Question Answer Chapter 2 FInancial Reporting

Financial Reporting Analysis

CH.2

QUESTIONS & Answers 2- 1. a. Unqualifed opinion with eplanator! para"raph #. Unqualifed opinion with eplanator! para"raph $. Unqualifed opinion d. Ad%erse opinion e. Qualifed opinion 2- 2. The responsi#ilit! responsi#ilit! or the preparation preparation and inte"rit! o fnan$ial state'ents rests with 'ana"e'ent. The auditor si'pl! ea'ines the' or airness( $onor'it! with )AA*( and $onsisten$!. 2- +. The #asi$ purpose o the inte"rated dis$losure dis$losure s!ste' is to a$hie%e unior'it! #etween annual reports and SE, flin"s. It is hoped that this will i'pro%e the qualit! o dis$losure and li"hten the dis$losure load or the $o'panies reportin".  2- . The eplanator! eplanator! para"raphs eplain i'portant $onsiderations $onsiderations that the re%iewer o the fnan$ial state'ents should #e aware o. An ea'ple would #e a dou#t as to "oin" $on$ern a#ilit!.  2- . A re%iew $onsists prin$ipall! prin$ipall! o inquiries o $o'pan! personnel and anal!ti$al pro$edures applied to fnan$ial data. It is su#stantiall! less in s$ope than an ea'ination in a$$ordan$e with "enerall! a$$epted auditin" standards. 2- /. No. The a$$ountant0s report will indi$ate that the! are not aware o an! 'aterial 'odif$ations that should #e 'ade to the fnan$ial state'ents in order or the' to #e in $onor'it! with "enerall! a$$epted a$$ountin" prin$iples( and the report will indi$ate departures ro' "enerall! a$$epted a$$ountin" prin$iples. 2- . The a$$ountant does not epress an opinion or an! other or' o assuran$e with a $o'pilation. 2- . No. So'e state'ents ha%e not #een audited( re%iewed( or $o'piled. These state'ents are presented without #ein" a$$o'panied #! an a$$ountant0s report. 2- 3. 4alan$e Sheet The purpose o a #alan$e sheet is to show the fnan$ial position o an a$$ountin" entit! as o a parti$ular date. In$o'e State'ent The in$o'e state'ent su''ari5es the results o operations or an a$$ountin" period. State'ent o ,ash 6lows The state'ent o $ash 7ows 7 ows details the in7ows and out7ows o $ash durin" a spe$ifed period o ti'e. 2-18. 6ootnotes 9notes: in$rease the ull dis$losure o the state'ents #! pro%idin" inor'ation on in%entor! and depre$iation 'ethods( su#sequent e%ents( $ontin"ent lia#ilities( et$.  2-11. ,ontin"ent lia#ilities are dependent on an o$$urren$e to deter'ine i pa!'ent will #e ne$essar!. ;ia#ilities ro' lawsuits are dependent on the out$o'e o the $ases< the! thereore represent $ontin"ent lia#ilities.

2-12. a( $. 2-1+. A pro! is the soli$itation sent to sto$=holders or the ele$tion o dire$tors and or the appro%al o other $orporation a$tions. The pro! represents the shareholder authori5ation re"ardin" the $astin" o that shareholder>s %ote.  2-1. A su''ar! annual report is a $ondensed annual report that o'its 'u$h o the fnan$ial inor'ation in$luded in a t!pi$al annual report.  2-1. The fr' 'ust in$lude a set o ull! audited state'ents and other required fnan$ial dis$losures in the pro! 'aterials sent to shareholders. The 18-? is also a%aila#le to the pu#li$. 2-1/. There is t!pi$all! a su#stantial redu$tion in nonfnan$ial pa"es and fnan$ial pa"es. The "reatest redu$tion in pa"es is usuall! in the fnan$ial pa"es.  2-1. ,ash 7ows ro' operatin" a$ti%ities( $ash 7ows ro' in%estin" a$ti%ities( and $ash 7ows ro' fnan$in" a$ti%ities. 2.1. The in$o'e state'ent and the state'ent o $ash 7ows. The in$o'e state'ent des$ri#es in$o'e #etween two #alan$e sheet dates. The state'ent o $ash 7ows des$ri#es $ash 7ows #etween two #alan$e sheet dates.  2-13. Assets( lia#ilities( and owners> equit! 2-28. No. ,ash di%idends are paid with $ash. This redu$es the $ash a$$ount and the retained earnin"s a$$ount.  2-21. 6ootnotes are an inte"ral part o fnan$ial state'ents. A detailed re%iew o ootnotes is a#solutel! essential in order to understand the fnan$ial state'ents.  2-22. A*4 Opinion No. 22 requires dis$losure o a$$ountin" poli$ies as the frst ootnote to fnan$ial state'ents or @ust prior to the ootnotes.  2-2+. The! are inter$han"ea#le ter's reerrin" to ideals o $hara$ter and $ondu$t.  These ideals( in the or' o $odes o $ondu$t( urnish $riteria or distin"uishin" #etween ri"ht and wron". 2-2. ;aw $an #e %iewed as the 'ini'u' standard o ethi$s.  2-2. Assets  ;ia#ilities B Sto$=holders0 equit! 9$apital:.  2-2/. The s$he'e o the dou#le-entr! s!ste' re%ol%es around the a$$ountin" equationC Assets  ;ia#ilities B Sto$=holders0 Equit! Dith dou#le-entr!( ea$h transa$tion is re$orded with the total dollar a'ount o the de#its equal to the total dollar a'ount o the $redits. Ea$h transa$tion ae$ts two or 'ore asset( lia#ilit!( or owners0 equit! a$$ounts 9in$ludin" the te'porar! a$$ounts:.  2-2. a. Assets( lia#ilities( and sto$=holders0 equit! a$$ounts are reerred to as per'anent a$$ounts #e$ause the #alan$es in these a$$ounts $arr! orward to the

net a$$ountin" period. #. Fe%enue( epense( "ain( loss( and di%idend a$$ounts are not $arried into the net period. These a$$ounts are $losed to Fetained Earnin"s.  The! are reerred to as te'porar! a$$ounts. 2-2. 4e$ause the e'plo!ee wor=ed in the period @ust ended( the salar! 'ust #e 'at$hed to that period0s re%enue. 2-23. Gost o the a$$ounts are not up to date at the end o the a$$ountin" period.  These a$$ounts need to #e ad@usted so that all re%enues and epenses are re$o"ni5ed and the #alan$e sheet a$$ounts ha%e a $orre$t endin" #alan$e. 2-+8. ,o'panies use a nu'#er o spe$ial @ournals to i'pro%e re$ord =eepin" eH$ien$! that $ould not #e o#tained #! usin" onl! the "eneral @ournal. 2-+1. The SE, requires orei"n re"istrants to $onor' to U.S. )AA*( either dire$tl! or #! re$on$iliation. This approa$h presents a pro#le' to the U.S. Se$urities e$han"es( su$h as the NSE. This is #e$ause the U.S. standards are per$ei%ed to #e the 'ost strin"ent. This puts e$han"es li=e the NSE at a $o'petiti%e disad%anta"e with orei"n e$han"es that are per$ei%ed to ha%e lower standards. 2-+2. Sole *roprietorship A sole proprietorship is a #usiness entit! owned #! one person. *artnership A partnership is a #usiness owned #! two or 'ore indi%iduals. ,orporation A $orporation is a le"al entit! in$orporated in a parti$ular state. Ownership is e%iden$ed #! shares o sto$=. 2-++. The use o insider inor'ation $ould result in a#nor'al returns. 2-+. In an eH$ient 'ar=et the 'ethod o dis$losure is not as i'portant as whether or not the ite' is dis$losed.  2-+. A#nor'al returns $ould #e a$hie%ed i the 'ar=et does not ha%e a$$ess to rele%ant inor'ation or i raudulent inor'ation is pro%ided. 2-+/. *ur$hase J Dith the pur$hase 'ethod the fr' doin" the a$quirin" re$ords the identifa#le assets and lia#ilities at air %alue at the date o a$quisition. The dieren$e #etween the air %alue o the identifa#le assets and lia#ilities and the a'ount paid is re$orded as "oodwill 9an asset:.  2-+. ,onsolidated state'ents re7e$t an e$ono'i$( rather than a le"al( $on$ept o the entit!. 2-+. The fnan$ial state'ents o the parent and the su#sidiar! are $onsolidated or all 'a@orit!-owned su#sidiaries unless $ontrol is te'porar! or does not rest with the 'a@orit! owner. 2-+3. The SE, requires that a $op! o the $o'panies $ode o ethi$s #e 'ade a%aila#le #! flin" and ehi#it with its annual report( or #! pro%idin" it on the $o'pan!>s Internet De# Site.