Question 1

All entities with which a company has long-term relationship are consolidated.

Accepted Answer

Not all entities with which a company has a long-term relationship are consolidated. Only those over which the company has control, typically through ownership of more than 50% of the voting rights, are required to be consolidated in the financial statements.

Question 2

Pensions can be either defined-benefit or defined-contribution plans.

Accepted Answer

Pensions can indeed be either defined-benefit or defined-contribution plans. Defined-benefit plans promise a specific payout in retirement based on various factors, such as years of service and salary history, while defined-contribution plans depend on how much an individual contributes to the plan and the performance of investments.

Question 3

Disclosures are meant to facilitate comparisons between entities that select different measurement attributes for similar assets and liabilities.

Accepted Answer

This statement is true. Disclosures, particularly in financial statements, are a way to provide information that allows for meaningful comparisons between entities, even if they use different methods to measure the same assets and liabilities. This transparency can help investors and other stakeholders make informed decisions.

Question 4

Comprehensive income is the sum of all nonowner-related changes in equity.

Accepted Answer

Comprehensive income includes all changes in equity other than those resulting from owner contributions and distributions (such as dividends). This includes items such as gains and losses from investments, changes in foreign currency translation adjustments, and adjustments for certain pension and benefit plans.

Question 5

A cash equivalent is always short-term.

Accepted Answer

A cash equivalent is defined as a short-term investment that can be quickly converted into cash without significant risk of loss. Therefore, by definition, it is always short-term.

Question 6

The SEC requires that stock that has mandatory redemption requirements or has redemption considerations that are out of the issuer's control be shown outside of the stockholders' equity section. .

Accepted Answer

This is true as per the SEC's requirement. Such stock needs to be separately presented as a liability outside of the stockholders' equity section.

Question 7

Derivatives can be recorded as either an asset or liability.

Accepted Answer

Derivatives can be recorded as an asset or liability, depending on whether the value of the derivative is positive or negative. If the derivative has a positive value, it would be recorded as an asset, and if it has a negative value, it would be recorded as a liability.

Question 8

Long-term debt can be audited without testing controls.

Accepted Answer

Auditing long-term debt typically involves assessing the effectiveness of internal controls over the reporting and management of such debt. Without testing these controls, an auditor cannot fully assess the risk of material misstatement and ensure the accuracy of the reported long-term debt figures.

Question 9

Pensions are always defined-benefit plans.

Accepted Answer

Pensions can be either defined-benefit plans or defined-contribution plans. Defined-benefit plans guarantee a specific amount of retirement income based on factors like salary and years of service, while defined-contribution plans depend on the amount of contributions and investment performance.

Question 10

Kiting involves inter-bank transfers.

Accepted Answer

Kiting is a fraudulent practice of making use of the time needed for a check to clear to generate additional funds. It involves writing a check from one account and depositing it into another, overstating the account's balance, and then withdrawing the funds before the check clears in the first account. This process involves inter-bank transfers to move funds between accounts. Hence, the statement is true.

Question 11

Disclosures are meant to facilitate comparisons between entities that select similar measurement attributes for similar assets and liabilities.

Accepted Answer

Disclosures are meant to facilitate comparisons between entities that select different measurement attributes for similar assets and liabilities, providing transparency and context for the financial statements.

Question 12

Disclosures provide users the means to understand how changes in fair values affect cash flows.

Accepted Answer

Disclosures can provide users with information about fair values and their impact on cash flows, allowing for a better understanding of financial statements.

Question 13

Purchasing preferred stock is an equity investment.

Accepted Answer

Preferred stock represents ownership in a company, making it an equity investment.

Question 14

If a client is in violation of a debt covenant, the debt is shown as short-term.

Accepted Answer

If a client is in violation of a debt covenant, it means they are not meeting the requirements set out in their loan agreement. This can trigger a default, which typically makes the debt due immediately. Therefore, it would be classified as short-term debt.

Question 15

Typical debt disclosures include future cash payments for each of the five years following the latest balance sheet date.

Accepted Answer

This statement is true as per the guidelines of accounting standards. The disclosure of future cash payments for each of the five years is known as the maturity analysis of debt and is a common practice in financial reporting.

Question 16

Proof of cash detects deposits not recorded in the books.

Accepted Answer

Proof of Cash is a process that reconciles the organization's cash balances with the bank statement and detects any discrepancies. It also reveals any deposits made via bank lockbox that have not been recorded in the organization's books, helping to prevent fraud or errors.

Question 17

Post-employment benefits refer to health benefits for retired employees.

Accepted Answer

The answer of Post-employment benefits refer to health benefits for...

Question 18

Commercial paper is considered a debt investment.

Accepted Answer

Commercial paper is a type of short-term debt instrument typically issued by companies to raise funds for operational or other short-term financing needs. Therefore, it can be considered a debt investment.

Question 19

FASB codification section 712 addresses pension obligations.

Accepted Answer

FASB Codification Section 712 addresses Compensation—Nonretirement Postemployment Benefits, not pension obligations. Pension obligations are primarily addressed in ASC 715, Compensation—Retirement Benefits.

Question 20

Auditing the consolidation process is not required if the equity method is used.

Accepted Answer

Auditing the consolidation process is still necessary even if the equity method is used. While the equity method doesn't require a full consolidation of financial statements, it still involves significant judgment and estimation in determining the appropriate accounting for the investment. As a result, auditors need to assess the accuracy and completeness of these methods, including reviewing the underlying assumptions and calculations behind the equity method.

Quiz 15: Assets, Liabilities and Equity Related to the Financing Cycle