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10 Cards in this Set

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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.


Adequacy of pension plan assets relative to vested benefits.


c.


Guarantees of indebtedness of others.


d.


Criteria for determining which investments are treated as cash equivalents.

Explanation


Choice "d" is correct. The method of determining which assets are considered to be cash equivalents is a significant accounting policy.


Choice "a" is incorrect. Debt refinancing would be disclosed in a separate indebtedness note.


Choice "c" is incorrect. Guarantees of other entity's indebtedness would be disclosed in a separate commitments and contingencies note.


Choice "b" is incorrect. Information about pension plan assets and pension plan liabilities is disclosed in a separate pensions note.

What is the purpose of information presented in notes to the financial statements?


a.


To provide recognition of amounts not included in the totals of the financial statements.


b.


To present management's responses to auditor comments.


c.


To correct improper presentation in the financial statements.


d.


To provide disclosures required by generally accepted accounting principles.

Explanation


Choice "d" is correct. Information presented in notes to the financial statements have the purpose of providing disclosures required by generally accepted accounting principles. SFAC 5 para. 7

Which of the following should be disclosed in a summary of significant accounting policies?


a.


Basis of profit recognition on long-term construction contracts.


b.


Composition of sales by segment.


c.


Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.


d.


Depreciation expense.

Explanation


Choice "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 long-term construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies.


Choice "c" is incorrect. The future minimum lease payments should be disclosed, but not in the summary of significant accounting policies.


Choice "d" is incorrect. Depreciation expense should certainly be disclosed, but not in the summary of significant accounting policies.


Choice "b" is incorrect. The composition of sales by segment should be disclosed, but not in 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.


Schedule of fixed assets.


b.


Summary of long-term debt outstanding.


c.


Revenue recognition policies.


d.


Description of current year equity transactions.


Explanation


Choice "c" is correct. The summary of significant accounting policies should include "policies." The only policy in the choices listed is the revenue recognition policies.


Choice "d" is incorrect. A description of current year equity transactions is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies.


Choice "b" is incorrect. A summary of long-term debt outstanding is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies.


Choice "a" is incorrect. A schedule of fixed assets is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies.

Which of the following is correct concerning financial statement disclosure of accounting policies?


a.


Disclosure of accounting policies is an integral part of the financial statements.


b.


The format and location of accounting policy disclosures are fixed by generally accepted accounting principles.


c.


Disclosures should be limited to principles and methods peculiar to the industry in which the company operates.


d.


Disclosures should duplicate details disclosed elsewhere in the financial statements.

Explanation


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


Choice "c" is incorrect. For disclosure of accounting policies, disclosure shouldnot be limited to principles and methods peculiar to the industry in which the company operates. All material accounting policies should be disclosed.


Choice "b" is incorrect. For disclosure of accounting policies, the format and location of accounting policies are not fixed by GAAP. Accounting policy disclosures are normally Note 1, but that is a (reasonable and very general) practice and not a "rule." It does make sense to disclose the "why" before the "what."


Choice "d" is incorrect. Disclosure of accounting policies should not duplicate details disclosed elsewhere in the financial statements.

Dean Co. acquired 100% of Morey Corp. prior to Year 3. During Year 3, the individual companies included in their financial statements the following:


DeanMorey



Officers' salaries$ 75,000$ 50,000



Officers' expenses20,00010,000



Loans to officers125,00050,000



Intercompany Sales150,000--


What amount should be reported as related party disclosures in the notes to Dean's Year 3 consolidated financial statements?


a.


$150,000


b.


$155,000


c.


$175,000


d.


$330,000

Explanation


Choice "c" is correct. The only related party transaction that would require disclosure (assuming that all amounts are material to the financial statements) would be the loans to officers since they are outside of the ordinary course of business.


Choices "a", "b", and "d" are incorrect. Officers' salaries, officers' expenses and intercompany sales (between entities included in a consolidated set of financial statements) are all transactions in the ordinary course of business and generally would not require disclosure.

John Co. acquired 100% of George Corp. prior to Year 3. During Year 3, the individual companies included in their financial statements the following:


JohnGeorge



Officers' salaries$ 75,000$ 50,000



Officers' expenses20,00010,000



Loans to officers125,00050,000


What amount should be reported as related party disclosures in the notes to John's Year 3 consolidated financial statements under IFRS?


a.


$155,000


b.


$125,000


c.


$175,000


d.


$300,000


Explanation


Choice "d" is correct. Under IFRS, loans to officers and key management compensation would require disclosure:



Consolidated officers' salaries$ 125,000



Consolidated loans to officers175,000



Total$ 300,000


The officers' expenses are not related party transactions because these are incurred in the ordinary course of business and are not considered to be compensation.


Choice "b" is incorrect. Both the officers' salaries and the loans to officers must be reported as related party transactions.


Choice "a" is incorrect. Both the officers' salaries and the loans to officers must be reported as related party transactions. The officers' expenses are not related party transactions because these are incurred in the ordinary course of business and are not considered to be compensation.


Choice "c" is incorrect. Both the officers' salaries and the loans to officers must be reported as related party transactions.

Which of the following is not a disclosure requirement related to risks and uncertainties under U.S. GAAP?


a.


Disclosure of concentrations when it is reasonably possible that a concentration could cause a severe impact in the near term.


b.


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.


c.


Disclosure of the use of estimates in the preparation of the financial statements.


d.


Disclosure of an entity's major products or services and its principle markets.


Explanation


Choice "b" 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.


Choice "d" is incorrect. This is a disclosure requirement.


Choice "c" is incorrect. This is a disclosure requirement.


Choice "a" is incorrect. This is a disclosure requirement.

Dex Co. has entered into a joint venture with an affiliate to secure access to additional inventory. Under the joint venture agreement, Dex will purchase the output of the venture at prices negotiated on an arms'-length basis. Which of the following is(are) required to be disclosed about the related party transaction?


I.


The amount due to the affiliate at the balance sheet date.


II.


The dollar amount of the purchases during the year.


a.


II only.


b.


I only.


c.


Neither I nor II.


d.


Both I and II.


Explanation

Explanation


Choice "d" is correct. For a related party transaction, both the amount due to the affiliate and the dollar amount of the purchases during the year must be disclosed. In disclosure questions, if you are not sure, disclose the most rather than the least.


Choice "b" is incorrect. For a related party transaction, both the amount due to the affiliate and the dollar amount of the purchases during the year must be disclosed.


Choice "a" is incorrect. For the related party transaction, both the amount due to the affiliate and the dollar amount of the purchases during the year must be disclosed.


Choice "c" is incorrect. For the related party transaction, both the amount due to the affiliate and the dollar amount of the purchases during the year must be disclosed.

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?


a.


The names and ownership percentages of the other stockholders in the investee company.


b.


The reason for the company's decision to invest in the investee company.


c.


Whether the investee company is involved in any litigation.


d.


The company's accounting policy for the investment.

Explanation


Choice "d" is correct. A company owning a 22% investment in another company in which the investment is accounted for using the equity method is considered as having "significant influence" over the company and is required to disclose the company's accounting policy for the investment.


Choices "a", "b", and "c" are incorrect. A company owning a 22% investment in another company in which the investment is accounted for using the equity method is not required to make any of the listed disclosures.