Try 10 focused Series 28 questions on Financial Reporting, with explanations, then continue with the full Securities Prep practice test.
Series 28 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 28 |
| Official topic | Function 1 - Financial Reporting |
| Blueprint weighting | 17% |
| Questions on this page | 10 |
An introducing broker-dealer’s FINOP is preparing the monthly FOCUS Part IIA filing. The trial balance ties to the general ledger, but the filing workpapers include a manual reclassification used in the report with no supporting memo or source document, and there is no dated evidence that the designated reviewer completed a supervisory review. The filing deadline is later that day. What is the best next step?
Best answer: C
Explanation: A FOCUS filing should not be submitted until material workpaper support and documented supervisory review exist for the reported amounts and manual adjustments.
The best next step is to complete the filing package before submission. For a FOCUS filing, a tie-out to the general ledger is necessary but not sufficient when a manual reclassification and reviewer evidence are missing.
A FOCUS filing must be supported by workpapers that show how reported amounts were derived and by evidence that supervisory review occurred before the filing was submitted. Here, the draft ties to the general ledger, but the file is still incomplete because a manual reclassification used in the report lacks support and there is no dated reviewer sign-off. The proper sequence is to document the basis for the reclassification, retain the supporting source or memo, obtain contemporaneous supervisory review evidence, and then file. If those controls cannot be completed by the deadline, the issue should be escalated under the firm’s filing procedures rather than cured after submission. A clean ledger tie-out alone does not make the regulatory submission adequately supported.
A fully disclosed introducing broker-dealer that claims the Rule 15c3-3 exemption reported month-end net capital only slightly above its minimum requirement. Two days before month-end, the owner wired $125,000, and the controller recorded it as a subordinated loan. The subordination agreement was not executed until the following week. FINRA asks the FINOP about the transaction. What is the primary regulatory red flag?
Best answer: A
Explanation: Without an executed subordination agreement at month-end, the owner loan may not support net capital, creating deficiency and filing-notification risk.
The key concern is regulatory capital, not merely documentation timing. If the subordinated loan was not properly executed by month-end, the firm may have counted capital it could not actually use, making the FOCUS filing and any required notifications potentially inaccurate.
This scenario points first to net capital and reporting accuracy. For an introducing broker-dealer under financing stress, a last-minute owner infusion is a classic red flag if the firm was only barely above its minimum requirement. A subordinated loan generally supports net capital only when the required agreement is properly in place; if it was not executed until after month-end, the amount may have been treated incorrectly in the month-end computation.
The FINOP should evaluate:
The late paperwork does create a documentation issue, but the more urgent regulatory risk is that the firm may have misstated its capital position.
A fully disclosed introducing broker-dealer that claims the Rule 15c3-3 exemption is preparing its FOCUS report. The FINOP must identify which month-end balance belongs on a firm asset line rather than as a customer-related or clearing-related balance.
Month-end balances
Which balance should be reported as the introducing firm’s asset?
Best answer: A
Explanation: A receivable for commissions already earned is the introducing firm’s own property and belongs on a firm asset line.
The key distinction is ownership. An introducing firm reports its own assets on FOCUS, while customer balances and carrying-firm settlement items are not mapped as the introducing firm’s assets. A commission receivable owed to the firm is therefore the reportable firm asset.
For an introducing broker-dealer, FOCUS classification turns on whether the item is the firm’s own asset or a balance tied to customer accounts or the carrying broker’s functions. Commissions earned by the introducing firm and due from the clearing broker are a firm receivable, so they belong on the introducing firm’s asset side.
Customer credit balances and customer margin debits are part of customer accounts carried by the clearing broker, not assets of the introducing firm. Stock borrowed by the clearing broker to complete customer deliveries is also part of the carrying and settlement function, not an introducing-firm asset. The main takeaway is to map only balances the firm actually owns to firm asset lines.
Which statement is most accurate about classifying an introducing broker-dealer’s revenue or expense item for financial statements and FOCUS line mapping?
Best answer: C
Explanation: A gain from selling office equipment is not part of normal securities business revenue, so it belongs outside ordinary operations and may require separate disclosure if material.
Items from the firm’s regular securities business belong in ordinary operations; unusual one-time gains or charges do not. A gain on selling office equipment is not commission or fee revenue, and a material unusual item should be shown separately rather than blended into recurring operating results.
The key issue is whether the item arises from the broker-dealer’s normal, recurring business activities. For an introducing broker-dealer, ordinary operating revenue usually comes from securities-related activities such as commissions or service fees, and ordinary operating expenses come from ongoing business costs. A one-time gain on selling office equipment does not come from core securities operations, so it should not be mapped as operating revenue. If the item is material, separate disclosure helps keep the financial statements and FOCUS presentation from overstating recurring performance.
A good FINOP judgment is to classify by economic substance first, then map the item to the appropriate non-operating or separately disclosed line. The closest trap is treating any item that improves income as ordinary revenue just because it increases earnings.
The FINOP of an introducing broker-dealer reviews this month-end account listing. The suspense balance has no supporting schedule and has been open for 12 business days. Which action is INCORRECT?
Cash Dr $148,000
Receivable from clearing broker Dr $36,500
Furniture and equipment Dr $11,000
Suspense account Dr $9,500
Accounts payable Cr $7,000
Accrued expenses Cr $18,000
Subordinated loan Cr $75,000
Commission revenue Cr $105,000
Best answer: A
Explanation: A balanced trial balance does not validate an unsupported suspense balance, which should be investigated promptly.
The incorrect action is delaying the review just because the trial balance balances. Equal debits and credits show arithmetic balance, but they do not prove that postings are accurate or that a suspense balance is supported.
A suspense account with no support is a control exception, even when the trial balance is in balance. For a FINOP, the key point is that arithmetic equality does not rule out posting errors, misclassifications, or unresolved items. An unsupported suspense balance should be researched promptly, traced to source activity, and either cleared or properly reclassified.
Appropriate follow-up includes:
The closest distraction is the idea that a balanced trial balance is enough; it is not enough when a suspense item remains unexplained.
An introducing broker-dealer did not carry customer accounts or hold customer funds or securities during the fiscal year and claimed an exemption under SEC Rule 15c3-3. Which statement correctly describes its annual report requirement?
Best answer: B
Explanation: An exempt introducing firm files its annual report within 60 calendar days of fiscal year-end, and that filing includes audited financial statements and an exemption report rather than a compliance report.
For an exempt introducing broker-dealer, the annual report is a year-end filing due within 60 calendar days after fiscal year-end. Its required components include audited financial statements and management’s exemption report, not a compliance report or the clearing firm’s reserve computation.
The key distinction is between an exempt broker-dealer and a non-exempt broker-dealer under Rule 15c3-3. A fully disclosed introducing firm that does not hold customer funds or securities generally files an annual report within 60 calendar days after fiscal year-end. For an exempt firm, that annual report includes the audited financial statements and management’s exemption report. A compliance report is used by firms that must comply with the customer protection rule rather than claim an exemption. Periodic FOCUS filing deadlines are separate from the annual report deadline, and a carrying firm’s reserve computation is not a required component of the introducing firm’s annual audited report. The key takeaway is to match exempt status with the exemption report and the 60-day annual filing deadline.
An introducing broker-dealer receives monthly allocations of rent, payroll, and technology costs from its parent. The draft audited financial statements show a year-end “due to affiliate” balance, but the notes do not explain the services provided, the allocation method, or how much expense came from the affiliate arrangement. What is the most likely consequence?
Best answer: D
Explanation: Without clear disclosure of the affiliate relationship and its financial effect, the auditor will typically require fuller footnote disclosure before concluding the statements are fairly presented.
Related-party transactions must be disclosed clearly enough for regulators and auditors to understand their nature and effect on the firm’s financial statements. When key details such as the allocation basis, services provided, and amounts involved are omitted, the most likely outcome is a demand for expanded disclosure, which can delay completion of the audit or filing.
The core issue is financial statement transparency for related-party transactions. In this scenario, the firm has recorded the affiliate charges and the payable, but the draft notes do not explain what the affiliate provided, how costs were allocated, or how much of the firm’s expenses arose from that arrangement. That makes it harder for auditors and regulators to evaluate whether the amounts are reasonable, consistently applied, and properly reflected in the statements.
For an introducing broker-dealer, the most likely consequence is not an automatic capital or customer protection problem. Instead, the auditor will usually require clearer related-party footnote disclosure and supporting documentation before being comfortable that the statements are fairly presented. The key takeaway is that inadequate disclosure is primarily a reporting and audit-completion issue unless separate facts show a valuation, capital, or custody problem.
An introducing broker-dealer that claims the Rule 15c3-3 exemption replaces a long-term subordinated borrowing with a large unsecured affiliate loan that can be called on short notice. The amount is significant relative to the firm’s working capital. Which function match is most appropriate for the FINOP?
Best answer: B
Explanation: A significant callable affiliate loan can abruptly reduce funding, so it is a material or unusual transaction that raises liquidity risk and warrants escalation and disclosure review.
The key issue is not customer protection status, record retention, or margin processing. A large callable affiliate loan changes the firm’s funding profile and creates clear liquidity risk, so the FINOP should treat it as a material or unusual transaction for escalation and possible disclosure.
In Financial Reporting, the FINOP must identify transactions that materially change the firm’s risk profile, not just its bookkeeping classification. Here, the firm replaced stable financing with a large unsecured affiliate loan that can be called on short notice. Because the amount is significant relative to working capital, the arrangement creates liquidity risk: the firm could lose a major funding source quickly.
Useful risk clues are:
Those facts make the transaction material or unusual and support escalation and disclosure review. It does not, by itself, mean the firm loses its customer protection exemption or turn into a margin-processing issue.
While reviewing the introducing broker-dealer’s draft monthly FOCUS, the FINOP sees this mapping in the workpapers:
GL 1365 Due from affiliate for shared rent and payroll $48,000
Mapped to: Receivable from brokers, dealers, and clearing organizations
Net capital treatment: allowable
The balance is unsecured and has been outstanding for 45 days. Which action best aligns with proper FOCUS classification and reporting?
Best answer: B
Explanation: An unsecured affiliate receivable should not be treated as an allowable broker-dealer or clearing receivable, so it must be reclassified and deducted from net capital.
The issue is a classification error, not just collectibility. An unsecured due from affiliate is not the same as a receivable from brokers, dealers, or clearing organizations, and treating it as allowable would overstate net capital and misstate the balance sheet on the FOCUS.
FOCUS reporting depends on accurate line mapping from the general ledger to both the statement of financial condition and the net capital computation. Here, the balance is an unsecured receivable from an affiliate for shared overhead, so classifying it as a broker-dealer or clearing receivable is improper. For regulatory capital purposes, unsecured receivables of this type are generally non-allowable assets, so leaving the balance as allowable would overstate net capital.
The proper response is to correct the books-and-records mapping before filing:
The key takeaway is that a misclassified asset can distort both financial condition and regulatory capital, even if management expects to collect it.
An introducing broker-dealer is preparing its FOCUS filing. The trial balance shows a commission receivable control account of $86,400. The FINOP reviews the supporting records below:
Exhibit: Month-end support
Commission receivable aging total $82,900
Unidentified receivable suspense $3,500
General ledger control balance $86,400
Before relying on the reported $86,400 balance for filing purposes, which evidence is necessary?
Best answer: D
Explanation: The FINOP must be able to tie the control account to the sub-ledger and document the reconciling suspense amount before relying on the filed balance.
The key issue is whether the general ledger balance is supported by detailed records. Here, the control account exceeds the receivable aging by $3,500, so the FINOP needs a reconciliation to the sub-ledger and documentation for that suspense difference before using the balance in a filing.
For filing purposes, a FINOP cannot rely on a control account balance unless it is supported by underlying ledger or sub-ledger evidence. In the exhibit, the commission receivable control account is $86,400, while the aging totals $82,900. That creates a reconciling difference of $3,500.
The needed support is:
Without that reconciliation, the reported receivable balance is not adequately supported for FOCUS reporting. A cash statement, expense aging, or one invoice may provide partial information, but none proves the full ledger balance is accurate and complete.
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