CH 10 SB
Assume that Ellis Inc. reported basic earnings per share and cash dividends per share of $3.00 and $1.20, respectively, for Year 1 and that in Year 2, the firm had a 2-for-1 stock split. In the annual report for Year 2, earnings per share (EPS) and dividends per share (DPS) for Year 1 should be reported as:
EPS = $3.00 / 2 = $1.50 DPS = $1.20 / 2 = $0.60
Assume that Mason Inc. reported basic earnings per share and cash dividends per share of $6.00 and $2.10, respectively, for Year 1 and that in Year 2, the firm had a 3-for-1 stock split. In the annual report for Year 2, earnings per share (EPS) and dividends per share (DPS) for Year 1 should be reported as: Multiple choice question.
EPS = $6.00 / 3 = $2.00 DPS = $2.10 / 3 = $0.70
In geographic and "lines of business" segment disclosures, what five data items must be shown for each segment?
Identifiable assets Operating profit Sales to unaffiliated customers Depreciation and amortization expense Capital expenditures
Identify the correct statements about the method used for accounting mergers and acquisitions. Multiple select question.
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. The acquiring company records the acquisition of net assets at their fair value at the date of acquisition.
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
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 Blank______.
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:
average stockholders' equity working capital at year end earnings per share
Reports issued by accounting firms that clearly communicate to the user that the firms are not providing any form of assurance about the fairness of the financial statements are called (review/compilation/audit) reports.
compilation
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning:
depreciation methods. earnings per share of common stock. employee benefit (pension and postretirement) plans. basis of consolidation.
Most corporate annual reports present a summary of financial data for at least five years; items frequently included in the summary include:
dividends per share earnings as a percentage of sales average assets
The component that is treated as a reduction of net pension expense is: Multiple choice question.
expected return on plan assets.
Segment disclosures for publicly traded companies are generally required for:
geographic territories. major customers. lines of business.
In addition to expressing an audit opinion on the company's financial statements and related note disclosures, (independent/internal) auditors are required to express an opinion on the effectiveness of the company's (external/internal) control systems.
independent Internal
A business segment is a group of the firm's business activities that has a common denominator. The components of each business segment are identified and defined by management. Segments may reflect: Multiple select question.
industries served product line groups manufacturing processes organizational structure
The key components of net pension expense include:
interest cost of the projected benefit obligation. expected return on plan assets. service cost.
The Sarbanes-Oxley (SOX) Act of 2002 prohibited accounting firms from performing certain specific nonaudit services to their audit clients, including:
internal auditing services "expert" services financial information systems design and implementation
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
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning:
inventory valuation methods. goodwill and acquisition-related intangibles. income taxes. stock option and stock purchase plans.
When a company's financial report consists of immaterial misstatements or adjustments made in normal course of business, the company is required to simply revise the financial statements and notes that were previously filed with the Securities and Exchange Commission, and such revision is called a Blank______.
little r restatement
Most corporate annual reports present a summary of financial data for at least five years; items frequently included in the summary include:
long-term debt property, plant, and equipment (net) book value per share of common stock
Reasons for the difference between the statutory income tax rate and the company's effective tax rate may include the effects of:
non-U.S. income taxed in other countries. special treatment given to certain items for tax purposes. tax benefits associated with export sales. state income taxes.
In an independent auditor's report, the (introductory/scope/opinion) paragraph normally uses language such as "present fairly, in all material respects" and "in conformity with U.S. generally accepted accounting principles."
opinion
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
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.
responsibility External fairness
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 long-term debt. issuance of a large amount of capital stock
In an independent auditor's report, the (introductory/scope/opinion) paragraph describes the nature and extent of the auditors' work and refers to the need to obtain reasonable assurance about whether the financial statements are free of material misstatement.
scope
Some of the key financial shenanigans related to the income statement that have occurred in recent years (as identified by Schilit and Perler) include:
shifting current expenses to a later period. boosting income using one-time or unsustainable activities. recording revenue too soon.
Some of the key financial shenanigans related to the income statement that have occurred in recent years (as identified by Schilit and Perler) include:
shifting current expenses to a later period. recording bogus revenue. shifting current income to a later period.
The Sarbanes-Oxley (SOX) Act of 2002:
was aimed primarily to curtail the misbehavior of senior management of corporate entities. requires CEOs and CFOs to attest (in front of a notary) to the correctness of their company's financial statements. created the Public Company Accounting Oversight Board (PCAOB).
Sometimes events subsequent to the balance sheet date would have a material impact on the balance sheet or income statement. Which of these fall into that category and therefore should be described in the notes to the financial statements?
Issuance of a large amount of capital stock Restructuring of long-term debt Agreement to enter into a business combination
What does corporate governance encompass?
Issues concerning full and fair disclosure and the equitable treatment of stakeholders The strategies, behaviors, and actions of the company and its directors, managers, and employees A set of structures, control mechanisms, rules, and regulations that all directors, officers, and employees must follow
Examples of circumstances requiring departures from the standard auditors' report include all of the following except:
the inability to verify the company's ownership of an immaterial asset.
Common examples of accounting changes include:
those necessitated by FASB codification updates that require companies to adopt new accounting methods. switching from the FIFO to LIFO inventory cost-flow assumption.
An accounting firm provides a compilation report Blank______.
to clearly communicate to the user that the firm is not providing any form of assurance about the fairness of the financial statements
Registered securities can be traded publicly on a stock exchange or in the over-the-counter market. Firms that issue these securities are required to file an annual informational report with the SEC. This report is referred to as Form (10-K/10-40/10-Q).
10-K
How did the Sarbanes-Oxley Act of 2002 (SOX) lead to a dramatic decrease in Big R restatements being filed in recent years?
A more effective regulatory environment became the "new normal" in accounting and auditing. Businesses adopted more reliable methods of financial reporting. Businesses adopted tighter internal controls.
Identify the scenarios that describe contingencies and commitments that need to be disclosed in the annual report. Multiple select question.
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
What are some of the key note disclosures frequently reported regarding income taxes?
A reconciliation of the statutory income tax rate with the company's effective tax rate 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
When employees have an opportunity to purchase shares of their company's common stock at a discount from market value, what is this fringe benefit called? Multiple choice question.
A stock purchase plan
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
What circumstances frequently require departures from the standard auditors' report?
Basing the opinion in part on the work of another auditor A material change from a prior accounting period in the application of an accounting principle
When a company's financial report consists of material errors, it is required to completely reissue the full set of financial statements and related note disclosures that were previously filed with the Securities and Exchange Commission, and such reissue is called a Blank______.
Big R restatement
What led to the passage of the Sarbanes-Oxley Act in 2002?
Certain CEOs, CFOs, auditors, investors, investment bankers, and others were engaging in outright fraud. Greed and arrogance in the business sector contributed to a stock market boom during the late 1990s. Financial accounting and reporting processes were being stretched beyond the limits of general acceptability.
What requirements did the Dodd-Frank Act impose on companies?
Companies must disclose why they have chosen to have either the same person or separate people serve as the CEO and board chair. All board compensation committees must be comprised solely of independent directors. Companies must have periodic shareholder advisory votes on executive compensation (the so-called "say on pay" mandate).
During a particular year, if a firm acts as a guarantor of the indebtedness of another entity, the firm that is acting as the guarantor needs to disclose this information as what type of accounting change?
Contingencies and commitments
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
Copies of public documents filed by publicly traded corporations can be obtained either from the corporation or from the SEC, including the most recent: Multiple select question.
Form 10-K registration statement prospectus
The Wall Street Reform and Consumer Protection Act of 2010 is commonly referred to as the Dodd- (Oscar/Frank/George) Act.
Frank
What other type of audit is conducted in conjunction with the audit of financial statements?
Internal control audit
Identify a true statement regarding management's discussion and analysis (MD&A) provided in a company's annual report. Multiple choice question.
It discloses non-GAAP financial measures and key performance indicators used to assess the company's financial and operating results.
Identify the section of an annual report where the reporting entity discloses the non-GAAP financial measures and key performance indicators used to assess the entity's financial and operating results.
Management's discussion and analysis
What information about depreciation is usually disclosed in notes to the financial statements?
The company's method of reporting depreciation: straight-line, units-of-production, or sum-of-the-years'-digits. The range of useful lives assumed for broad categories of asset types
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
How should information about a company's stock purchase plan be reported in notes to the financial statements?
The potential dilution of equity should be disclosed. The nature of the plan should be disclosed. Stock purchase plans should be accounted for under the fair value method.
What is included in corporate governance?
The responsibilities of the board of directors and its various committees The company's structures, control mechanisms, rules, and regulations The company's sense of business ethics and social responsibility
What is included in corporate governance? Multiple select question.
The responsibilities of the board of directors and its various committees The company's structures, control mechanisms, rules, and regulations The company's sense of business ethics and social responsibility
Identify the correct statements about notes that are an integral part of the financial statements.
They contain important disclosures that are not contained in the financial statements themselves. They help users of the financial statements to make informed decisions and judgments.
What are some of the key requirements that the Dodd-Frank Act imposed on businesses?
To have clawback policies in place to recoup executive compensation in the event of financial reporting restatements To disclose the reasons a company has chosen to have either the same person or separate people serve as the CEO and board chair That executive compensation and golden parachute provisions must have periodic shareholder advisory votes
True or false: The notes are an integral part of the financial statement, because they contain disclosures that are not contained in the financial statements themselves.
True
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
While auditing an entity's financial statements, the auditor finds that the financial statements are misrepresented, misstated, and do not present fairly in all material respects the financial position and results of operations of the reporting entity. In such a scenario, the auditor will issue a(n) Blank______ opinion.
adverse
In 2004, a rather strict interpretation of Section 404 of SOX was implemented. As a result, all public registrants have since been required to:
include a separate "Management's Report on Internal Control over Financial Reporting" with all 10-K filings. thoroughly document, test, and take responsibility for the effectiveness of their accounting and financial reporting safeguards. include with all 10-K filings an independent auditors' opinion on the effectiveness of the company's internal control systems.