FAR2:1 Notes to Financial Statements

What are the 8 types of accounting principles and methods that could be disclosed in the summary of significant accounting policies?

1. Basis of consolidation 2. Depreciation and Amortization Methods 3. Inventory Pricing 4. Use of estimates 5. Fiscal year definition 6. Special revenue recognition issues

What are the 4 items that the summary of specific accounting policies specifically does not include?

1. Composition and Dollar amounts of account balances 2. Details relating to changes in accounting principles 3. Dates of maturity and amounts of longterm debt 4. Yearly computation of depreciation, depletion and amortization

What are the 3 conditions that must be met for Concentrations to be disclosed?

1. Concentration exists at financial statement date 2. Concentration makes the entity vulnerable to risk of a near term severe impact 3. Reasonably possible that the events could cause a a near term severe impact

What are the 4 asset estimates are particularly sensitive to changes?

1. Inventory and equipment subject to technological obsolescence 2. Deferred Tax Asset valuation allowance (Contra Asset) 3. Capitalized computer software costs 4. Long term contracts

What are the 4 liability estimates are particularly sensitive to changes?

1. Loan valuation allowance 2. Litigation related obligations 3. Long term obligations (Pension benefits) 4. Long term contracts

What are the 3 items included in the Nature of Operations footnote?

1. Major products or services 2. Principal markets and their locations 3. Relative importance of each business unit

What are the 10 items typically disclosed in the notes?

1. Material information about significant asset/liability balances 2. Changes in SE 3. Marketable Securities disclosure 4. Fair value estimates 5. Contingency gains and losses 6. Contractual obligations which includes specific restrictions 7. Segment reporting 8. Subsequent events 9. Changes in principles 10. Pension plan description

What are the 2 major disclosures required in the summary of significant accounting policies?

1. Measurement bases used in preparing the financial statements 2. Specific principles and methods used during the period

What are the 3 types of risks and uncertainties that must be disclosed according to U.S. GAAP?

1. Nature of Operations 2. Estimates 3. Vulnerability due to concentrations

When is an estimate disclosed?

1. Significant management estimates should always be disclosed 2. When an estimate will have a material change in the near term, the change must be disclosed

A public entity sells steel for use in construction. One of its customers accounts for 43 percent of sales, and another customer accounts for 40 percent of sales. What should the entity disclose in its annual financial statements about theses two customers? a. The amount of the entity's revenue from each of the two customers. b. The financial condition of the two customers. c. The names of the two customers. d. The payment terms of accounts receivable due from each of the two customers.

A is correct Concentrations in the volume of business transacted with a particular customer should be disclosed in the notes to the financial statements because these two customers individually contribute to significant sales. Theses concentrations increase the risk of loss, and information stating that fact should be disclosed to the financial statement user.

Which of the following is not a criterion in determine whether to disclose information in the footnotes to the financial statements about vulnerability to a concentration? a. The concentration pertains to a specific geographic region. b. It is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term. c. The concentration exists as of the financial statement date. d. The concentration makes the entity vulnerable to the risk of a near-term severe impact.

A is correct Disclosure of vulnerability to concentration is required if all of the following criteria are met:- The concentration exists as of the financial statement date.- The concentration makes the entity vulnerable to the risk of a near-term severe impact.- It is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term.

Which of the following information should be included in Melay, Inc.'s summary of significant accountingpolicies? A. Property, plant, and equipment is recorded at cost with depreciation computed principally by thestraightlinemethod. B. During the current period, the Delay component was sold. C. Business segment sales are Alay $1M, Belay $2M, and Celay $3M. D. Future common share dividends are expected to approximate 60% of earnings.

A is correct. Computing depreciation principally by the straightlinemethod is a GAAP method ofdepreciation that should be described in the "summary of significant accounting policies."

Which of the following is not a disclosure requirement related to risks and uncertainties under U.S.GAAP? A. Disclosure of significant estimates when it is probable that the estimate will change in the near term, even if the effect of the change will be immaterial. B. Disclosure of an entity's major products or services and its principle markets. C. Disclosure of the use of estimates in the preparation of the financial statements. D. Disclosure of concentrations when it is reasonably possible that a concentration could cause a severe impact in the near term.

A is correct. Significant estimates should be disclosed when it is reasonably possible (not probable) that the estimate will change in the near term and that the effect of the change will be material. Immaterial items are not disclosed.

What is the purpose of information presented in notes to the financial statements? A. To provide disclosures required by generally accepted accounting principles. B. To correct improper presentation in the financial statements. C. To provide recognition of amounts not included in the totals of the financial statements. D. To present management's responses to auditor comments.

A is correct. The purpose of the notes are to provide disclosures required by GAAP. SFAC 5 para. 7

Which of the following should be disclosed in a summary of significant accounting policies? A. Basis of consolidation. B. Concentration of credit risk of financial instruments. C. Composition of plant assets. D. Adequacy of pension plan assets in relation to vested benefits.

A is correct. The summary of significant accounting policies is typically the first note providedafter the financial statements and will include components such as: measurement bases, accountingprinciples and methods, criteria, and policies such as basis of consolidation, depreciation methods,revenue recognition, etc.

Which of the following should be disclosed in a summary of significant accounting policies? A. Basis of profit recognition on longterm construction contracts. B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years. C. Depreciation expense. D. Composition of sales by segment.

A is correct. The summary of significant accounting policies should disclose policies. The only policy in this question is the "basis" of profit recognition on longterm construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies.

Which of the following would not be disclosed in the footnotes to the financial statements? a. Gross unrealized gains and losses on the company's marketable securities. b. Excerpts from the minutes of a board of directors' meeting in which a proposed acquisition was discussed but rejected. c. Descriptions of the company's pension plans. d. Material information regarding the company's reported inventory.

B is correct Information that is not pertinent to a company's financial statements is not included in the footnotes. Furthermore, even if this meeting took place during the subsequent events evaluation period, no disclosure would be necessary because no event actually occurred.

Which of the following is correct concerning financial statement disclosure of accounting policies? A. Disclosures should be limited to principles and methods peculiar to the industry in which the companyoperates. B. Disclosure of accounting policies is an integral part of the financial statements. C. The format and location of accounting policy disclosures are fixed by generally accepted accounting principles. D. Disclosures should duplicate details disclosed elsewhere in the financial statements.

B is correct. Disclosure of accounting policies (and all other disclosure also) is an integral part of the financial statements.

Which of the following information should be disclosed in the summary of significant accounting policies? A. Refinancing of debt subsequent to the balance sheet date. B. Guarantees of indebtedness of others. C. Criteria for determining which investments are treated as cash equivalents. D. Adequacy of pension plan assets relative to vested benefits.

C is correct. The method of determining which assets are considered to be cash equivalents is asignificant accounting policy.

What are the 4 common examples of a Concentrations?

Concentrations in 1. Customer, supplier, lender or grantor 2. Products, services or fundraising 3. Supplies such as materials or labor 4. Market

The summary of significant accounting policies should disclose the: A. Maturity dates of noncurrent debts. B. Terms for convertible debt to be exchanged for common stock. C. Concentration of credit risk of all financial instruments by geographical region. D. Criteria for determining which investments are treated as cash equivalents.

D is correct. The criteria for determining which investments are treated as cash equivalentswould be part of the summary of significant accounting policies.

Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements? A. Description of current year equity transactions. B. Summary of long term debt outstanding. C. Schedule of fixed assets. D. Revenue recognition policies.

D is correct. The summary of significant accounting policies should include "policies." The onlypolicy in the choices listed is the revenue recognition policies.

Which of the following is a required disclosure under IFRS but not under U.S. GAAP? I. Statement of compliance with applicable accounting principles. II. Disclosure of all significant accounting policies. III. Disclosure of judgements made in the preparation of the financial statements.

I and III IFRS requires that a statement of compliance with IFRS be included in the financial statements; U.S. GAAP does not require inclusion of a statement of compliance with U.S. GAAP. Both IFRS and U.S. GAAP require disclosure of all significant accounting policies. Likewise, both IFRS and U.S. GAAP require the disclosure of estimates made in the preparation of financial statements; however, IFRS also requires disclosure of judgements made (e.g., whether a financial asset is categorized as "held-to-maturity" or "available-for-sale") but U.S. GAAP does not require disclosure of judgements made.

What is the difference between GAAP and IFRS Risk and Uncertainty disclosure?

IFRS requirements are narrower and focus more on estimation

What is the 2 extra requirements of IFRS regarding notes to the financial statements?

IFRS requires an explicit and unreserved statement of compliance with IFRS in the notes 2. IFRS requires also requires disclosures of judgments and estimates made by management (GAAP only estimates)

Which of the following should be disclosed in a summary of significant accounting policies? I. Management's intention to maintain or vary the dividend payout ratio. II. Criteria for determining which investments are treated as cash equivalents. III. Composition of the sales order backlog by segment.

II only The criteria for determining which investments are treated as "cash equivalents" is a method ofaccounting policies that needs to be disclosed in the summary of significant accounting policies.

Where do companies present a description of all significant policies used in the financial statements?

This information is in either the first or second note of the FS and is title "Summary of Significant Accounting Policies"

Loan valuation allowances

Used to cover factors associated with potential loan losses; increases by the amount of the loan loss provision or decrease by the amount of net charge offs a quarter

When do vulnerabilities due to concentrations arise?

When an entity is exposed to risk of loss that could be mitigated through diversification

Deferred tax asset valuation account

the amount of DTA with more than a 50% probability of NOT being utilized in the future because there is sufficient future taxable income