SASB FSA CREDENTIAL LEVEL I EXAM
QUESTIONS AND ANSWERS
What were some of the findings of the investigation to what caused the Great
Depression? - Answer- Bankers and companies failed to fully disclose information
about the companies whose securities were being offered for sale, creating widespread
securities sales using false or misleading information.
What are the two purposes for the U.S. SEC's existence? - Answer- 1. to protect
investors
2. to influence corporate behavior
What is the "total-mix" concept? - Answer- A concept determined by a U.S. Supreme
Court ruling that notes information is deemed to be material if the information is
significantly likely to be considered by a reasonable investor in investment decisions.
This is a higher threshold than if it "might" be considered.
How can materiality be assessed? - Answer- materiality can be assessed by using a
probability and magnitude test, that determines the probability that an event may take
place and the magnitude of impact of the event on the company
What was the purpose in establishing the generally accepted accounting principles
(GAAP)? - Answer- To improve the consistency and comparability of financial reporting
disclosures
What is historical cost accounting? - Answer- A 1930's best practice for preparing
financial statements, which measures an assets value as the actual cost paid for the
asset at the time of purchase. Under this accuracy-focused approach, the original
nominal value is reported on the balance sheet even if the value of the asset changes
over time.
What is the definition of accounting from a decision-usefulness concept perspective? -
Answer- the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information.
What types of public companies are required to report under the International Financial
Reporting Standards (IFRS)? - Answer- Public companies domiciled in more than 140
jurisdictions. IFRS reporting is optional for listed companies in a range of jurisdictions,
including China, Japan, and the US.
What are environmental externalities? - Answer- Outcomes of some corporate activities
that impose costs on the rest of society (e.g. pollution)
, ***Chapter 2 Explanation Question: 1. Why was disclosure the basis of regulatory
reform in the wake of the 1930's stock market crash? - Answer- Disclosure was the
basis of regulatory reform in this defining period because disclosure is a means to
promote transparency, and transparency is essential to fostering sound and efficient
capital markets. As evidenced by the basis of the formation of the US SEC, regulated
corporate disclosure is an effective mechanism to protect investors, positively influence
corporate behavior, and enable informed investor decisions.
***Chapter 2 Explanation Question: 2. What is the relevance of "materiality" in the
context of disclosure, and how has the concept historically been interpreted? - Answer-
The concept of "materiality" traditionally focuses on information that impacts financial
performance and investor decision-making. In the wake of regulatory efforts to enhance
transparency from corporations, materiality was adopted to provide guidance to
reporting companies. "Materiality" dictates what companies are (and are not) obligated
to disclose.
***Chapter 2 Explanation Question: 3. How has the purpose of accounting changed
since the 1930s, and why did financial reporting move toward standardization? -
Answer- In early years, accounting practices centered around accurate recordkeeping
via historical cost accounting. The profession ultimately determined that accounting
exists to provide information for the purpose of making economic decisions, which can
include both historical records and forward-looking information. With higher levels of
standardized disclosure comes more consistent, comparable, and reliable information
across markets, allowing investors to equally assess and compare companies'
performance and prospects.
What is enterprise value? - Answer- The total value of a company, defined in terms of
its financing. It includes both the current share price (market capitalization) and the cost
to pay off debt (net debt, or debt minus cash).
What is EBITDA? - Answer- One of the most common non-GAAP measures, stands for
earnings before interest, taxes, depreciation, and amortization (EBITDA), which
provides an alternative measure of a company's profitability or cash flow not subject to
standardized financial accounting practices. Used alongside financial disclosure metrics
for situations such as a change in operating structure or the impacts of a merger or
acquisition.
When do companies use non-GAAP measures? - Answer- Companies use non-GAAP
measures to report adjusted earnings when the company believes an adjusted metric
provides a better understanding of the business to investors.
What are some examples of intangible market valuations? - Answer- - intellectual
capital
- customer relationships
- brand value
- other "soft" assets
QUESTIONS AND ANSWERS
What were some of the findings of the investigation to what caused the Great
Depression? - Answer- Bankers and companies failed to fully disclose information
about the companies whose securities were being offered for sale, creating widespread
securities sales using false or misleading information.
What are the two purposes for the U.S. SEC's existence? - Answer- 1. to protect
investors
2. to influence corporate behavior
What is the "total-mix" concept? - Answer- A concept determined by a U.S. Supreme
Court ruling that notes information is deemed to be material if the information is
significantly likely to be considered by a reasonable investor in investment decisions.
This is a higher threshold than if it "might" be considered.
How can materiality be assessed? - Answer- materiality can be assessed by using a
probability and magnitude test, that determines the probability that an event may take
place and the magnitude of impact of the event on the company
What was the purpose in establishing the generally accepted accounting principles
(GAAP)? - Answer- To improve the consistency and comparability of financial reporting
disclosures
What is historical cost accounting? - Answer- A 1930's best practice for preparing
financial statements, which measures an assets value as the actual cost paid for the
asset at the time of purchase. Under this accuracy-focused approach, the original
nominal value is reported on the balance sheet even if the value of the asset changes
over time.
What is the definition of accounting from a decision-usefulness concept perspective? -
Answer- the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information.
What types of public companies are required to report under the International Financial
Reporting Standards (IFRS)? - Answer- Public companies domiciled in more than 140
jurisdictions. IFRS reporting is optional for listed companies in a range of jurisdictions,
including China, Japan, and the US.
What are environmental externalities? - Answer- Outcomes of some corporate activities
that impose costs on the rest of society (e.g. pollution)
, ***Chapter 2 Explanation Question: 1. Why was disclosure the basis of regulatory
reform in the wake of the 1930's stock market crash? - Answer- Disclosure was the
basis of regulatory reform in this defining period because disclosure is a means to
promote transparency, and transparency is essential to fostering sound and efficient
capital markets. As evidenced by the basis of the formation of the US SEC, regulated
corporate disclosure is an effective mechanism to protect investors, positively influence
corporate behavior, and enable informed investor decisions.
***Chapter 2 Explanation Question: 2. What is the relevance of "materiality" in the
context of disclosure, and how has the concept historically been interpreted? - Answer-
The concept of "materiality" traditionally focuses on information that impacts financial
performance and investor decision-making. In the wake of regulatory efforts to enhance
transparency from corporations, materiality was adopted to provide guidance to
reporting companies. "Materiality" dictates what companies are (and are not) obligated
to disclose.
***Chapter 2 Explanation Question: 3. How has the purpose of accounting changed
since the 1930s, and why did financial reporting move toward standardization? -
Answer- In early years, accounting practices centered around accurate recordkeeping
via historical cost accounting. The profession ultimately determined that accounting
exists to provide information for the purpose of making economic decisions, which can
include both historical records and forward-looking information. With higher levels of
standardized disclosure comes more consistent, comparable, and reliable information
across markets, allowing investors to equally assess and compare companies'
performance and prospects.
What is enterprise value? - Answer- The total value of a company, defined in terms of
its financing. It includes both the current share price (market capitalization) and the cost
to pay off debt (net debt, or debt minus cash).
What is EBITDA? - Answer- One of the most common non-GAAP measures, stands for
earnings before interest, taxes, depreciation, and amortization (EBITDA), which
provides an alternative measure of a company's profitability or cash flow not subject to
standardized financial accounting practices. Used alongside financial disclosure metrics
for situations such as a change in operating structure or the impacts of a merger or
acquisition.
When do companies use non-GAAP measures? - Answer- Companies use non-GAAP
measures to report adjusted earnings when the company believes an adjusted metric
provides a better understanding of the business to investors.
What are some examples of intangible market valuations? - Answer- - intellectual
capital
- customer relationships
- brand value
- other "soft" assets
