CH08-Financial Accounting and Reporting

Question 1

Financial Statements are used by the board and executive leadership to accomplish ___

Answer 1

• Assess performance
• Set strategy and targets
• Reward staff

Question 2

Potential investors use F/S to

Answer 2

determine whether or not to invest

Question 3

Customers and Suppliers use F/S to

Answer 3

assess creditworthiness

Question 4

Treasury Professionals use F/S to determine the company’s:

Answer 4

• overall liquidity level
• ability to generate revenues and control costs
• Capital structure

Question 5

Which inventory method is not allowed under IFRS but is allowed under GAAP?

Answer 5

LIFO
GAAP allows LIFO
IFRS prohibits LIFO

Question 6

The SEC’s Financial Reporting Release No. 1 (FRR 1) officially recognizes accounting standards issued by

Answer 6

the FASB because the SEC’s philosophy is that the PRIVATE sector retains the initiative for establishing and improving accounting standards.

Question 7

Why is Accrual-Based Income more useful to EXTERNAL decision makers?

Answer 7

b/c it provides a better basis for assessing historical activity and predicting future earnings and cash flows

Question 8

Title of income statement

Answer 8

“For the Year Ended 2020” OR “Jan 1 - Dec 31, 2020” b/c it is measured over a SPAN of time

Question 9

What congressional act requires audited financial statements for publicly traded companies?

Answer 9

SOX

US Congress passed SOX in 2002.
SOX established a set of controls over audit procedures and disclosure requirements, and provided an administrative vehicle to implement and oversee them.

Question 10

Explain Dodd-Frank Act of 2010

Answer 10

• Brought consumer protection under a single authority
• US legislation in response to concerns about the financial services industry in wake of the global financial crisis of 2007-2009.
• Major impact on banks.

“Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010”

Question 11

Source or Use: Increase Asset

Answer 11

Use

Debit = Use

Question 12

Source or Use: Decrease Liability

Answer 12

Use

Debit = Use

Question 13

Source or Use: Increase Liability

Answer 13

Source

Credit = Source

Question 14

Source or Use: Decrease Asset

Answer 14

Source

Credit = Source

Question 15

Source or Use: Increase Depreciation

Answer 15

Source

CR Accum Depr = Source

Question 16

T Accounts of Source vs. Use

Answer 16

Debit = Use
Credit = Source
Contra (Flip) Depreciation

Question 17

What is a source of funds on the Statement of Cash Flows?

Answer 17

Increase in Liability

CR=Source

Question 18

Where do patent rights fall on Balance Sheet order?

Answer 18

Patent Rights are Intangible Assets, so after Fixed Assets

Question 19

What does an independent auditor’s opinion comment on?

Answer 19

whether F/S fairly reflect the firm’s financial position, are comparable to prior periods

(NOT financial fitness, NOT ongoing viability)

Question 20

Independent auditors perform which tasks

Answer 20

• check that accounting methods used conform to GAAP/IFRS
• all material items are included in F/S and disclosures
• examine internal controls

Question 21

What is the common financial measure that attempts to more accurately reflect cash operating profitability?

Answer 21

EBITDA

Question 22

T/F: EBITDA is NOT a US GAAP measure

Answer 22

True

Question 23

Lenders, creditors and investors usually pay additional attention to which financial statement?

Answer 23

Statement of Cash Flows

Question 24

What does the Statement of Cash Flows indicate to investors?

Answer 24

firm’s ability to generate cash flow to repay financial obligations as well as dividends to shareholders.

I.e. going concern

Question 25

Sources of funds:

Answer 25

● Decrease in an asset. The reduction of noncash assets produces funds via an increase in cash flow. For example, as accounts receivable are collected, cash flow increases while the accounts receivable balance is lowered.
● Increase in a liability. Liabilities represent financing, so an increase in a liability increases available funds. Examples include the purchase of inventory using trade credit or a bank loan.

Question 26

Uses of funds:

Answer 26

● Increase in an asset. A cash outflow occurs when investments in noncash assets occur. For example, a purchase of raw materials increases inventory but uses funds, assuming that the purchase is not made on trade credit.
● Decrease in a liability. Funds are used to repay liabilities. Examples include the use of cash to pay off a loan, redeem a long-term bond, or repay an accounts payable balance.

Question 27

Cash Flow Statement prep

Answer 27

The statement of cash flows begins with the operating activities section. As a first step, net income is adjusted for depreciation expense. Depreciation expense is added to net income since it is a non-cash expense. Next, any changes in accounts receivable, inventory, accounts payable, or operating accruals are accounted for. These items represent the cash inflows and outflows related to daily operations

Question 28

Define Functional Currency

Answer 28

Currency of the primary economic environment in which the entity operates.
Normally the majority of business activities are transacted in the Functional Currency.

Question 29

Under fair value hedge accounting, where are differences in value between the derivative and the hedged item recorded?

Answer 29

Income Statement

Question 30

Is a subsidiary’s functional currency the same as it’s home currency?

Answer 30

NO

Question 31

In Government and Not-for Profit organizations the focus of financial reporting is on:

Answer 31

Compliance and Accountability

Question 32

How do financial statements vary for Government and Not-For-profit companies from For Profit institutions?

Answer 32

Equity is replaced with Fund Balance or Net Worth