Try 10 focused Series 27 questions on Financial Reporting, with explanations, then continue with the full Securities Prep practice test.
Series 27 Financial Reporting questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.
| Item | Detail |
|---|---|
| Exam | FINRA Series 27 |
| Official topic | Function 1 - Financial Reporting |
| Blueprint weighting | 17% |
| Questions on this page | 10 |
Under U.S. GAAP, which statement best describes the financial statement presentation of a broker-dealer’s qualifying subordinated loan (subordinated borrowings)?
Best answer: C
Explanation: Subordinated borrowings remain debt under GAAP and are carried as a liability with interest accrued, even if they receive regulatory capital treatment.
A subordinated loan is still a borrowing under GAAP, so it is presented as a liability on the balance sheet. The broker-dealer accrues interest expense over the term of the borrowing. Regulatory net capital benefits do not change GAAP classification.
GAAP classification focuses on the substance of the instrument (a contractual obligation to repay) rather than its regulatory capital treatment. A broker-dealer’s subordinated loan is debt and is presented as a liability (often within subordinated liabilities/borrowings), with related interest expense recognized using accrual accounting over the period benefited. The fact that a properly approved subordination agreement can improve net capital under SEC Rule 15c3-1 does not convert the instrument into equity or allow it to be kept off the balance sheet.
A SEC-registered broker-dealer that clears and carries customer accounts has completed its fiscal year-end audit. As the FINOP, you are preparing the firm’s annual financial reporting package for submission to the SEC (with required copies to the firm’s designated examining authority).
Which action best aligns with annual broker-dealer reporting standards for SEC filings?
Best answer: A
Explanation: Annual SEC broker-dealer reporting is made on Form X-17A-5 and includes audited financial statements, required schedules, and the compliance/exemption reporting package with accountant reports.
Broker-dealers satisfy annual SEC financial reporting through Form X-17A-5 (the FOCUS report), which includes audited financial statements and required supporting schedules. For firms subject to the Customer Protection Rule, the annual filing package also includes the compliance report (or exemption report, if applicable) and the independent accountant’s audit and attestation reports.
For broker-dealers, the SEC’s annual financial reporting framework is built around Form X-17A-5 (commonly referred to as the FOCUS report). The annual filing is not just a quarterly unaudited submission; it must incorporate the year-end audited financial statements and the supporting schedules required for broker-dealer regulatory reporting (for example, schedules tied to net capital and customer protection obligations). For carrying firms, the annual package also includes the customer protection compliance reporting component (a compliance report or, if eligible, an exemption report) and the independent public accountant’s associated audit and attestation reports. This combination supports audit readiness, accurate regulatory reporting, and oversight of customer asset protection controls.
Which statement is most accurate regarding how a broker-dealer typically records a repurchase agreement (repo) for financial reporting purposes?
Best answer: A
Explanation: Repos are usually accounted for as secured financings rather than sales, so the collateral stays on the books and a repo payable (plus interest) is recorded.
For broker-dealer financial reporting, repos are typically accounted for as secured financings, not sales. The dealer continues to carry the securities because it retains the economic exposure, and it records a financing liability for the cash received. The financing cost is recognized through repo interest accruals over the term of the transaction.
A repurchase agreement economically functions like a short-term loan secured by securities: the dealer receives cash today and agrees to repurchase the same (or substantially the same) securities later at a higher price. Because the dealer generally retains the risks and rewards of the securities (price exposure and the obligation to repurchase), the transaction is typically recorded as a collateralized borrowing.
Operational/accounting touchpoints include:
Key takeaway: repos usually increase liabilities and interest expense rather than create trading gains or remove securities from the balance sheet.
An introducing broker-dealer’s FINOP identifies a material reconciling item during preparation of the monthly FOCUS report: a clearing firm fee accrual was omitted, overstating net income and net worth by approximately $250,000. The FINOP can correct the entry before the report is filed, but the issue indicates a control breakdown and may require a regulatory notification depending on the firm’s written supervisory procedures.
What is the best next step in the FINOP’s workflow?
Best answer: C
Explanation: The FINOP should ensure the correction is supported by documentation and routed for internal escalation/approval so any required regulatory notification is made before filing.
A FINOP’s next step is to document the issue and follow the firm’s escalation path, including involving Compliance and obtaining supervisory approval where required, before finalizing the filing. This preserves an audit trail for the correction and ensures any required regulatory notification is coordinated and consistent. Correcting the FOCUS without internal sign-off can bypass required controls.
When a material item is discovered during FOCUS preparation, the FINOP should do more than just fix the entry. The expected workflow is to (1) document what was found, why it occurred, and how it was corrected (supporting schedules, journal entry, and impact), and (2) escalate internally per WSPs—typically to Compliance and an appropriate supervisor/FINOP management—for review and sign-off on whether a regulatory notification is required and how it will be communicated. This keeps regulatory communications controlled and consistent and creates a defensible record that the firm identified, assessed, and remediated a potential control breakdown before filing.
The key takeaway is that internal escalation and documentation precede (and inform) the final filing decision when an issue may trigger notification obligations.
All amounts are in USD. An introducing broker-dealer has a $250,000 minimum net capital requirement under SEC Rule 15c3-1. On June 30, the firm’s parent contributes $300,000 of unregistered shares in a private company; the shares are subject to a 12-month lock-up, cannot be pledged, and there is no public market or reliable third-party pricing.
The controller recorded the contribution as “Investments—equity securities” at $300,000. If the investment is treated as allowable for net capital, net capital would be $520,000; if it is treated as non-allowable, net capital is $240,000 and the FOCUS filing is due tomorrow.
What is the FINOP’s best decision?
Best answer: A
Explanation: Because the shares are not readily marketable, they should not be relied on as allowable liquidity for net capital, leaving a deficiency that requires prompt escalation/notice.
For financial responsibility, the key question is whether the asset is readily convertible to cash at a predictable value. Restricted, unpriced private shares with transfer limits are not readily marketable and generally cannot be used as allowable liquidity to satisfy net capital. Treating the investment as non-allowable leaves the firm below its minimum, requiring prompt escalation/notification and remediation.
Net capital focuses on a firm’s ability to meet obligations with assets that can be converted to cash quickly and with reasonable price certainty. Securities that are restricted, lack a public market, and lack reliable independent pricing are not readily marketable; as a result, they generally must be treated as non-allowable (or effectively fully deducted) for net capital purposes rather than being relied upon to cure a deficiency.
Here, excluding the contributed private shares leaves net capital at $240,000 versus a $250,000 requirement. A FINOP should therefore (1) treat the contribution as non-allowable for the net capital computation, (2) escalate internally, and (3) make the appropriate prompt regulatory notification and obtain qualifying capital/liquidity before relying on the FOCUS filing.
The takeaway is that the liquidity/marketability of an asset—not its booked GAAP classification—drives whether it supports financial responsibility.
A FINOP is preparing the broker-dealer’s annual SIPC assessment filing. The worksheet requires the firm to support its assessment base (net operating revenues) by tying total revenues and any claimed exclusions/deductions to the general ledger/FOCUS revenue line items. During preparation, the FINOP finds that several revenue accounts are posted as net amounts (client commissions netted against payouts and rebates), and there is no sub-ledger or schedule that can break the net figures into gross revenues and related deductions.
Which is the primary risk/red flag the FINOP should identify?
Best answer: B
Explanation: If gross revenues and deductions cannot be supported and reconciled, the SIPC assessment base may be misstated.
SIPC assessments are generally based on net operating revenues and are expected to be supportable from the firm’s books and records and reconcilable to reported revenue line items. Netting revenues and related payouts without a reliable breakout prevents the FINOP from evidencing gross revenues and claimed exclusions/deductions. That creates the highest risk of filing an inaccurate SIPC assessment and paying the wrong amount.
The core control for SIPC assessments is that the assessment base (net operating revenues) must be derived from, and supportable by, the firm’s accounting records and reconciled to the revenue reporting used for regulatory financial reporting. When revenue accounts are recorded only as net amounts and the firm lacks a sub-ledger/schedule to separate gross revenues from items treated as exclusions/deductions, the FINOP cannot substantiate what was included in the assessment base.
A practical SIPC assessment support package typically includes:
The key takeaway is that unsupported netting is a books-and-records integrity issue that directly threatens SIPC assessment accuracy.
A FINOP is preparing the firm’s SIPC assessment filing. Which item below matches the type of information SIPC typically requires to determine the assessment amount due for the period?
Best answer: D
Explanation: SIPC assessments are generally based on reported gross revenues from the securities business, reduced by permitted exclusions, to compute the amount due.
SIPC assessments are tied to a member’s revenues from its securities business for the assessment period. The filing typically captures gross revenues and the specific exclusions/deductions permitted so the net assessment base and amount due can be calculated. This is conceptually different from net capital, reserve computations, or FOCUS financial reporting schedules.
SIPC assessment filings are designed to let SIPC calculate (and the firm to support) the assessment owed based on the firm’s revenue activity for the period. At a high level, the FINOP should expect to report gross revenues attributable to the securities business and then identify any allowable exclusions/deductions that reduce the assessment base, along with basic period/firm identifying information and the resulting payment due.
By contrast, Customer Protection Rule computations focus on the customer reserve/PAB reserve and segregated cash requirements, and Net Capital Rule schedules focus on liquid capital and operational charges. Those are separate regulatory frameworks and are not the core inputs used to determine the SIPC assessment amount.
A FINOP prepares a mid-month net capital computation for an introducing broker-dealer. The firm’s minimum net capital requirement is $250,000. Per the firm’s written procedures (based on SEC Rule 17a-11), if net capital falls below 120% of the minimum requirement, the firm must transmit notice to the SEC and its DEA (FINRA) within 24 hours by electronic means, and then provide a written notice within 2 business days signed by the FINOP.
Net capital components (USD):
| Item | Amount |
|---|---|
| Net worth | $900,000 |
| Less: non-allowable assets | ($430,000) |
| Less: haircuts | ($160,000) |
| Less: operational charges | ($20,000) |
Based on the computation, what is the appropriate regulatory notification action?
Best answer: B
Explanation: Net capital is $290,000, which is below 120% of $250,000 ($300,000), triggering the stated notice method, recipients, and signer.
Net capital equals $900,000 − $430,000 − $160,000 − $20,000 = $290,000. The early-warning threshold provided is 120% of $250,000, or $300,000, so the firm is below the trigger even though it still meets its minimum. The stem specifies the required recipients, transmission method, timing, and that the FINOP signs the written follow-up.
This question tests how a FINOP uses a simple net capital calculation to determine whether a regulatory notification is triggered and, if so, the timing and method.
First compute net capital from the components provided:
\[ \begin{aligned} \text{Net capital} &= 900{,}000 - 430{,}000 - 160{,}000 - 20{,}000\\ &= 290{,}000 \end{aligned} \]Then compare it to the early-warning level stated in the firm’s procedures: \(1.20 \times 250{,}000 = 300{,}000\). Because $290,000 is below $300,000, the firm must follow the described process: transmit notice within 24 hours by electronic means to the SEC and the DEA (FINRA), followed by a written notice within 2 business days signed by the FINOP. Meeting the minimum does not eliminate the early-warning notification requirement when the threshold is breached.
A carrying broker-dealer has been net capital compliant on its monthly FOCUS filings. To reduce costs, the CFO tells the FINOP the firm will file its annual financial statements prepared internally with a management certification and will not engage an independent auditor.
Which outcome is the MOST likely consequence of this decision?
Best answer: B
Explanation: Audited financial statements provide independent assurance that supports regulators’ confidence in the firm’s financial responsibility compliance.
Audited financial statements are required annual reporting for broker-dealers and are intended to provide independent assurance over the firm’s financial condition. That independent work supports regulatory confidence that the broker-dealer is meeting financial responsibility requirements (such as net capital and customer protection). Substituting management-prepared statements removes that assurance and typically results in a deficient filing and regulatory scrutiny.
Annual audited financial statements are a key control in the broker-dealer financial responsibility framework because they add independent, third-party credibility to what the firm reports. Through audit procedures, the auditor evaluates whether the financial statements are fairly stated and considers whether the broker-dealer’s processes and records support required regulatory assertions and schedules. Regulators rely on this independent assurance to increase confidence that the firm’s reported net worth, liabilities, and other amounts used in financial responsibility compliance are supported and not materially misstated.
If a firm files only internally prepared statements, regulators lose the independent verification element, which can lead to a deficient annual filing, requests for additional support, remediation expectations, and heightened oversight compared with an audit-backed submission.
A carrying broker-dealer is preparing its annual audited financial statements. The FINOP is also responsible for making sure customers receive appropriate high-level financial condition disclosure and can obtain the firm’s Statement of Financial Condition under Exchange Act Rule 17a-5.
Which practice is INCORRECT?
Best answer: D
Explanation: Rule 17a-5 contemplates furnishing the statement to customers on request, not website-only access.
Financial condition disclosures are part of customer protection because customers must be able to understand the firm’s financial condition and obtain the official Statement of Financial Condition when needed. Posting a statement online can supplement disclosure, but it does not replace the obligation to furnish the statement to customers upon request. Clear, non-misleading language helps prevent customer confusion about the firm’s financial strength.
A FINOP helps ensure that customer-facing financial condition disclosures are accurate, clear, and consistent with the firm’s audited financial statements. Under Exchange Act Rule 17a-5, broker-dealers have a customer disclosure framework that includes making the Statement of Financial Condition available and furnishing it when requested. This supports customer protection by giving customers access to reliable, auditable information and reducing the risk that customers rely on incomplete or misleading summaries. Website availability may be a helpful delivery channel, but it cannot be used to deny customers access to the statement when they request it.
Key takeaway: the control objective is customer access to clear, reliable financial condition information, not merely public posting.
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