ch 10 smartbook
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 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 circumstances frequently require departures from the standard auditors' report?
Uncertainties about a significant event that would have affected the financial statements if the outcome could have been estimated Substantial doubt about the entity's ability to continue as a going concern
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
Corporate governance encompasses:
a set of structures, control mechanisms, rules, and regulations that all directors, officers, and employees must follow. issues concerning full and fair disclosure and the equitable treatment of stakeholders.
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) _____ opinion.
adverse
Some of the key note disclosures frequently reported regarding income taxes include:
an explanation of the deferred taxes resulting from a variety of transactions that the company has entered into. a reconciliation of the statutory income tax rate with the company's effective tax rate.
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:
average stockholders' equity working capital at year end earnings per share
The Sarbanes-Oxley (SOX) Act of 2002 prohibited accounting firms from performing certain specific nonaudit services to their audit clients, including:
"expert" services financial information systems design and implementation internal auditing services
the Sarbanes-Oxley (SOX) Act of 2002 prohibited accounting firms from performing certain specific nonaudit services to their audit clients, including:
"expert" services internal auditing services financial information systems design and implementation
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
Identify the scenarios that describe contingencies and commitments that need to be disclosed in the annual report.
A commitment made to another entity to take an equipment on lease for several years into the future A potential loss that can arise from a pending lawsuit
What circumstances frequently require departures from the standard auditors' report?
A material change from a prior accounting period in the application of an accounting principle Basing the opinion in part on the work of another auditor
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?
Agreement to enter into a business combination Issuance of a large amount of capital stock Restructuring of long-term debt
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 _____.
Big R restatement
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 _____. Multiple choice question.
Big R restatement
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
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:
EPS = $6.00 / 3 = $2.00 DPS = $2.10 / 3 = $0.70
Identify the correct statements about the method used for accounting mergers and acquisitions.
If there is any goodwill recognized during acquisition, the goodwill needs to be evaluated annually for possible impairment losses. The acquiring company records the acquisition of net assets at their fair value at the date of acquisition. If the payment made for the acquisition of net assets is more than their fair value, the excess amount is recorded as goodwill.
Identify a true statement regarding management's discussion and analysis (MD&A) provided in a company's annual report.
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
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 property, plant, and equipment (net) long-term debt
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
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 under the ground of _____. Multiple choice question.
contingencies and commitments
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning:
earnings per share of common stock. basis of consolidation. depreciation methods. employee benefit (pension and postretirement) plans.
The component that is treated as a reduction of net pension expense is:
expected return on plan assets.
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
The Wall Street Reform and Consumer Protection Act of 2010 is commonly referred to as the Dodd- (Oscar/Frank/George) Act.
frank
Segment disclosures for publicly traded companies are generally required for:
geographic territories. lines of business. major customers.
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning
goodwill and acquisition-related intangibles. stock option and stock purchase plans. income taxes. inventory valuation methods.
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. include with all 10-K filings an independent auditors' opinion on the effectiveness of the company's internal control systems. thoroughly document, test, and take responsibility for the effectiveness of their accounting and financial reporting safeguards.
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
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
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:
issuance of a large amount of long-term debt. issuance of a large amount of capital stock sale of a significant part of the company's assets.
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 _____.
little r statement
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. state income taxes. tax benefits associated with export sales. special treatment given to certain items for tax purposes.
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 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:
product line groups organizational structure manufacturing processes industries served
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
Some of the key financial shenanigans related to the income statement that have occurred in recent years (as identified by Schilit and Perler) include:
recording bogus revenue. shifting current income to a later period. shifting current expenses to a later period.
Some of the key financial shenanigans related to the income statement that have occurred in recent years (as identified by Schilit and Perler) include:
recording revenue too soon. shifting future expenses to an earlier period. boosting income using one-time or unsustainable activities.
The Sarbanes-Oxley (SOX) Act of 2002:
requires CEOs and CFOs to attest (in front of a notary) to the correctness of their company's financial statements. was aimed primarily to curtail the misbehavior of senior management of corporate entities. created the Public Company Accounting Oversight Board (PCAOB).
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
The key components of net pension expense include:
service cost. expected return on plan assets. interest cost of the projected benefit obligation.
Some of the key financial shenanigans related to the statement of cash flows that have occurred in recent years (as identified by Schilit and Perler) include:
shifting financing cash inflows to the operating section. shifting normal operating cash outflows to the investing section. inflating operating cash flow using acquisitions or disposals.
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.
Some of the key provisions of the Dodd-Frank Act included the requirement:
that all board compensation committees must be comprised solely of independent directors. to have periodic shareholder advisory votes on executive compensation (the so-called "say on pay" mandate).
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.
Corporate governance encompasses:
the responsibilities of the board of directors and its various committees. issues concerning business ethics and social responsibility.
An accounting firm provides a compilation report _____.
to clearly communicate to the user that the firm is not providing any form of assurance about the fairness of the financial statements
Some of the key provisions of the Dodd-Frank Act included the requirement:
to disclose the reasons a company has chosen to have either the same person or separate people serve as the CEO and board chair. to have clawback policies in place to recoup executive compensation in the event of financial reporting restatements.
Some of the key provisions of the Dodd-Frank Act included the requirement:
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.
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
