries in total. Separate disclosure of revenues from external customers attributed to a single foreign country is also required if those revenues are material. These disclosures are intended to provide information about reliance on particular markets or customers.
Nancarrow Corp. released its financial statements for the year ended December 31, Year 7, on March 15, Year 8. On February 1, Year 8, Nancarrow settled a long-standing lawsuit that resulted in a material loss. No liability for this circumstance had been accrued in the financial statements. How should this event be disclosed or recognized?
The event must be recognized in the financial statements. An entity recognizes in the financial statements adjusting events occurring after the end of the reporting period but before the statements are authorized for issue. These events provide evidence about conditions existing at the end of the reporting period. Settlement of the court case established that the entity had a present obligation at the end of the period. The adjustment is to restate the related liability (if any) or to recognize a new liability. Settlement of a lawsuit is indicative of conditions existing at the end of the reporting period and requires adjustment of the statements.
Which of the following phrases best describes a Level 1 input for measuring the fair value of an asset or liability? Quoted prices for similar assets or liabilities in active markets. Inputs for the asset or liability based on the reporting entity's internal data. Unadjusted quoted prices for identical assets or liabilities in active markets. Inputs that are principally derived from or corroborated by observable market data.
Unadjusted quoted prices for identical assets or liabilities in active markets. Level 1 inputs are the most reliable. They are unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. Quoted prices for similar assets or liabilities in active markets are Level 2 inputs. Inputs that are based on the entity's own data are Level 3 inputs. Inputs that are principally derived from or corroborated by observable market data are Level 2 inputs.
Hampton, Inc., has identified the following operating segments. Total Operating Identifiable Segments Revenue Profit Assets Bingham $ 200,000 $ 20,000 $ 120,000 Charles 100,000 4,000 60,000 Harvey 1,400,000 80,000 780,000 Norton 600,000 40,000 320,000 Randall 1,800,000 36,000 560,000 Wicker 200,000 15,000 100,000 $4,300,000 $195,000 $1,940,000 Based on the standard quantitative tests, the Hampton segments that should be disclosed in the financial statements are
Bingham, Harvey, Norton, and Randall. For an operating segment to be reportable, it must meet one or more of the following quantitative thresholds: (1) reported revenue is at least 10% of the combined revenue of all operating segments; (2) reported profit or loss is at least 10% of the greater (in absolute amount) of (a) the combined reported profit of all operating segments that did not report a loss or (b) the combined reported loss of all operating segments that did report a loss; or (3) its assets are at least 10% of the combined assets of all operating segments. Total % Operating % Identifiable % Segments Revenue Profit Assets Bingham $ 200,000 4.7 $ 20,000 10.3 $ 120,000 6.2 Charles 100,000 2.3 4,000 2.1 60,000 3.1 Harvey 1,400,000 32.6 80,000 41.0 780,000 40.2 Norton 600,000 14.0 40,000 20.5 320,000 16.5 Randall 1,800,000 41.9 36,000 18.5 560,000 28.9 Wicker 200,000 4.7 15,000 7.7 100,000 5.2 $4,300,000 $195,000 $1,940,000 Accordingly, Harvey, Norton, and Randall met all three criteria. Bingham meets the reported-profit-or-loss test.
Vilo Corp. has estimated that total depreciation expense for the year ending December 31 will amount to $60,000, and that year-end bonuses to employees will total $120,000. In Vilo's interim income statement for the 6 months ended June 30, what is the total amount of expense relating to these two items that should be reported?
Costs and expenses other than product costs should be either charged to income in interim periods as incurred or allocated among interim periods based on the benefits received. The depreciation and the bonuses to employees clearly provide benefits throughout the year, and they should be allocated ratably to all interim periods. In the interim income statement for the 6 months ended June 30, the total amount of expense that should be recorded is $90,000 [($180,000 ÷ 12 months) × 6 months].
Which of the following information should be disclosed in the summary of significant accounting policies? Adequacy of pension plan assets relative to vested benefits. Guarantees of indebtedness of others. Criteria for determining which investments are treated as cash equivalents. Refinancing of debt subsequent to the balance sheet date.
Criteria for determining which investments are treated as cash equivalents. All significant accounting policies should be disclosed as an integral part of the financial statements. Disclosure of the policy for determining which investments are treated as cash equivalents is required.
The summary of significant accounting policies should disclose the Concentration of credit risk of all financial instruments by geographical region. Terms for convertible debt to be exchanged for common stock. Maturity dates of noncurrent debts. Criteria for determining which investments are treated as cash equivalents.
Criteria for determining which investments are treated as cash equivalents. All significant accounting policies should be disclosed as an integral part of the financial statements. The policy for determining which investments are treated as cash equivalents is such a policy.
On January 1, Year 1, an entity receives a payment of $20,000 for delivering a product to a customer at the end of Year 3. Based on the contract's terms, the performance obligation will be satisfied at a point in time (upon delivery of the product). The entity determined that (1) the contract includes a significant financing component and (2) a financing rate of 6% is an appropriate discount rate. What amount of interest expense and contract liability will be recognized in the entity's December 31, Year 2, financial statements?
Until the product is delivered to the customer, all payments received are recognized as a contract liability. Because the contract includes a significant financing component, interest expense is recognized using the effective interest method. The contract liability at the beginning of Year 2 equals $21,200 ($20,000 × 1.06). Thus, Year 2 interest expense equals $1,272 ($21,200 × 6%), and the contract liability at the end of Year 2 equals $22,472 ($21,200 × 1.06).
Financial statements must disclose significant risks and uncertainties. The required disclosures include Risk-reduction techniques that have successfully mitigated losses. Information about a significant estimate used to value an asset only if it is probable that the financial statement effect of a condition existing at the balance sheet date will change materially in the near term. Vulnerability due to a concentration if a near-term severe impact is at least reasonably possible. Quantified comparisons of the relative importance of the different businesses in which the entity operates.
Vulnerability due to a concentration if a near-term severe impact is at least reasonably possible. The current vulnerability due to concentrations must be disclosed if certain conditions are met. Disclosure is necessary if management knows prior to issuance of the statements that the concentration exists at the balance sheet date; it makes the entity vulnerable to a near-term severe impact; and such impact is at least reasonably possible in the near term. A severe impact may result from loss of all or a part of a business relationship, price or demand changes, loss of a patent, changes in the availability of a resource or right, or the disruption of operations in a market or geographic area.