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CPA EXAM PREP FAR

Accounting Standards and Conceptual Framework


SEC has the legal authority to establish US GAAP
o Deferred to FASB

Authoritative Literature Included in the Codification (FED PRIA)
FASB
Emerging Issues Task Force (EITF)
Derivative implementation group issues
Accounting Principles Board opinions (APB)
Accounting Research Bulletins (ARB)
Accounting Interpretations
AICPA

International Financial Reporting Interpretations Committee (IFRIC)
IFRIC provides guidance on newly identified financial reporting issues not
addressed in IFRSs and assists IASB in achieving convergence

Convergence
A single set of high quality, international reporting standards that companies can
use for both domestic and cross-border financial reporting

Conceptual Framework Basis of All FASB Pronouncements
SFAC #8: Objective of financial reporting (disclose entitys performance)
SFAC #6: Elements of Financial Statements (REGL ALE needs ID)
o Revenues
o Expenses
o Gains
o Losses
o Assets
o Liabilities
o Equity
o Investments by owners
o Distributions to owners

Presentation order of major components of Income and Retained Earnings (IDEA)
Income from continuing operations
Discontinued operations (net of tax)
Extraordinary items (net of tax)
Accounting principle change RETAINED EARNINGS (net of tax)




Account Receivable Account Analysis
A/R
Beginning Balance
+ Credit Sales (Write-offs)
(Convert to note)
(Cash Collected)
Ending Balance

Objective of Financial Reporting
Provide financial information about the reporting entry that is useful to the
primary users (investors, creditors, and other lenders)

Fundamental Qualitative Characteristics of Financial Statements
Relevance
Faithful Representation

Components of Relevance (Passing Confirms Money)
Predictive value
Confirming value
Materiality
Makes a difference in decision making

Components of Faithful Representation (Completely neutral is free from error)
Completeness
Neutrality
Freedom from error


Enhancing Qualitative Characteristics of Financial Statements
Enhance the usefulness of info that is relevant and faithfully represented
Comparability (current year to prior year, for example)
Verifiability
Timeliness
Understandability
Fundamental
Characteristics of
Financial
Statements
Relevance
Predictive Value Materiality Confirming Value
Faithful
Representation
Completeness Neutrality
Freedom From
Error
Fundamental Recognition Criteria
Definitions
Measurability
Relevance
Reliability

Fundamental Assumptions
Entity
Going concern
Monetary unit
Periodicity
Revenue recognition
Matching
Accrual accounting
Full disclosure
Conservatism

Income Statement
Performance for a period of time

Discontinued Operations
Component of an entity held for sale
Reported net of tax
o Can consist of:
Impairment loss (in period when it occurs)
Gain / loss from operations (in period when it occurs)
Gain / loss on disposal (in period when it occurs)
Gain recognized for any subsequent increase in FV (not in excess of cumulative
loss)
Assets of component no longer depreciated or amortized

Exit or Disposal Activities
Recognize a liability for costs associated with exit or disposal when:
o An event has occurred that
o Creates an obligation to transfer assets/services in the future and
o The obligation cannot be avoided
Measured at FV in the period incurred

Extraordinary Items
Unusual AND infrequent
Reported net of tax
Not allowed under IFRS



Change in Accounting Estimate
Prospective approach
Changes in accounting principle inseparable from a change in estimate (i.e. from
installment method to immediate recognition) should be handled prospectively as
well

Change in Accounting Principle
Adjust RE in earliest period presented
o Non-comparative statements: cumulative effect = beg. Retained earnings
correct retained earnings
o Comparative statements: cumulative effect = beg. Retained earnings in 1
st

period shown correct retained earnings

Changes to LIFO or in Depreciation Method
Prospective approach

Changes in Accounting Entity + Error Correction
Restate financials
Non-GAAP to GAAP: an example of an error
No change in accounting entity under IFRS

Comprehensive Income
Non-owner transactions
Net income per income statement + other comprehensive income =
comprehensive income

Other Comprehensive Income (PUFE R)
Pension adjustment
Unrealized gains and losses on available for sale securities
Foreign currency items
Effective portion of cash flow hedge
Revaluation surplus IFRS only!!!

Accumulated OCI
A component of equity that includes the total of OCI for the period and previous
periods (like RE)

Full Set of Financial Statements
Balance sheet
Income statement
Comprehensive income
Cash flows
Changes in owners equity


Reclassification Adjustments
Avoids double counting
Moves OCI items from AOCI to the income statement
Displayed in net income for the current year

Interim Financial Reporting
Not required under GAAP / IFRS
o Considered an integral part of annual financial statements
Revenues and expenses matched by quarter
Unaudited
Permanent inventory losses from market declines should be reflected in the period
in which they occur
o Temporary losses that are expected to reverse before the end of the period
should not be recognized
Income tax rate = estimated effective tax rate for the year
o If changes during year, calculate as: Total net income for all periods * new
effective tax rate income tax expense reported for the year

Segment Reporting
Required for all public companies
o Operating segments
o Products and services
o Geographic areas
o Major customers
Use the same principles as main statements
Intercompany transactions are not eliminated

Materiality Tests for Reportable Segments
10% or more of:
o Revenues (internal and external)
o Combined reported profit
o Combined reported loss
o Combined assets of all operating segments
AND 75% of external revenue must be included in reportable segments (if not,
add segments until 75% is reached)

Segment Profit and Loss Defined
Revenues (for that segment internal and external)
(Directly traceable costs)
(Reasonably allocated costs by CFO)
Operating Profit (Loss) for that segment
o Items normally excluded: general corporate revenues and expenses



Development Stage Enterprises (GAAP only)
Start-up, organizational costs are immediately expensed
Disclosure of cumulative net losses in balance sheet, income statement, and cash
flows

First-time Adoption of IFRS
Required to present 3 balance sheets and 2 income statements
Explanation of transition required

SEC Reporting Requirements (common)
Form 10-K: US annual report
Form 10-Q: US quarterly report
Form 20-F and Form 40-F: Foreign annual report
Form 6-K: Foreign semi-annual report
Forms 3, 4, 5: directors, officers, owners of 10% or more equity

XBRL
Data tags to describe financial information for business and financial reporting

XBRL Tag
Tags provide contextual information that allow data to be recognized and
processed by software

SEC Interactive Data Rule
Requires U.S. public companies and foreign private issuers that use GAAP to
present financial statements and schedules in an exhibit prepared using XBRL

Assets + Liabilities
Assets = probable future economic benefits, Liabilities = probable future
sacrifices

Revenue Recognition Criteria
Persuasive evidence of an arrangement exists (signed contract)
Delivery occurred / services rendered (transfer risks and rewards)
Price is fixed and determinable (no contingencies)
Collection is reasonably assured

Revenue Recognition Categories IFRS
Sale of goods
Rendering of services
Revenue from interest, royalties, dividends
Construction contracts



Basic Revenue Recognition Criteria IFRS
Measured reliably
Economic benefits will flow to the entity

Franchises
Initial franchise fee: revenue when substantially performed
Continuing franchise fees: revenue when earned
o Franchisor accounting:
Unearned revenue => initial franchise fee (not yet earned) and
prepaid franchise fee
o Franchisee accounting:
Initial franchise fee => intangible asset (amortize)
Continuing franchise fee => expense as incurred

Purchased Intangible Assets
Record at Cost

Internally Developed Intangible Assets
Expense as incurred

Costs to Capitalize Intangible Assets
Legal fees and other costs for successful defense (unsuccessful = expense)
Registration and consulting fees
Design costs
Direct costs to secure the asset

What to Capitalize Assets, Liabilities, and C/S
Assets: cash paid or FV of other assets distributed
Liabilities: PV of amounts to be paid
Stock: FV of consideration received

Patent Amortization
Amortized over the shorts of its estimated life or legal life

IFRS Intangible Asset Valuation
Cost model: cost amortization impairment
Revaluation model: FV on revaluation date subsequent amortization
subsequent impairment







R&D Costs US GAAP
DO NOT EXPENSE:
o Machines and equipment with alternate future uses (capitalize and
depreciate)
o R&D performed for others
NOT R&D:
o Periodic design changes
o Marketing research
o Quality control testing
o Reformulation

Computer Software to be Sold (not internal use)
Expense costs until technological feasibility has been established, then:
Capitalize costs until released for sale

Amortization of Capitalized Software Costs
The greater of:
o % of revenue = Total capitalized amount * (Current revenue / Total
projected revenue)
o S/L depreciation = Capitalized amount / Economic life

Computer Software Costs Internal Use
Expense costs incurred for the preliminary project state and training and
maintenance
Capitalize after the preliminary project state and for upgrades and enhancements
o Amortize S/L

Impairment of Intangible Assets, Finite Life (2-Step Method)
Compare CV to undiscounted future cash flows
o CV>UFCF, impairment, then
Amount of Impairment loss = CV FV

Impairment of Intangible Assets, Indefinite Lives (1 Step Method)
Compare CV to FV
o CV>FV, impairment, then
Amount of Impairment loss = CV FV
Note: same as step 2 above only!!!

Goodwill Impairment US GAAP
Tested at the reporting unit level
Compare the FV of the reporting unit (including goodwill) to the CV
o If CV>FV, then:
Goodwill impairment = CV of goodwill implied FV of goodwill



Completed Contract Method (GAAP ONLY!!!)
Income recognition at completion of contract
Losses recognized in full in year of discovery

Completed Contract Method Balance Sheet Presentation
Current Asset Accounts
o Due on accounts (receivable)
o Costs of uncompleted projects in excess of billings (construction in
progress) OR
Current Liabilities
o Progress billings in excess of cost

Percentage of Completion Method (GAAP + IFRS)
Recognize profit based on amount of contract completed
o % of job earned = (Actual costs incurred / Total expected costs)
Loss on entire contract recognized immediately (adjust any previous gross profit
recognized as well)

Percentage of Completion Method Calculation of Recognized Gross Profit
Total GP = Contract price estimated total costs
% of job earned = (Actual costs incurred to date / Total estimated costs)
Step 1 * Step 2 = Total profit to date
Profit to date prior profit recognized = current period gross profit

Percentage of Completion Method Balance Sheet Presentation
Current Asset Accounts
o Due on accounts (receivable)
o Costs and estimated earnings in excess of billings (construction in
progress) OR
Current Liability Account
o Progress billings in excess of cost and estimated earnings

Accounting for Installment Sales
Only used when there is no reasonable basis for estimating the degree of
collectability
Revenue is recognized when cash is actually collected

Installment Sales Problem Solving Formulas
Gross Profit = Sales COGS
Gross Profit % = GP / Sales
Earned Gross Profit = Cash collections * GP%
Deferred Gross Profit = Installment Accounts Receivable * GP%



Cost Recovery Method
Expected profit reported as deferred profit at the time of sale
Cash collection first applied to the recovery of costs; after all costs recovered,
other collections are recognized as revenue

Exchanges with Commercial Substance (ANY CHANGE IN CASH FLOWS)
Future cash flows change because of transaction
Under IFRS, exchange of similar assets => no gain recognized
o Dissimilar accounted for in the same manner as those having commercial
substance under GAAP

Exchanges with Commercial Substance Journal Entry Framework
New asset (FV of consideration given)
Accumulated depreciation of asset given up
Cash received
Loss (if any)
o Old asset at historical cost
o Cash given
o Gain (if any)

Exchanges without Commercial Substance (NO CHANGE IN CASH FLOWS)
No change in future cash flows
Always recognize a loss
Gain recognition is conditional:
o No boot received: do not recognize any gain
o Boot paid: do not recognize any gain
o Boot received: recognize gain proportional to consideration (25% rule)
If (Boot received / consideration received) > 25%, recognize the
entire gain
If (Boot received / consideration received) < 25%, recognize gain
proportional to (boot received/consideration received)*Gain

Measurement Methods and Current Cost Determination Effect of Changing Prices
Historical cost / nominal dollar: no adjustment necessary
Historical cost / constant dollar: adjust for inflation
Current cost / nominal dollar: adjust for appreciation
Current cost / constant dollar: adjust for both inflation and appreciation
o Monetary assets and liabilities are fixed
o Non-monetary assets and liabilities fluctuate with inflation and deflation

Foreign Currency Transactions
Transactions with a foreign entity denominated in a foreign currency



Functional Currency
The currency of the primary economic environment in which the entity operates,
usually the local currency or the reporting currency

Foreign Currency Translation (Functional)
The restatement of financial statements denominated in the functional currency to
the reporting currency using appropriate rates of exchange

Foreign Currency Remeasurement (Dysfunctional)
The restatement of foreign financial statements from the foreign currency to the
entitys functional currency when:
o The reporting currency is the functional currency
o The statements must be restated in the entitys functional currency prior to
translating from the functional to the reporting

Remeasurement (Temporal) Method
In order:
1) Start with Balance sheet:
a. Monetary items use current rate
b. Non-monetary items historical rate
2) Income statement:
a. Non-balance sheet items weighted average rate
b. Balance sheet items historical rate
3) Remeasurement G/L goes to Income Statement
a. Plug a G/L required to for Net Income necessary for RE in Step 1 to
balance the balance sheet

Translation (Current Rate) Method
In order
1) Start with Income statement:
a. Everything at the weighted average rate
b. Transfer Net income to retained earnings on balance sheet
2) Balance sheet:
a. Assets and liabilities: current rate
b. Common stock and APIC: historic rate
c. Retained earnings: roll forward
i. Retained earnings: beginning translation retained earnings +
net income calculated in step 1 translated dividends
3) Translation G/L in OCI
a. Plug a G/L to OCI to get RE to balance

General OCBOA Guidelines
Titles should differentiate OCBOA statements from accrual basis statements
Should explain changes in equity accounts
Cash flow statement not required

Cash Basis Statements
Cash is the only Asset, no liabilities, and equity = cash

Income Tax Basis Statements
Nontaxable revenues and expenses may be reported as:
o Separate line items in the statement of revenues and expenses
o Additions and deductions to net income
o A disclosure

Personal Financial Statements
Statement of financial condition => balance sheet
Assets are reported at estimated current fair value
Liabilities are reported at estimated current amount
Assets and liabilities are listed in order of liquidity

Trading Securities
Current assets
Debt or equity bought and held for purpose of selling in the near term

Available For Sale Securities
GR: Noncurrent assets
Debt or equity not meeting the definitions of the other two classifications
Can be reported as current assets or noncurrent assets depending on the intent of
the corporation

Held to Maturity Securities
Debt ONLY
GR: Noncurrent assets
Classified as HTM only if the corporation has the intent and the ability to hold
these securities to maturity

Trading and Available For Sale Securities: Valuation
Fair value (mark to market)
o Unrealized gain/loss of trading securities: recognized in Income Statement
o Unrealized gain/loss of available for sale securities: recognized in Other
Comprehensive Income
o All realized gains/losses are recognized on the income statement

Reclassifications Between Categories
From Trading to any other category: no adjustment necessary
Any other category to Trading: recognize unrealized G/L in earnings immediately
From HTM to AFS: record unrealized G/L in OCI
AFS to HTM: amortize the unrealized G/L over the remaining life of the security


Consolidated Statements
Consolidated financial statements ignore important legal relationships and
emphasize substance over form

When to Consolidate Statements
Majority-owned subsidiaries have one management and economic entity
If there are different year ends, it is still OK to consolidate
DO NOT CONSOLIDATE:
o When control is NOT with the owners

Cost Method
There is NO significant influence
Generally between 0-20% ownership
DO NOT consolidate statements

Equity Method
There IS significant influence
Generally between 20-50% ownership (presence of significant influence is the
still the determining factor!!)
DO NOT consolidate statements

Acquisition Method (Consolidation)
When there is CONTROL
Generally 50%+ ownership

Cost Method Balance Sheet Journal Entries
Record initial investment at cost:
o Investment in entity
Cash
Unrealized gains/losses recorded in OCI (marketable securities):
o Investment in entity
Unrealized gain
Reduce share of entity for dividends received in EXCESS of investors share of
retained earnings:
o Cash
Investment in entity

Cost Method Income Statement Journal Entries
Record income for dividends received that are NOT in excess of investors share
of earnings:
o Cash
Dividend Income
DO NOT RECOGNIZE STOCK DIVIDENDS
o Increase number of shares held only!
o Memo entry only!

Equity Method Balance Sheet Journal Entries
Record initial investment at cost:
o Investment in entity
Cash
Increase investment by investors share of entity earnings (income/loss)
o Investment in entity
Equity in entity
o Note: same entry for the income statement
Decrease investment for share of dividends received:
o Cash
Investment in entity
o Stock dividends = memo only!!

Equity Method Simple Account Calculation (BASE)
Beginning balance
Add: investors share of earnings
Subtract: investors share of dividends
Ending balance

Equity Method Income Statement Journal Entries
Record equity for share of entity earnings
o Investment in entity
Equity in entity
o Note: same entry for balance sheet

Equity Method Recording a Premium Paid and Goodwill
Any premium paid: amortized over the life of the asset (except land)
o Journal entry to record amortization:
Equity in entity
Investment in entity
Goodwill: not amortized, not tested for impairment

Changing from Cost to Equity Method
Apply the equity method using the prior periods old percentage
o DO NOT apply the new percentage to the prior periods

Acquisition Method
When there is control (50%+ ownership, generally)
Consolidate the sub at 100% of its fair value at the acquisition date, even if less
than 100% is acquired





Acquisition Method Initial Journal Entry
Acquired for cash:
o Investment in entity
Cash
Acquired for stock (measure the value of the stock as of the TRANSACTION
date)
o Investment in entity
Common stock
APIC

Calculating Consolidated Amounts
Always value at 100%



Consolidating Workpaper Eliminating Journal Entry (CAR IN BIG)
Common stock subsidiary
APIC subsidiary
Retained Earnings Subsidiary
o Investment in subsidiary
o Noncontrolling interest (create if not 100% owned)
Balance Sheet adjustments to FV
Identifiable intangible assets to FV
Goodwill


Business Combination Costs
EXPENSE: legal costs, finders fees, indirect and direct costs
CAPITALIZE AND AMORTIZE: bond issue costs
REDUCE APIC OF PARENT: stock issuance costs, registration costs




Subsidiary Acquired
4 - Goodwill
3 - Identified Intangible
Assets at Fair Value
2 - Balance Sheet
adjustments at Fair value
1 - Book Value of subsidiary
acquired
Consolidating Acquirer
2 - Non-controlling interest
if less than 100% is
acquired
1 - Investment in
subsidiary (price paid)
Acquired R&D
Expense continuing R&D to complete a project
o Project success: amortize IP R&D
o Project failure: impair/write-off IP R&D

Partial Goodwill Method IFRS ONLY
Goodwill = acquisition cost FV of subs net assets acquired
Plug non-controlling interest

Intercompany Transactions
Eliminate 100% for external reporting

Intercompany Profit on Inventory
Calculate Intercompany Profit on sale
Allocate Intercompany profit between COGS and ending inventory:
o Beginning inventory
o + Purchases
o = Cost of goods available for sale
o Ending Inventory
o = Cost of Goods Sold
(COGS / Purchases) * Profit = Correction necessary to COGS
(Ending inventory / Purchases) * Profit = Correction necessary to ending
inventory

Intercompany Bond Transactions
If one member of the group acquires affiliates debt from an outsider, the debt is
considered retired and gain/loss recognized on consolidated income statement
Only considered extraordinary if unusual and infrequent

Intercompany Sale of Land
Eliminate any G/L and restore land to original carrying amount

Intercompany Profit on Fixed Assets
Eliminate gain
Restore asset and accumulated depreciation to correct amounts
Fix depreciation to original amount

Combined Financial Statements
A group of related companies, not consolidated because there is no parent
o Under common control and management






Push Down Accounting
Reports assets and liabilities at fair value in separate financial statements of the
subsidiary
o In essence, consolidation adjustments are pushed down into the records of
each sub

Working Capital
The ability to pay debt as due to short-term financial risk
Working capital = Current assets current liabilities
Current ratio = Current assets / Current liabilities
Quick ratio = (Cash + net receivables + Marketable securities) / Liabilities
o (Current Assets Inventory) / Current Liabilities

Current Assets
Resources that are reasonably expected to be realized in cash/sold/consumed
during the normal operating cycle or one year, whichever is longer

Current Liabilities
Obligations whose liquidation is reasonably expected to require the use of current
assets or the creation of other current liabilities
o Includes estimates or accrued amounts that are expected to be required to
cover expenditures within the year for know obligations

Classification of Short-term Obligations to be refinanced
GAAP: may be excluded from current liabilities and included in noncurrent debt
if the company intends to refinance it on a long-term basis and the intent is
supported by the ability to do so
IFRS: must wait until actually refinanced to classify as noncurrent

Cash Equivalents
Short-term, highly liquid investments that are both readily convertible to cash and
so near their maturity when acquired by the entity that they present insignificant
risk of changes in value
o Original maturity date 90 days or less
Time certificates of deposit (CODs) are NOT cash equivalents
Legally restricted deposits are NOT cash equivalents

Restricted Cash
Cash that has been set aside for a specific use or purpose
o If restriction is associated with a current asset or liability, classify it as a
current asset but separate from unrestricted cash

Simple Reconciliation
Goal calculate the true balance


Simple Reconciliations Bank Adjustments
Add: deposits in transit
Subtract: outstanding checks

Simple Reconciliations Book Adjustments
Add: bank collections, interest income
Subtract: service charges, nonsufficient funds

Net Realizable Value Accounts Receivable
Accounts receivable balance (gross) is adjusted for
o Allowance for uncollectible accounts
o Sales discounts
o Sales returns and allowances

Sales / Cash Discounts
The discount is generally based on a percentage of the sales price
o Example: 2/10, n/30 => 2% discount within 10 days, net amount due in 30
days

Gross Method Sales Discounts
Records a sale without regard to the available discount
If payment is received within the discount period, a sales discount account is
debited to reflect the sales discount
o Record Sale:
Accounts Receivable (gross amount)
Sales (gross amount)
o If payment is received within the discount period
Cash
Sales discounts taken
Accounts Receivable
o If payment is not received within the discount period
Cash
Accounts Receivable













Net Method Sales Discounts
Records ales and accounts receivable net of the available discount
If payment is received after the discount period, a sales discount not taken account
must be credited
o Record Sale:
Accounts Receivable (net amount)
Sales (net amount)
o If payment is received within the discount period
Cash
Accounts Receivable
o If payment is not received within the discount period
Cash
Accounts Receivable
Sales discounts not taken

Trade (Quantity) Discounts
Revenue and Accounts Receivable reported net of discounts
o Apply sequentially (DO NOT combine)

Sales Returns and Allowances
Expected exchanges DO NOT affect sales, inventory, or COGS
Journal entry to record a sales return:
o Sales returns and allowances
Accounts receivable

Estimating Uncollectible Accounts Receivable
Direct Write-Off Method the account is written off and the bad debt is
recognized when the account becomes uncollectible
o NOT GAAP
Allowance Method - estimate and book uncollectible Accounts Receivable now
o GAAP 3 allowable methods:
Percent of sales method
Percent of Accounts Receivable
Aging of Accounts Receivable

Percent of Sales Method
Bad Debt Expense = % estimated * credit sales
Allowance for Uncollectibles
Beginning Balance
(Write-Offs) + Bad Debt Expense
Directly Calculated

Ending Balance



Percent of Accounts Receivable Method
Ending Allowance Balance = % estimated * ending Accounts Receivable balance
Bad Debt Expense is a plug amount allowing the account to arrive at the correct
ending balance
Allowance for Uncollectibles
Beginning Balance
(Write-Offs) + Bad Debt Expense
Plug amount

Ending Balance

Aging of Accounts Receivable
Ending Allowance Balance = Sum of the product of each gaining category
Bad Debt Expense is a plug amount allowing the account to arrive at the correct
ending balance
Allowance for Uncollectibles
Beginning Balance
(Write-Offs) + Bad Debt Expense
Plug amount

Ending Balance

Subsequent Collection of Previously Written-Off Receivable
Journal entry to restore the account:
o Accounts Receivable
Allowance for Uncollectibles
Journal entry to record cash collection:
o Cash
Accounts Receivable

Pledging
The company uses existing accounts receivable as collateral for a loan
o Requires only note disclosure

Factoring Accounts Receivable
The company can convert its receivables into cash by assigning them to a factor
either without or with recourse

Factoring Without recourse
The sale is final and the factor assumes risk of any losses on collections
Journal entry to factor accounts receivable without recourse
o Cash
o Due from factor (factors margin)
o Loss on sale of receivables
Accounts receivable

Factoring With recourse
The factor has an option to re-sell any uncollectible receivables back to the seller
Can be either a sale (same journal entry as without recourse) or loan (footnote)

Discounting Notes Receivable
When the holder endorses the note to a third party and receives cash
Without recourse: the holder assumes no further liability; its a true sale
With recourse: holder remains liable, remains on Balance Sheet

Discounting a Note at a Bank
Compute the Maturity Value of the note by adding the interest to the face amount
of the note
o Face value of the note + interest on note to maturity = payoff value of
note at maturity
Compute bank discount on the payoff value at maturity
o Bank discount rate * payoff value at maturity
Determine the amount paid by the bank for the note (Cash Received)
o Payoff value at maturity bank discount = amount paid by bank for the
note
Derive the interest income (or expense) by subtracting the face value of the note
from the amount paid by the bank for the note
o Amount paid by bank for the note face value of the note = interest
income to company

FOB Shipping Point
With terms of FOB shipping point the title to the goods usually passes to the
buyer at the shipping point. This means that goods in transit should be reported as
a purchase and as inventory by the buyer
o Buyers inventory at shipment
o Freight-in added to cost (buyers)

FOB Destination
With terms of FOB destination the title to the goods usually passes from the seller
to the buyer at the destination. This means that goods in transit should be reported
as inventory by the seller, since technically the sale does not occur until the goods
reach the destination
o Sellers inventory
o Freight-out = selling expense
o Non-conforming goods = sellers inventory

Consigned Goods
The seller delivers the goods to an agent to hold and sell on the consignors behalf
Revenue will be recognized when the goods are sold to a third party
o Sales COGS = Gross Profit
o GP Commission Advertising = Net Income
Until the sale, the goods remain in the consignors inventory
Lower of Cost or Market (US GAAP)
Market = Replacement Cost
Cannot be higher than the ceiling: Net Realizable Value
o NRV = Selling Price Costs to complete/dispose
Cannot be lower than the floor: Net Realizable Value less a normal profit margin
o Based on selling price
Between all three values (RC, NRV, NRV-PM), pick the one in the middle; that is
the market

Lower of Cost or Net Realizable Value (IFRS)
Net Realizable Value = Selling Price Costs to complete/dispose
o Same as US GAAP ceiling
The reversal of inventory write-downs for subsequent recoveries is allowed;
however, the reversal is limited to the amount of the original write-down and is
recorded as a reduction of total inventory costs on the statement (COGS)

Periodic Inventory System (Use Purchases)
Quantity determined by physical count
o Beginning inventory
o + Purchases
o = Cost of Goods Available for Sale
o Ending Inventory
o = Cost of Goods Sold

Perpetual Inventory System (No Purchases)
COGS determined and recorded with each sale (a running total)

FIFO
Start with oldest costs first in, first out
Ending inventory is the same whether a periodic or perpetual system is used
In a period of rising prices, COGS decreases, NI increases and ending inventory
increases

Weighted Average Method
Calculate weighted-average cost per unit: total units purchased / total cost
Multiply units sold by rate for COGS, units remaining for ending inventory

Moving Average Method
Perpetual weighted average method
o Average computed after each purchase






LIFO (GAAP ONLY)
Use most recent costs last in, first out
LIFO periodic IS NOT the same as LIFO perpetual
In a period of rising prices, COGS increases, NI decreases, and ending inventory
decreases

Dollar-Value LIFO
Price Index = Total ending inventory at Current Year cost / Total ending
inventory at Base Year cost
LIFO layer in the current year = Current year layer at base year cost * Price Index

Valuation of Fixed Assets US GAPP
Historical Cost

Valuation of Fixed Assets IFRS
Cost Model
o Carry value = historical cost accumulated depreciation impairment
Revaluation model
o Carry value = fair value at revaluation date subsequent accumulated
depreciation subsequent impairment
o Revaluation losses income statement
o Revaluation gains - OCI

Cost of Equipment
Invoice price (taking into account any cash discounts)
+ Freight-in
+ Insurance
+ Installation Charges
+ Sales and federal tax
+ Construction period interest

Cost of Equipment Capitalize
Additions
Improvements
Replacements
Extraordinary repairs that increase the assets life or usefulness

Cost of Land
All costs up to excavation LESS proceeds from sale of existing buildings,
standing timber
Basket purchase: Allocate the purchase price of land and a building based on the
ratio of appraised values of the individual items



Investment Property (IFRS ONLY)
Land or buildings held by an entity or by a lessee under a finance lease to earn
rental or for capital appreciation are classified and reported as investment
property (rental or flip property)
Can be reported under the fair value model or cost model
o Fair value model: Reported on balance sheet at fair value and not
depreciated
o Cost model: Reported on the balance sheet at historical cost less
accumulated depreciation

Capitalization of Construction Period Interest
Only capitalize interest on money actually spent, NOT total amount borrowed
Amount to capitalize is the lower of: actual interest costs OR computed
capitalized interest

Computing Capitalized Interest
Weighted average of accumulated expenditures & applicable interest rate =
amount to be capitalized
o If less than actual interest, capitalize the full amount
o Any remaining amount is expensed

Sum-of-the-Years Digits Depreciation
SYD = (Cost salvage value) * (Remaining Life / sum of years digits)
Quick computation of sum of years digits: (N*(N+1)) / 2

Declining Balance Depreciation (Can Be Double Declining (200%) or Less (150%))
1/N * Cost accumulated depreciation (carrying value)
o If 200% or 150%, multiply by 2 or 1.5
DO NOT depreciate below the salvage value

Units of Production
Rate = (cost salvage value) / estimated units or hours
Rate * units or hours = depreciation expense

Depletion
Depletion Base = cost of land + development costs + restoration residual value
Depletion Rate = Depletion Base / Estimated Recoverable Units
Rate * units extracted = depletion, Rate * units sold = COGS

Definition of Annuity
A large number of business transaction involve multiple payments or receipts
Bond interest payments and lease rental payments are two examples



Types of Annuities
Ordinary annuity (or annuity in arrears): payments start later
o Number of payments = number of interest periods
Annuity due: payments start immediately
o Number of interest periods is one less than the number of payments
Annuity due 1 = ordinary annuity

Present Value of $1
Amount that must be invested now at a specific interest rate so that $1 can be paid
or received in the future
Examples:
o Capital lease buyout at the end of the lease
o Bond principal payoff at the end of the term
o U.S. savings bond

Future Value of $1
The amount that would accumulate at a future point in time if $1 were invested
now
Example:
o Bank savings account

Present Value of an Ordinary Annuity
The current worth of a series of identical periodic payments to be made in the
future
Examples:
o Periodic lease payments
o Periodic bond payments
o Winning the lottery

Future Value of an Ordinary Annuity
The sum to be received at some point in the future of identical periodic
investments made from the present until that future point
Example:
o Investing in an IRA

Present and Future Value of an Annuity Due
The only difference between an ordinary annuity and annuity due is the timing of
the payments
By adding 1 to the PV of an ordinary annuity, the PV of an annuity due can be
found

Operating Lease
There is no transfer of ownership or any risk/benefit of ownership
o Lease does not meet the capital lease criteria
A rental agreement

Operating Lease Accounting Lessee (Renter)
Lease rent expense: Rent expense is recorded over the lease term, usually on a
straight-line basis unless other methods are warranted
o Rent expense
Cash/rent payable
Lease bonus: Any prepayment for future expenses (commission paid to rental
agent) should be classified as an asset (deferred charge) and amortized using the
straight-line method over the life of the lease
Leasehold improvements: An improvement that is permanently affixed to the
property and reverts back to the lessor at the termination of the lease
o Capitalize any leasehold improvements AND
o Depreciate over the LESSER of the lease life or the asset/improvement
life
Rent kicker: Any premium rent payment required for specific events is a period
expense
Refundable security deposit: Reported as an asset until refunded by the lessor
Free or reduced rent consideration: Must take the total rent expense to be paid for
the entire lease term and divide it evenly over each period

Operating Lease Accounting Lessor (Owner)
Fixed asset: the cost of the property remains on the owners books and is
depreciated over the assets useful life
Rental income: reported using the straight-line method (matches with lessees
rental expense)
o Cash/rent receivable
Rental income
Security deposits:
o Nonrefundable: deferred by the lessor (unearned revenue) and capitalized
by the lessee (prepaid rent expense) until it is considered earned
o Refundable: treat as a receivable by the lessee and a liability by the lessor
until the deposit is refunded to the lessee
Cash
Refundable deposit
Lease bonus: deferred and amortized over the life of the lease (into income)
Free or reduced rent: lessor must take the total rental income to be received over
the entire lease term and divide it evenly over each period

Capital (US GAAP) / Finance (IFRS) Lease
Transfers substantially all of the benefits and risks inherent in ownership of the
property of the lease






Capital Lease Criteria Lessee (Buyer) US GAAP (OWNS)
Must meet just one condition to capitalize:
o Ownership transfers at the end of the lease
o Written option for bargain purchase
o Ninety percent of leased property fair value LESS THAN OR EQUAL TO
the present value of the lease payments
o Seventy-five percent or more of the assets economic life is being
committed in the lease term

Finance Lease Criteria Lessee (Buyer) IFRS (OWES FACS)
Generally defined as a lease in which substantially all the risks and rewards
inherent in ownership are transferred to the lessee
List of non-exhaustive situations that would lead to a lease being classified as a
finance lease under IFRS
o Ownership is transferred
o Written bargain purchase option contained
o Economic life for a major part of the asset is covered by the lease term
o Fluctuation gains/losses due to changes in the fair value of the asset accrue
to the lessee
o Ability to continue the lease for a secondary period at a rent substantially
below market rent
o Cancelation of lease losses are borne by the lessee
o Specialized nature of the leased asset such that only the lessee can use it
without modification

Sales-Type / Direct Financing Lease Criteria Lessor (Seller) US GAPP (LUC)
If the lease meets ALL 3 of the following conditions, it should be classified as a
sales-type lease or direct financing lease, whichever is appropriate:
o Lessee OWNS the leased property (meets any of the 4 criteria)
o Uncertainties do not exist regarding any unreimbursable costs
o Collectability of the lease payments is reasonably predictable
Note: under GAAP, it is possible for the lessee to classify a lease as capital and a
lessor to classify it as operating

Sales-type Lease 2 Profits
The fair value of the leased property at the inception of the lease differs from the
cost/carrying amount to the lessor
o Gives rise to a manufacturers profit/loss
The 2 profits on the lease:
o Gain on the sale
o Interest income





Direct Financing Lease 1 Profit
The fair value of the leased property at the inception of the lease is the same as
the cost/carrying amount
1 profit on the lease
o Interest income

Capital Lease (Finance Lease) Accounting Lessee (Buyer)
Recording the lease: the lessee records as an asset and liability the LESSER of:
o Fair value of the asset at the inception of the lease
o Cost => Present value of the minimum lease payments
End of period PV of an ordinary annuity (annuity in arrears)
Beginning of period PV of an annuity due
o Include in this amount:
Required Payments
Bargain purchase option (PV of $1)
Guaranteed Residual value (PV of $1)
o EXCLUDE from this amount:
Executory costs insurance, maintenance and taxes paid by the
lessee
Optional buyout
o Interest rate: when calculating the present value of the minimum lease
payments, the lessee uses the LOWER of:
Rate implicit in the lease
Lessees incremental borrowing rate
o Under IFRS, the cost of any initial indirect costs are added to the asset, but
NOT the obligation:
Leased equipment
Obligations under lease
Cash (amount of initial indirect costs paid)
Depreciation period of benefit (US GAAP)
o If the lease qualifies as a capital lease using Ownership transfer or Written
Bargain:
Depreciate over the estimated economic life of the asset
o If the lease qualifies as a capital lease using Ninety % of fair value or
Seventy-five percent of economic life:
Depreciate over the lease term
o Summary: OW = economic life, NS = lease term
o If the lease meets more than one criteria, the order of priority is: O-W-N-S
Depreciate period of benefit (IFRS)
o Depreciate over the LESSER of: lease term and the useful life of the asset

Lease Liability and Asset Amortization Lessee
1 2 3 4
Annual Lease
Payments
Interest on Unpaid
Obligation (Interest
rate * 4)
Reduction of Lease
Liability (1 2)
Carrying Amount of
Lease Obligation
(Prior period 4 3)
**Note: 1
st
payment of an annuity due is ALL PRINCIPAL**

Sales-Type Lease Accounting Lessor
Gross Investment (lease receivable): the minimum lease payments plus any
unguaranteed residual value
o Lease Payments
o + Unguaranteed residual value
o = Gross Investment
Net investment: Gross investment * present value
Unearned Interest Revenue (contra-lease receivable): gross investment net
investment
Cost of Goods Sold:
o Cost of asset
o PV of unguaranteed residual value
Sales Revenue: present value of the minimum lease payments

Direct Financing Lease Accounting Lessor
Gross Investment (lease receivable): the minimum lease payments plus any
unguaranteed residual value
o Lease Payments
o + Unguaranteed residual value
o = Gross Investment
Net investment: Gross investment * present value
Unearned Interest Revenue (contra-lease receivable): gross investment net
investment
NO COGS OR SALES REVENUE

Sale-Leaseback
The owner of the property sells the property and simultaneously leases it back
from the purchaser-lessor
Selling Price: the negotiated price in the agreement
Profit or Loss: the amount that would have been recognized by the seller
assuming theres no leaseback
Excess Profit:
o Operating lease: the amount of profit that exceeds the minimum lease
payments: Sales price net book value = tentative gain PV of minimum
lease payments
o Capital lease: the amount of profit that exceeds the recorded amount of the
asset: Sales price net book value = tentative gain leaseback asset







Sales-Type Lease Accounting Seller/Lessee
Amount of deferred gain is determine by the retained rights to remaining use of
the leaseback property
o Substantially all rights retained (+90% of the sales price): the present
value of the rent payments is greater than or equal to 90% of the fair value
of the property
Defer all gain and amortize with leased asset
o Rights retained are less than substantially but greater than minor (between
90% and 10%): the present value of the rent payments are less than 90%
but greater than 10% of the fair value of the property
Defer gain up to the present value of the minimum payments.
Anything in excess is recognized immediately
o Minor portion of rights retained (less than 10%): the present value of the
rent payments is 10% or less of the fair value of the property
Recognize gain or loss at the time of the sale-leaseback gains are
NOT deferred
ANY REAL ECONOMIC LOSS MUST BE RECOGNIZED IMMEDIATELY
(when FV < BV)
Amortization of deferred gain:
o Capital leaseback: amortized in proportion to the amortization of the
leased asset
o Operating leaseback: any deferred gain or loss is amortized in proportion
to the gross rental expense of the leased asset

Convertible Bonds
Convertible into common stock generally at the option of the bondholder
o Non-detachable warrants: convertible bond itself is converted into
common stock
o Detachable warrants: the bond is not surrendered upon conversion, only
the warrants plus cash representing the exercise of the warrants

Term Bonds
Bonds that have a single fixed maturity date the entire principal is paid at the
end of the term

Serial Bonds
Pre-numbered bonds that the issuer may call and redeem a portion by serial
number

Overview of Bond Terms
Usually denominated in $1000
Price is always quoted in 100s (i.e. 106 = 1060)
Indenture: contract for purchase of a bond
Coupon rate: stated interest rate on the bond
o Used to calculate the face coupon
Bond interest (check amount): coupon * face
Effective interest rate: market rate
Principal payoff is always full face value
Premium / discount adjusts coupon to market rate

Bond Valuation
PV of principal (PV of $1)
+ PV of interest (PV of an ordinary annuity)
= Fair Value of bond (cash received)
o Can be either a premium or a discount

Bonds Issued at Par value
When the market rate = coupon rate

Bond Issued at a Discount
When the stated rate (coupon) on the bonds is less than the market rate
The unamortized discount is a contra-account to bonds payable (a direct
reduction)
Amortization of the discount INCREASES interest expense each period

Bond Issued at a Premium
When the stated rate (coupon) on the bonds is greater than the market value
The unamortized premium is a direct addition to bonds payable
Amortization of the premium DECREAES interest expense each period

Bond Issue Costs
Examples: legal fees, accounting fees, underwriting, and commissions
Deferred charges (an asset) and amortized using the straight line method into
expense
Under IFRS, bond issue costs are deducted from the carrying value and amortized
using the effective interest method

Bond Amortization Straight Line Method (NOT GAAP BUT ALLOWED)
Yields a constant dollar amount of interest each period
Periodic amortization = premium or discount / number of periods bond is
outstanding

Effective Interest Method
Required by both GAAP and IFRS
Interest expense = carrying value at the beginning of the period * effective
interest rate (market rate)
Amortization of the discount = interest expense cash paid at the coupon rate
Amortization of the premium = cash paid at the coupon rate interest expense



1 2 3 4 5 6
Beginning
Period
Carrying
Value
Semi-Annual
Amortization
Interest (using
MARKET rate)
Effective
Carrying
Value
(1*2)
Face Coupon
(using
COUPON rate)
Amortization
- (3-4) = positive,
discount and add
- (3-4)= negative,
premium and
subtract
Ending
Period
Carrying
Value (1 5)

Bond Sinking Fund
Used to avoid a cash shortage at the time of debt repayment
The sinking fund is generally a non-current (restricted) asset

Determination of Sinking Fund Payments
Use the future value of an ordinary annuity

Serial Bonds
Principal matures in installments

Non-detachable Warrants
Convertible bonds are often issued at more than face value because of the value of
the conversion feature. Under GAAP, the issuance price is allocated to the bonds
with NO RECGONITION of the conversion feature because it is difficult to
assign a specific value to the conversion feature
EVERYTHING GOES TO THE BOND AT ISSUANCE

Conversion of the Bonds to Stock
Can be done using either the book value method (GAAP) or market value method
(NOT GAAP)
Book value method: No gain or loss is recognized, bond payable and any
premium/discount are written off and common stock/APIC are credited for the
value of the stock
o Bond payable
o Premium on bond payable
Common stock
APIC
Market value method: gain or loss is recognized as the difference between the
market value of the stock and the book value of the bonds
o Bond payable
o Premium on bond payable
o Loss
Common stock
APIC




Detachable Warrants
A conversion feature that is separate from a security should be accounted for
separately at its relative fair value at the time of issue
This amount is credited to APIC warrants
o Cash
Bonds Payable
APIC warrants
Can be recorded at issuance using either the warrants only method or the market
value method
o Warrants only method: use if the fair value of the warrants is known
Issuance:
Cash
Discount (plug)
o Bond payable
o APIC warrants (FV)
Warrants exercised:
Cash
APIC warrants (removed)
o Common stock
o APIC
Warrants expire:
APIC warrants
o APIC
o Market value method: use if the fair value of the warrants AND the bonds
is known
Issuance: allocate the sales price to the bonds and warrants based
on relative market value
Cash
Discount (plug)
o Bond payable (FV)
o APIC warrants (FV)
Warrants exercised:
Cash
APIC warrants (removed)
o Common stock
o APIC
Warrants expire:
APIC warrants
o APIC

Defined Contribution Plan
This type of plan specifies the periodic amount of contributions to the plan
Like a 401(k)



Defined Benefit Plan
This type of plan defines the benefits to be paid to employees at retirement.
Contributions are computed using actuarial assumptions of future benefit
payments

Accumulated Benefit Obligation (ABO)
The actuarial present value of benefits attributed by a formula based on
CURRENT and past compensation levels.
Differs from PBO only in that it includes no assumption about future
compensation levels

Projected Benefit Obligation
The actuarial present value of all benefits attributed by the plans benefit formula
to employee service rendered prior to that date
Only uses an assumption as to FUTURE compensation levels
Under IFRS, DBO (defined benefit obligation) and PBO are calculated in a
similar manner

Prior Service Cost
The cost of benefits based on past service granted for:
o Service prior to the initiation of a pension plan that employees receive
retroactive credit for
o Subsequent plan amendment, reflecting new or increased benefits that is
also applied to service already provided
Increases the PBO in the period of plan initiation or amendment and should be
amortized to pension expense over the future service periods of the affected
employees

Calculating the PBO
Beginning PBO
+ Service cost
+ Interest Cost
+ Prior service cost from current period plan amendments
+ Actuarial losses incurred in the period
- Actuarial gains incurred in the period
- Benefits paid to retirees
= Ending PBO

Calculating Plan Assets or Actual Return on Plan Assets
Beginning fair value of Plan Assets
+ Contributions
+ Actual return on plan assets
- Benefits paid to retirees
= Ending fair value of plan assets

Income Statement Expense Formula (SIR AGE)
Service cost (current period)
+ Interest cost
- Return on plan assets
+ Amortization of Prior Service Cost
- Gains (+Losses)
+ Amortization of Existing net obligation or net asset
= Net Periodic Pension Cost
o Under GAAP, must be aggregated and presented as one number; no such
requirement under IFRS
o A-G-E: anything unamortized is in OCI
Net Periodic Pension Cost
o Pension Benefit Liability
o OCI

Current Service Cost (S)
This cost is provided by the actuary

Interest Cost (I)
Beginning of period PBO * Discount rate

Return on Plan Assets (R)
GAAP allows the use of either actual return or expected return on plan assets
o Actual return: can be calculated by looking at the plan assets account for
the period
o Expected return: Beginning FV of plan assets * expected rate of return
When companies use expected return, the difference between the
actual and expected return must be recognized in OCI each period
and amortized to pension expense over time with any actuarial
gains or losses

Amortization of Unrecognized Prior Service Cost (A)
The unrecognized prior service cost in Accumulated OCI is amortized to pension
expense over the plan participants remaining years of service
Beginning unrecognized prior service cost / average remaining service life

Gains and Losses (G)
Gains and losses arise from two sources:
o The difference between the expected and actual return on plan assets when
the expected return on plan assets is used to calculate pension expense
o Changes in actuarial assumptions (actuarial gains and losses)
Under GAAP, there are two choices for when to account for gains and losses:
o Recognize on the income statement in the period incurred OR
o In OCI in the period incurred and amortize unrecognized gains and losses
over time using the corridor approach
Corridor approach: the unrecognized gain/loss is amortized over the employees
remaining service period ONLY IF it exceeds 10% of the greater of:
o Beginning balance in plan assets OR
o PBO
o Unamortized belongs in AOCI

Amortization of Existing Net Obligation or Net Asset at Implementation (E)
PBO FV of plan assets
= Initial Unfunded obligation
/ 15 years OR average employee job life (greater of)
= Minimum amortization

Pension Plan Contributions
Pension benefit asset/liability
o Cash
Funded status = FV of plan assets PBO
o Pension plan asset: overfunded, always a noncurrent asset
o Pension plan liability: underfunded, current to the extent that the benefit
obligation payable in the next 12 months exceeds the FV of plan assets

Postretirement Benefits Other than Pensions / Other Deferred Compensation
Must be accrued if:
o Attributable service is already rendered
o Obligation relates to rights that vest or accumulate
o Payment of the compensation is probable
o The amount can be reasonably estimated

Permanent Differences
DO NOT affect the deferred tax computation
o Affect current, not deferred, taxes
Examples of permanent differences:
o Tax-exempt interest (muni, state)
o Life insurance proceeds on an officers policy
o Life insurance premiums when the corporation is the beneficiary
o Certain penalties, fines, kickbacks
o Nondeductible portion of meals and entertainment expense (50%)
o Dividends received deduction for corporations
o Excess percentage depletion over cost depletion

Temporary Differences
Affect current and deferred taxes

Accounting for Interperiod Tax Allocation
Total income tax expense = Current income tax expense/benefit + Deferred
income tax expense/benefit
o Current income tax expense/benefit is equal to the income taxes payable
or refundable for the current year as determined on the corporate tax return
o Deferred income tax expense/benefit is equal to the change in deferred tax
liability or asset account from the beginning to the end of the year

Deferred Tax Liabilities
Created when temporary difference results in future tax income being GREATER
than future accounting income (tax deductible first or tax income later)
Examples of deferred tax liabilities
o Installment sales (tax income later)
o Contractors accounting (tax income later)
o Equity method (undistributed dividends tax income later)
o Depreciation expense (tax deductible first)
o Amortization of franchise (tax deductible first)
o Prepaid expenses (tax deductible first)
When the difference between taxable income and financial statement income is
negative, a deferred tax liability is created

Deferred Tax Assets
Created when temporary difference results in future tax income being LOWER
than future accounting income (tax income first or tax deductible later)
Example of deferred tax assets
o Bad debt expense (tax deduct later)
o Estimated liability/warranty expense (tax deduct later)
o Start-up expenses (tax deduct later)
o Prepaid rent, royalties, interest (tax income first)
Valuation allowance: if it is more than likely that part of a DTA will not be
realized, a valuation allowance is recognized so that the net DTA equals the
portion that will likely be realized (for amount expected not to be used)
o Not permitted under IFRS
When the difference between current taxable income and financial statement
income is positive, a deferred tax asset is created

Tax Rate
Use the tax rate IN EFFECT when the temporary difference reverses itself to
calculate the DTA or DTL
IFRS permits the use of enacted or substantially enacted

Net Temporary Adjustment
The deferred income tax expense/benefit is the difference between the beginning
balance in the deferred tax account and the computed ending balance
o Beginning temporary differences
o + Current period temporary difference
o Total temporary differences
o * Enacted tax rate
o = Required Ending Balance
o Beginning balance
o = Required adjustment (deferred income tax expense)

Balance Sheet Presentation
All deferred tax assets and liabilities classified as current must be netted and
presented as one amount (net current deferred tax asset/liability)
All deferred tax assets and liabilities classified as noncurrent must be netted and
presented as one amount (net noncurrent deferred tax asset/liability)
Under IFRS, all DTA and DTL are noncurrent

Operating Loss Carrybacks
100% collectible no valuation allowance necessary
Can be carried back 2 years

Operating Loss Carryforwards
If an operating loss is carried forward, the tax effects are recognized to the extent
that the tax benefit is likely to be realized
o Valuation allowance may be necessary

Calculating the Carryback and Carryforward
Net Operating Loss
o - Carryback: Income from prior 2 years
o = Net Carryforward
Calculate income tax refund receivable from prior years (100% of income tax
paid)
Net Carryforward * Enacted rate = Deferred Tax Asset
Valuation allowance (if necessary):
o Net Carryforward any future income = What Will Not Be Used
o Net Carryforward not used * enacted rate = Valuation Allowance

Book Value Per Common Share
Book value per common share = common shareholders equity / common shares
outstanding
Common shareholders equity = Total shareholders equity preferred stock
outstanding (at greater of call or par value) cumulative preferred dividends in
arrears

Cumulative Preferred Stock
All or part of the preferred dividend not paid in any year accumulates and must be
paid in the future before dividends can be paid to common shareholders






Participating Preferred Stock
Preferred shareholders share with common shareholders in dividends in excess of
a specific amount
o Fully participating preferred shareholders participate in excess dividends
without limit
o Partially participating there is a percentage limit in the excess

Convertible Preferred Stock
May be exchanged for common stock at a specified conversion rate

Callable Preferred Stock
May be called at a specific price

Mandatorily Redeemable Preferred Stock (Liability)
Must be bought back by the company on the maturity date
Classified as a liability

Calculation of Retained Earnings
Net Income/Loss
- Dividends declared
+/- Prior period adjustments (i.e. correction of error), net of tax
+/- Accounting changes reported retrospectively, net of tax
+ Adjustment from quasi-reorganization
= Change in retained earnings

Quasi-Reorganization
An accounting adjustment that revises the capital structure of a corporation as
though it had been legally reorganized
Allows a corporation with a significant deficit in retained earnings to eliminate
that deficit
Purpose: restate overvalued assets to their lower fair values
o NO CHANGE in total equity

Treasury Stock
Reduces stockholders equity (normal debit balance)
Methods of accounting: cost or par









Treasury Stock Cost Method
The treasury shares are recorded and carried at their reacquisition cost
Gain/loss is recognized at REISSUE
Journal Entries:
o Buyback:
Treasury stock (at COST)
Cash
o Reissue above cost:
Cash
Treasury stock
APIC T/S
o Reissue below cost:
Cash
APIC T/S
Retained Earnings
Treasury Stock

Treasury Stock Par Method
The treasury shares are recorded and carried at par value
Gain/loss is recognized at BUYBACK
Journal Entries:
o Buyback above issue price:
Treasury stock (at PAR)
APIC C/S (note must be at original APIC amount)
Retained earnings
Cash
o Buyback below issue price:
Treasury stock (at PAR)
APIC C/S (note must be at original APIC amount)
Cash
APIC T/S (Plug)
o Reissue:
Cash (amount received)
Treasury Stock
APIC C/S

Dividends
A distribution to shareholders based on earnings
Date of declaration: Create a liability and reduce retained earnings
Date of record: NO JOURNAL ENTRY

Cash Dividend
Dividends are only paid on authorized, issued and outstanding shares


Property (In-Kind) Dividend
On the date of declaration, the property should be restated to fair value and any
gain or loss should be recognized in income

Scrip Dividends
A form of notes payable whereby a corporation commits to paying a dividend at a
later date
o Typically when there is a cash shortage

Liquidating Dividends
When dividends to shareholders exceed retained earnings

Stock Dividends
Distribute additional shares of stock to shareholders
Not dividend income to the shareholder
o Small stock dividend (less than 20% of previously outstanding shares
issued): reduce retained earnings by the FMV of the stock
Retained earnings (FMV)
Common Stock
PIC
o Large stock dividend (greater than 25% of previously outstanding shares
issued): reduce retained earnings by PAR value of the stock
Retained Earnings (at par)
Common stock distributable
Note: there is no change to total shareholders equity

Stock Splits
No journal entry
Increase the number of share outstanding and reduce the par value
o I.E. 2-for-1 stock split: double number of shares, cut par value in half

Noncompensatory Stock Option/Purchase Plan
No journal entry until the stock is purchased; then, regular stock issuance entry

Compensatory Stock Option/Purchase Plan
Valued at the fair value of the options issued

Option Price
The price at which the underlying stock can be purchased pursuant to the option
contract

Exercise Date
The date by which the option holder must use the option to purchase the
underlying


Fair Value of an Option
Typically determined by an option pricing model

Grant Date
The date the option is issued

Vesting Period
Compensation expense is recognized over the service period, which typically is
the vesting period

Compensation Cost
Determined by the fair value of the options and recognized over the service period
o Compensation expense
APIC stock options
On exercise date:
o APIC stock options
Common stock
APIC
Expiration:
o APIC stock options
APIC expired stock options

Earnings Per Share
Under GAAP and IFRS, all public entities are required to present earnings per
share on the face of the income statement

Simple Capital Structure Report BASIC EPS ONLY
A company that only has common stock outstanding has a simple capital structure
Basic EPS is calculated as follows:
o (Net Income Preferred Dividends) / Weighted-Average Number of
Shares Outstanding (WACSO)
o Preferred dividends includes:
Dividends declared in the period on non-cumulative preferred
stock AND
Dividends accumulated in the period on cumulative preferred stock

WACSO
Treat stock dividends and stock splits as though they occurred at the beginning of
the period
Time weight all other securities

Complex Capital Structure Report BASIC AND DILUTED EPS
An entity has a complex capital structure when it has securities that can
potentially be converted to common stock and would therefore reduce (dilute)
EPS
Both basic and diluted EPS must be presented
Diluted EPS is calculated as follows:
o (Net Income Preferred Dividends) + interest on dilutive securities /
WACSO assuming all dilutive securities are converted to common stock

Dilution from Options, Warrants, and their equivalents
NO CHANGE IN THE NUMERATOR
Apply the treasury stock method:
o Formula to compute additional shares: Number of shares issued ((# of
shares * exercise price)/average market price) = additional shares
outstanding

Dilutive vs. Anti-dilutive
Options are only dilutive when the average market price is GREATER than the
strike price

Dilution from Convertible Bonds
Add to the numerator the interest expense, net of tax, due to assumed conversion
of the bonds to common stock
o Interest expense * (1 tax rate) => add to numerator
Add to the denominator the number of common shares associated with the
assumed conversion

Anti-dilutive
Use the results of each assumed conversion only if it results in dilution
Each issue should be considered separately from most to least dilutive

Dilution from Convertible Preferred Stock
Adjust the numerator preferred stock dividends removed as if they no longer
existed
Add to the denominator the number of shares associated with the conversion
Anti-dilution rules apply

Statement of Cash Flows
A required part of a full set of financial statements for all business enterprises

Operating Cash Flows
Cash receipts and disbursements from:
o Transactions reported on the income statement
o Current assets and liabilities (excluding current notes payable and current
portion of long-term debt financing activities)

Investing Cash Flows
Cash receipts and disbursements from:
o Noncurrent Assets


Financing Cash Flows
Cash receipts and disbursements from:
o Debt
o Equity

Operating Activities Direct Method
Cash received from customers (+)
o Revenues
o Increase in receivables
o + Decrease in receivables
o + Increase in unearned revenue
o Decrease in unearned revenue
o = Cash received from customers
Interest received (US GAAP) (+)
Dividends received (US GAAP) (+)
Other operating cash receipts such as the receipt of insurance proceeds and
lawsuit settlements (+)
Cash received from the sales of securities classified as trading securities, if
classified as current assets (+)
- Cash paid to suppliers
o COGS
o + Increase in inventory
o Decrease in inventory
o Increase in accounts payable
o + Decrease in accounts payable
o = Cash paid to suppliers
- Cash paid to employees
o Salaries and wages expense
o Increase in wages payable
o + Decrease in wages payable
o = Cash paid to employees
- Interest paid (US GAAP)
- Income taxes paid (US GAAP)
- Cash paid to acquire securities classified as trading securities, if classified as
current assets
- Other operating cash payments
o Other operating expenses
o Decrease in prepaid expenses
o + Increase in prepaid expenses
o + Decrease in accrued liabilities
o Increase in accrued liabilities
o = Cash paid for other expenses




Operating Activities Indirect Method
Net Income per income statement
+ Depreciation / amortization expense
+ Losses
- Gains / amortization of premium
- Earnings of equity affiliate
- Increase in operating assets
+ Decrease in operating assets
+ Increase in operating liabilities
- Decrease in operating liabilities

Investing Activities
The change in non-current assets such as:
o Making loans to other entities
o Purchasing / disposing of trading (noncurrent), AFS, and HTM securities
o Acquiring / disposing of PP&E
o Acquiring another entity under the acquisition method using cash

Financing Activities
The change in interest-bearing debt and equity
Equity activities:
o Issuing stock
o Paying dividends or repurchasing stock
Non-current liability activities:
o Issuing bonds, notes, and other borrowings
o Payment of principal (note: INTEREST IS IN OPERATING
ACTIVITIES)

IFRS Differences in Reporting Cash Flow
Interest received operating or investing
Interest paid operating or financing
Dividends received operating or financing
Dividends paid operating or financing
Taxes paid operating, investing, or financing

Dual Objective of Governmental Accounting
Demonstrate operational accountability for the entity as a whole
Demonstrate fiscal accountability for specific funding

Purpose of Fund Accounting
Enables service and mission-driven organizations to easily monitor and report
compliance with spending purposes, spending limits, and other fiscal
accountability objectives
Funds = legal restrictions

Governmental Accounting Principals and Standards
GASB establishes accounting and reporting standards for governments
o Note: FASB establishes accounting and reporting standards for Not-For-
Profit organizations
GAO prescribes government audit standards

Definition of a Fund
A fund is a sum of money or other resource segregated for the purpose of carrying
on a specific activity or attaining certain objectives in accordance with specific
regulations, restrictions, or limitations, constituting an independent fiscal and
accounting entity. Each fund is a self-balancing set of accounts

Fund Structure Government
Governmental funds
Proprietary funds
Fiduciary funds

Government-Wide Presentations (Consolidated Financial Statements)
Full accrual basis of accounting
Economic resources measurement focus
Classified in two categories:
o Government activities (GRaSPP + S)
o Business-type activities (E)

Major Fund Statements (like segment reporting)
Major funds are presented using the basis of accounting and measurement focus
unique to each category of fund. Only major funds are presented

Governmental Funds (no profit motive)
Modified accrual basis of accounting
Current financial resources measurement focus (no fixed assets or long-term debt)
Governmental fund types (GRaSPP):
o General Fund
o Special Revenue Fund
o Debt Service Fund
o Capital Projects Fund
o Permanent Fund
Balance Sheet:
o Current assets and deferred outflows =
o Current liabilities and deferred inflows of resources
o + Fund balance
Statement of Revenues, Expenditures, and Changes in Fund Balance
o Revenues
o Expenditures
o + Other financing sources (uses)
o = Net change in fund assets

Proprietary Funds (treat like customer / not citizen)
Full accrual accounting
Economic resources measurement focus (carry everything fixed assets and long
term debt)
Proprietary fund types (SE):
o Internal Service Fund
o Enterprise Fund
Statement of Net Position:
o All assets and deferred outflows of resources
o All liabilities and deferred inflows of resources
o = Net Position
Statement of Revenues, Expenses, and Changes in Net Fund Position
o Operating revenue
o Operating expenses
o + Non-operating revenues (expenses)
o = Change in net position

Fiduciary Funds (trust accounts)
Full accrual accounting
Economic resources measurement focus (carry everything fixed assets and long
term debt)
Fiduciary fund types (PAPI):
o Pension Trust Fund
o Agency Trust Fund
o Private Purpose Trust Fund
o Investment Trust Fund
Statement of Fiduciary Net Position:
o All assets and deferred outflows of resources
o All liabilities and deferred inflows of resources
o = Net position
Statement of Changes in Fiduciary Net Position
o Additions
o Deductions
o = Changes in net position

Balance Sheet Measurement Focus
Current Financial Resources (GRaSPP Funds)
o Modified accrual accounting
o No fixed assets are reported
o No no-current liabilities are reported
Economic Resources (SE-PAPI Funds)
o Full accrual accounting
o Fixed assets are reported
o Non-current liabilities are reported

Income Statement Basis of Accounting
Modified accrual (GRaSPP Funds)
o Revenue is recognized when measurable and available
Available = collectible within the current period or soon enough
thereafter to be used to pay liabilities in the current period (60
days)
o Expenditures are generally recorded when the related fund liability is
incurred
Full accrual (SE-PAPI Funds)
o Revenue is recognized when earned
o Expenses are recognized when incurred

Classification of Governmental Fund Balances (NU CAR) ON BALANCE SHEET
There are five degrees of constraint associated with the current equity of the fund
o Non-Spendable Fund balance: current assets that cannot be spent
o Restricted Fund balance: assets restricted by external authorities
o Committed Fund balance: assets obligated by a formal action of the
governments highest decision making authority
o Assigned Fund balance: assets the government intends to obligate but has
not formally committed
o Unassigned fund balance: spendable assets neither restricted, committed,
nor assigned
Only the general fund should have a positive unassigned balance

Modified Accrual Accounting (GRaSPP Funds)
Budgetary accounting is emphasized in order to control spending
Activity emphasizes flow of current financial resources
Encumbrance accounting is used to record purchase orders
o Book and Close the Budget-Activity-Encumbrance for the same amount
o BAE-BAE

Budgetary Accounting
Budgetary accounting is used by the GRaSPP funds
It is used to control expenditures and to account for the levy of taxes sufficient to
cover estimated expenditures

Budgetary Accounting Journal Entries
Budgetary accounts are posted only twice during the year beginning and end
Beginning budgetary control entry:
o Estimated revenue control
o Estimated other financing sources
o Budgetary control (negative / deficit)
Appropriations control (approved spending)
Estimated other financing uses
Budgetary control (positive / surplus)
Ending the budget is reversed and closed for the SAME AMOUNTS as those
recorded in the beginning of the period:
o Appropriations
o Estimated other financing uses
o Budgetary control (positive / surplus)
Estimated revenue control
Estimated other financing sources
Budgetary control (negative)

Activity Accounting
Emphasis is on the flow of current financial resources, not profit and loss
There is no application of the matching principle

Activity Revenue
Government fund revenues are recorded when measurable and available this
usually means the collection period does not exceed 60 days after fiscal year end
o Derived Tax revenues taxes imposed on or derived from exchange
transactions (sales tax and income tax)
Revenue when measurable and available
o Imposed non-exchange revenues taxes imposed on non-exchange
transactions (fines or property taxes)
Revenue when billed
o Government mandated non-exchange transactions instances in which a
higher level of government provides funds and mandates certain activities
by another level of government
Revenue when earned
o Voluntary Non-exchange transactions instances in which the
government receives resources and does not provide equal value (grant
agreements)
Revenue when earned

Activity Expenditures
Options for expenditure recognition:
o Purchase method: expenditure current assets when purchased and reverse
(set up current asset) for items not used during the period
Buying: Expenditures
Vouchers payable
Year end: Supplies inventory
Non-spendable fund balance inventory
o Consumption method: set up as a current asset when purchased and
expenditure as consumed
Buying: Supplies inventory
Voucher payable
Use of item: Expenditure
Supplies inventory
Transfers between funds: although not an expenditure, transfers out represent the
use of financial resources
o Other financing uses transfers out
Cash
Classification of governmental expenditures:
o Functional or program
o Organizational unit
o Activity
o Character
o Object classes
Fixed Assets: the acquiring of a fixed asset is not capitalized on the funds books.
Instead, it is considered an expenditure of the funds
o Fixed assets are reported on the government-wide statements
Long term debts: proceeds from long-term debts are recorded in the governmental
funds as other financing sources. The governmental funds do not record or
carry long-term debt
o Repayments of long-term debt are recorded as expenditures of both
principal and interest
o Long-term debt is carried on the government-wide financial statements

Encumbrances
Not a GAAP expenditure
Open purchase order represent an encumbrance or commitment of the available
appropriations of a government
o Set up the budgetary control:
Encumbrances
Budgetary control
o Reverse estimated encumbrances (SAME AMOUNT):
Budgetary control
Encumbrances
o Record actual expenditures:
Expenditures
Vouchers payable
Outstanding encumbrances at year-end will be carried forward within the
appropriate fund balance classification with a corresponding reduction of
unassigned fund balance, if the appropriations do not lapse

Deferred Outflows and Deferred Inflows of Resources
Service concession arrangements
Derivative instruments and hedge accounting

General Fund
Accounts for the general activities of a government that are not accounted for by
any other fund


Special Revenue Fund
Accounts for revenue and expenditures that are legally restricted or committed for
specific purposes other than debt service or capital projects
Expendable trust activities should be reported in the special revenue fund
(scholarship and endowment funds)
Grants that are monitored belong in the special revenue fund

Debt Service Fund
Accounts for the accumulation of resources and the payment of currently due
interest and principal on long-term general obligation debt by setting aside cash
and cash equivalents
o Only pays off the debt of the GRaSPP funds
o Encumbrances are not used interest payments are considered
expenditures

Capital Projects Fund (Purchasing department)
Established for the construction, purchase, or leasing of significant fixed assets
used by GOVERNMENTAL FUNDS ONLY
The life of the capital projects is short and limited to a construction period of 1-3
years
Special assessments: when the government is primarily or potentially liable,
report in the capital project fund
o If NOT liable, report in the agency fund
Bond Issue proceeds: other financing sources on the income statement

Permanent Funds
Used to report resources that are legally restricted to the extent that only earnings
(and not principal) may be used for the purposes that support the reporting
governments programs
Does NOT record encumbrances

Internal Service Fund (customer / not citizen)
Established to finance and account for services and supplies provided exclusively
to other departments within a government unit or to other governmental units,
typically on a cost-reimburse basis
Use accrual accounting
o Record long-term liabilities and fixed assets
o Fixed assets are depreciated
Net Position (RUN)
o Restricted
o Unrestricted
o Net Investment in capital assets

Enterprise Fund (customer / not citizen)
Used to account for operations that are financed and operated in a manner similar
to private business enterprise
Use accrual accounting
o Record long-term liabilities and fixed assets
o Fixed assets are depreciated
Net Position (RUN)
o Restricted
o Unrestricted
o Net Investment in capital assets
Municipal Landfills Cost components
o Cost of equipment expected to be installed and facilities expected to be
constructed near or after the date the landfills stops accepting waste
o Cost of gas monitoring and collection system
o Cost of final cover (capping)
o A portion is recognized as an expense and a liability each period according
to use

Pension Trust Funds
Account for government sponsored defined benefit and defined contribution plans
and other employee benefits such as post retirement healthcare benefits
Use accrual accounting
Changes in net pension liability are typically included in the pension expense
o Certain changes in the liability that are not included in pension expense
are required to be reported as deferred outflows or deferred inflows of
resources
Statement of cash flows NOT required (true for all Fiduciary PAPI funds)

Agency Trust Fund (mailman)
An agency fund collects cash to be held temporarily for an authorized recipient to
whom it will later be disbursed may be another fund / individual / firm /
government
No liability or monitoring of funds report in the agency fund
Current assets = current liabilities
Statement of cash flows NOT required

Private Purpose Trust (NOT general public use)
The designated fund for reporting all other trust arrangements under which
principal and income are for the benefit of one of the following:
o Specific individuals
o Private organizations
o Other governments
Use accrual accounting

Investment Trust Funds
Reports any external investment pool that is sponsored by the government



Government-wide Financial Statements (Operational Accountability)
The focus of the government-wide financial statements is to report the extent to
which the government has met its operating objectives efficiently and effectively

Fund Financial Statements (Fiscal Accountability)
The focus of the fund financial statements is to demonstrate that the government
entitys actions in the current period have complied with public decisions
concerning the raising and spending of the public funds in the short term

Reporting For General Purpose Governmental Units
Required reports:
o Managements Discussion and Analysis (MD&A) Before Financial
Statements
o Government-wide Financial Statements
Statement of Net Position
Statement of Activities
o Fund Financial Statements major funds shown individually; nonmajor in
total
Governmental Funds
Balance Sheet
Statement of Revenues, Expenditures, and Changes in Fund
Balance
Proprietary Funds
Statement of Net Position
Statement of Revenues, Expenses, and Changes in Fund
Net Position
Statement of Cash Flows
Fiduciary Funds
Statement of Fiduciary Net Position
Statement of Changes in Fiduciary Net Position
o Notes to Financial Statements
o Required Supplementary Information (RSI) other than MD&A After the
Financial statements
Pension
Budget comparison schedules
Infrastructure
Optional Reporting:
o Comprehensive Annual Financial Report (CAFR)
Intro Section
Basic Financial Statements and RSI (Includes all required reports)
Statistical Section

Primary Government
The primary government consists of all organizations that make up the legal
government entity

Primary Government Entities (SELF)
State governments
Local governments
Special purpose local governments that meet ALL of the following criteria:
o Separately-Elected governing body
o Legally separate
o Fiscally independent of other state and local governments
Primary government reports by it-SELF

Component Unit
A component unit of the primary government is usually an organization for which
the elected officials of the primary government are financially accountable
By its nature, it cannot be excluded from the primary governments financial
statements without making the primary governments financial statements
misleading or incomplete

Blended Presentation
The blended method is used when:
o A board of the component unit is substantively the same as that of the
primary government OR
o The component unit serves the primary government exclusively or almost
exclusively OR
o The component unit is not a separate legal entity
The blended presentation combines financial information with the primary
government

Discrete Presentation (Separate Presentation)
Discrete presentation is used when the criteria for blended presentation are not
met
Displays component units in separate columns

Managements Discussion and Analysis (MD&A)
Does NOT contain variance analysis or reconciliation of fund financials to
government-wide financials

Government-Wide Financial Statements
Use full accrual accounting
Economic resources measurement focus
o Report all assets and liabilities

Statement of Net Position
Assets Liabilities = Net Position (RUN)
o Not necessary to capitalize construction period interest
Required and Modified approach
o Required: all assets meeting capitalization requirements should be
recorded and depreciated
o Modified: eligible infrastructure assets are not required to be depreciated if
it meets two requirements:
The governments asset management system meets certain
conditions
Government documentation should include data on asset
preservation
Artwork and Historical Treasures (SAME RULES AS NOT FOR PROFITS)
o Governments may elect not to capitalize works of art when the collection
meets the following conditions
Collection is held for public exhibition
Collection is protected
Collection is subject to an organizational policy that requires the
proceeds from sales of collection items to be used to acquire other
items for collections

Statement of Activities
The net expense or revenue for each function or program is classified into one of
these categories:
o Governmental activities (GRaSPP + S)
o Business-type activities (E)
o Component units (rescue squad or board of education)
Expenses are reported by function on the full accrual basis
Program revenues are directly associated with the function or program on the full
accrual basis

Program Revenue Categories (SOC)
Service charges revenues based on exchange-like transactions
Operating grants and contributions mandatory and voluntary non-exchange
transactions with other governments, organizations, or individuals restricted for
use in a particular program
Capital grants and contributions

Fund Financial Statements
Financial statements are required for the governmental, proprietary, and fiduciary
funds

Major Fund Reporting Criteria
The GRaSPP funds and enterprise funds are individually compare to the total
governmental and enterprise funds (respectively) and must meet two criteria:
o 10% or more of the revenues/expenditures, assets/liabilities of all
governmental funds OR all enterprise funds AND
o 5% or more of the revenues/expenditures, assets/liabilities of all
governmental funds AND all enterprise funds



Reconciliation of Fund Financials to Government-Wide Statements (GRaSPP + S)
Balance Sheet (GALS BARE)
o GRaSPP Fund Balance
o + Assets (non-current)
o Liabilities (non-current)
o + Service (internal) fund net position
o Basis of accounting (adjustments)
o Accrued
o Revenues and
o Expenses
Statement of Revenues, Expenditures, and Changes in Fund Balance (GOES
BARE)
o GRaSPP net change in fund balance
o Other financing sources
o + Expenditure capital outlay (net of depreciation)
o +Service (internal) fund net income
o Basis of accounting (adjustments)
o Accrued
o Revenues and
o Expenses

Proprietary Funds Statement of Cash Flows
Direct method is required
Reconciliation of operating income to net cash provided by operations required
Four categories:
o Operating activities
o Capital and related financing activities
o Non-capital financial activities
o Investing activities
Capital assets are financing activities
Interest expense/payments are financing activities

Fiduciary Funds (PAPI)
NOT INCLUDED IN GOVERNMENT-WIDE STATEMENTS

Industries that Frequently Use Not-For-Profit Accounting
Health care organizations
Educational institutions
Voluntary health and welfare organizations
Other private, non-governmental not for profits

NFP Required Financial Statements
Statement of Financial Position (balance sheet)
Statement of Activities (income statement)
Statement of Cash flows
Statement of functions expenses
o Required for voluntary health and welfare organizations
o Optional for the rest

NFP Statement of Financial Position
Assets, Liabilities, and Net Assets (equity)
o Net Assets (PUT)
Unrestricted net assets not permanently or temporarily restricted,
internal-board designated funds
Temporarily restricted net assets donor-imposed stipulations
either expire by passage of time or can be fulfilled and removed by
actions of the organization
Permanently restricted net assets limited by donor-imposed
stipulations that neither expire by passage of time NOR can be
fulfilled or otherwise removed by actions of the organization

NFP Statement of Activities
Classification of Revenue, Gains, and Other Support (PUT)
o Unrestricted net assets not permanently or temporarily restricted,
internal-board designated funds
o Temporarily restricted net assets donor-imposed stipulations either
expire by passage of time or can be fulfilled and removed by actions of the
organization
o Permanently restricted net assets limited by donor-imposed stipulations
that neither expire by passage of time NOR can be fulfilled or otherwise
removed by actions of the organization
Timing of Reclassification of Restrictions
o Donor-imposed restrictions are recorded as restricted revenue in the period
received
o When satisfied, a reclassification is reported
o If met in the same period received, may be recorded as unrestricted
support if the policy is applied consistently and disclosed
Classification of Expenses
o Expenses are reported as decreases in unrestricted net assets ONLY
Program services activities for which the organization is
chartered
Support services include everything not classified as a program
service
Combined costs if fundraising costs are combined with
educational services, should be allocated

NFP Statement of Cash Flows
Either the direct or the indirect method may be used
Operating activities
o Include applicable agency transactions
o Under the direct method, should be reported by major class of cash
receipts
Financing activities include the cash transactions related to borrowing and cash
transactions related to certain restricted contributions
o Increases to an endowment, purchases of assets, annuity agreements
Investing activities
o Include proceeds from the sale/purchase of works of art
o Include investment in equipment
o Proceeds from the sale of assets that were received in prior periods and
whose sale proceeds were restricted to investment in equipment
Cash and cash equivalents
o Exclude donor-restricted securities

NFP Statement of Functional Expenses
Required for voluntary health and welfare organizations
Classification of expenses:
o Program support expenses
o Fund-raising expenses
o Management and general costs
o Multiple cost items

Contributions and Recognition
Cash contributions should be recognized as revenue when received
o Asset at FV
Contribution support revenue
Pledge should be recognized as revenue when the promise is made
Conditional pledge should be recognized when the conditions are substantially
met
Multi-year pledge recorded at the Net Present Value when the pledge is made
o Future collections are considered temporarily restricted
Allowance for uncollectible pledges allowance should be setup for the pledges
net realizable value

Donated Services (SOME)
Should be recorded as contribution revenue AND expense at FV if it meets the
following criteria:
o Specialized skills are required and possessed by the donor
o Otherwise needed by the organization
o Measureable
o Easily (fair value)
Volunteer assistance a fundraising expense

Donated Collection Items (SAME AS GOVERNMENT)
Do not need to be recorded at all when the collection meets the following
conditions
o Collection is held for public exhibition
o Collection is protected
o Collection is subject to an organizational policy that requires the proceeds
from sales of collection items to be used to acquire other items for
collections

Donated Materials
Record at fair value

Promises to Contribute
Unconditional promises to contribute in the future are reported as temporarily
restricted support
Donor-imposed restrictions are recognized as revenue/gain in the period received
and classified as temporarily or permanently restricted

Exchange Transactions (Buyer and Seller)
Reciprocal transfers in which each party receives and sacrifices something of
approximately equal value are termed exchange transactions
o Amount transferred FV Dues/Purchase = contribution revenue

Recipient Accounting
WITHOUT VARIANCE POWER (NFP acts as agent/no benefit or power)
o Assets are recognized at fair value
o Assets are recognized as a liability to the beneficiary
Asset
Refundable advance
GRANTED VARANCE POWER (NFP acts as agent/has power)
o Assets are recognized at fair value
o Assets are recognized as contribution revenue when received
Asset
Contribution revenue
FINANCIALLY INTERRELATED
o Assets are recognized at fair value
o Assets are recognized as contribution revenue when received
Asset
Contribution revenue

Beneficiary Accounting
Specified beneficiaries recognize their rights to assets held by others unless the
recipient is explicitly granted variance power

Investments in Securities
Measured at fair value
Gains and losses are reported as increases/decreases in unrestricted net assets
unless their use is restricted by donor stipulations or law


NFP Fund Accounting
Only appropriate for internal reporting purposes!!
Types of funds used by non-profits:
o Unrestricted current funds
o Restricted current funds
o Plant funds
o Loan funds
o Endowment funds
o Annuity and life income funds
o Agency funds

Colleges and Universities
Revenues
o Student tuition and fees (reported at gross)
o Government aid, grants, contracts
o Gifts and private grants
Gross revenue from tuition and fees = assessed student tuition and fees
cancelled classes
Expenses
o Scholarship and fellowship

Health Care Organization
Revenues
o Patient service revenue (reported at gross)
Charity care is not reported as revenue
Gross patient service revenue charitable services = patient
service revenue
Net patient service revenue = patient service revenue contractual
adjustments policy discounts administrative adjustments
o Other operating revenue can include tuition from schools, revenues from
educational programs, donated supplies and equipment, cafeteria and gift
shop revenue
o Non-operating revenue any unrestricted income and donated services

Voluntary Health and Welfare Organizations
Income - largely contributions and pledges from the general public

Fair Value (exit price)
The price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants
DOES NOT INCLUDE TRANSACTION COSTS
o Used to calculate most advantageous market
FV of non-financial assets assumes highest and best use

Principal Market
The market with the greatest volume or level of activity

Most Advantageous Market
The market with the best price for the asset or liability after considering
transaction costs

Valuation Techniques
Market approach used for prices and other relevant information from market
transactions involving identical or comparable assets or liabilities
Income approach (PV of discounted cash flows) converts future amounts to a
single amount to measure fair value
Cost approach uses current replacement cost to measure fair value

Hierarchy of Inputs
Level 1 quoted prices in active markets for identical assets or liabilities on the
measurement date
Level 2 inputs other than quoted market prices that are directly or indirectly
observable for the asset or liability
Level 3 unobservable inputs for the asset or liability (discounted cash flows)
o Only used when there are no Level 1 or Level 2 inputs or when undue
cost/effort is required to obtain observable inputs
If multiple levels are used, the fair value is classified as the lowest level used (the
weakest link)

Admission of a Partner By Sale of Existing Partnership Interest
Outside partnership transaction, no journal entry needed

Formation of a Partnership
Assets are valued at fair value
Liabilities assumed are recorded at their present value

Creation of a New Partnership Interest with Additional Investment of Capital
Exact method (equal to book value) when the purchase price is equal to the
book value of the capital account purchased, no goodwill or bonuses are recorded
o Use finger math get share, divide by 3
Bonus Method when the purchase price is more or less than the book value of
the capital account purchased, bonuses are adjusted between the old and new
partners capital accounts and do not affect partnership assets
o BALANCE in total capital accounts controls the allocation:
Total existing capital
+ New partner contribution
BALANCE in total capital accounts
/ new partners share %
= Amount of Capital attributed to new partner
- New partner contribution (Step 2 above)
= Bonus
o Bonus attributed to existing partners when new partner contributes MORE
than their capital share
Split based on partnership agreement
o Bonus attributed to existing partners when new partner contributes LESS
than their capital share
Goodwill method goodwill is recognized based upon the total value of the
partnership implied by the new partners contribution
o GOING IN INVESTMENT controls the allocation
Implied value going in (new partner contribution * share
denominator)
- Book value of partnership (total partners capital accounts,
including new partner)
= Goodwill
o Always allocated to old partners:
Cash
Goodwill
A
B
C

Profit and Loss Distribution
Start with total profit (or loss), then:
o Subtract any bonus, interest, or salary FIRST
Remaining balance after bonus, interest, and salary is distributed based on the
partnership agreement

Withdrawal of a Partner
Bonus Method the difference between the balance of the withdrawing partners
capital account and the amount that person is paid is the amount of the bonus
o Bonus is allocated to the remaining partners based on the partnership
agreement
o Goodwill IS NOT recognized
o Step 1: Revalue assets to fair value
Asset adjustment
A
B
C
o Step 2: pay off withdrawing partner
A
B
C
Cash
Goodwill Method the amount of the implied goodwill is allocated to ALL of the
partners based on the profit and loss ratios
o Step 1: Revalue assets to fair value
o Step 2: Record goodwill so that the withdrawing partners capital account
equals the amount of their payoff
Goodwill
A
B
C
o Step 3: Pay off withdrawing partner
C
Cash

Liquidation of a Partnership
Creditors must be paid before the noncreditor partners receive any payments
All possible losses must be provided for in a liquidation before any distribution is
made
Steps:
1. Convert non-cash asset to cash
2. Gain or loss on realization (of conversion)
3. If there is a capital deficiency in a partners account, the
other partners must cover (offset) based on their
profit/loss ratios
4. Distribute any remaining cash based on profit/loss
ratios

Variable Interest Entities (VIEs)
Consolidation required even if the company owns no stock if 3 conditions are
met:
o Variable interest there is a financial stake in the company
o Variable interest entity that companys equity is strange
o Primary beneficiary we have the power over the company and get P/L
Variable interest entity (strange equity) company either does not have equity
investors with voting rights or lacks sufficient financial resources to support its
activities
Primary beneficiary the entity that is required to consolidate the VIE
o Power to direct VIE activities
o Absorbs expected VIE losses
o Receives expected VIE profits
Under IFRS = Special Purpose Entity (SPE), similar determination process

Asset Retirement Obligations (AROs)
A legal obligation associated with the retirement of a tangible long-term assets
Measured at present value

Asset Retirement Cost (ARC)
The ARC is the amount capitalized that increases the carrying amount of the long-
lived asset when a liability for a ARO is recognized:
o ARC (asset at present value)
ARO (liability at present value)

ARO Subsequent Measurement
Accretion expense (interest expense) the increase in the ARO due to the passage
of time calculated using the accretion rate
o Accretion expense
ARO
Depreciation expense (every year on the ARC) decreases the ARC asset on the
balance sheet
o Depreciation expense
Accumulated depreciation (ARC)

Troubled Debt Restructurings
The creditor allows the debtor certain concessions to improve the likelihood of
collection that would not be considered under normal circumstances

Accounting by Debtors
Transfer of assets recognize a gain in the amount of the excess of the carrying
amount of the payable over the fair value of the assets given up
o FV assets transferred
o NBV asset transferred
Transfer of assets recognize a rain on the amount of debt discharge (could be
considered extraordinary if it meets requirements)
o Carrying amount of the payable
o FV of assets transferred
Transfer of equity interest recognize a gain on the difference between the
carrying amount of the payable and the fair value of the equity interest
o Carrying amount of the payable
o FV of equity transferred
Modification of terms handled PROSPECTIVELY
o If future cash payments are less than current book value, debtor should
recognize a gain

Accounting by Creditors
Receipt of assets or equity account for at fair value on date received
o The excess of debt forgiven over the fair value is a loss
Modification of terms impairment is recorded by creating a valuation allowance
with a corresponding charge to bad debt expense

Trade Accounts Payable
Cash discounts on accounts payable can be recorded gross or net:
o Gross method record the purchase without regard to the discount; if
discount is taken, credit purchase discounts take
o Net method record purchases and accounts payable net of the discount;
if payment is made after the discount period, purchase account lost is
debited

Sales Taxes Payable
Should be credited to a payable account after collection and until remitted
NOT an expense of the company collecting sales taxes from customers

Payroll Deductions
Deductions for social security, Medicare, and income taxes are withheld from
employees out of the gross pay on their paychecks
NOT an expense to the employer

Unemployment Taxes and Employers Share of Payroll Taxes
Unemployment taxes and the EMPLOYERs share of payroll taxes should be
accrued by the employer as an expense

Low or Absent Interest Rate Notes Payable and Receivable
Record the receivable/payable at its face amount
Record the sale of the asset at the present value of the obligation
Difference between the face amount and present value is a discount/premium that
is amortized over the life of the note
Use the effective interest method to calculate interest and note carrying value
Payment Interest Principal Balance
Coupon Balance * Eff.
Rate
Difference
between Payment
and Interest
Prior balance -
principal

Estimated Liabilities (Guessing looking forward)
An estimated liability represents recognition of a probable future charge that
results from a prior act, such as estimated liability for warrants, trading stamps, or
coupons
Premiums: offers to customers for stimulating sales (box tops, for instance)
o Total number of coupons issued * Estimated redemption rate = Total
estimated coupon redemptions
o Must accurately reflect the current liability at the end of each period
Warranties: must create a liability account if the cost of the warranty can be
reasonably estimated
Service contracts: treated as unearned revenue and estimated and accrued in the
financial statements

Accrued Liabilities (Looking back)
An accrued liability represents an expense recognized or incurred but not yet paid
Bonus: easiest method of solving select the middle answer and work backwards

Contingencies (GAAP)
Probable likely to occur
Reasonably possible more than remote but less than likely
Remote slight chance of occurring

Loss is Probably and Can Be Reasonably Estimated
Record Journal Entry
o Expense
Liability
Provision for a loss contingency should be accrued by a charge to income,
providing that both of the following conditions exist:
o It is probable
o The amount of the loss can be reasonably estimated
GAAP use minimum amount in range
IFRS midpoint in the range

Loss is Reasonably Probable
Disclose (DO NOT record journal entry or accrue)

Loss is Remote
Ignore and disclose
o Debts of others guaranteed
o Obligations of commercial banks
o Guarantees to repurchase receivables

Subsequent Events
An event or transaction that occurs after the balance sheet date but before the
financial statements are issued
Recognizable / Type 1: relate to pre-existing item (journal entry and disclose)
o Provide additional information about conditions that existed at the balance
sheet date
Non-recognizable / Type 2: important new event (disclose)
o Provide information about conditions after the balance sheet date and did
not exist at the balance sheet date

Gain Contingencies
DO NOT record journal entry
Not reflected on the financial statements
Disclose nature and amount

Reissuance of Financial Statements
The entity should NOT recognize events that occurred between the date of the
original financial statements and the reissue date unless the adjustment is required
by GAAP or other regulatory requirements





Types of Financial Instruments
Cash, foreign currency, and demand deposits
Evidence of an ownership interest in an entity (stock certificate, partnership
interests)
Contracts (bonds) which result in an exchange of cash or ownership interest in an
entity
Derivatives financial instruments whose value or settlement amount is derived
from the value of another unity of measurement (OFFS)
o Options
o Futures
o Forwards
o Swaps

Fair Value Option
On specified election dates, entities may choose to measure eligible financial
instruments at fair value. Under the fair value option, unrealized gains and losses
are reported in EARNINGS.
The fair value option is irrevocable and is applied to individual financial
instruments
Disclosures required:
o Fair value for all financial instruments together with related carrying
amounts showing clearly weather the amount represents an asset or
liability

Concentration of Credit Risk Disclosures
Credit risk is the possibility of loss or default from the failure of the other party
Concentration of credit risk occurs when an entity has contracts of material value
with one or more parties in the same industry/region/similar economic
characteristics
Entities must disclose all significant concentrations of credit risk

Market Risk (Beta) Disclosures
GAAP entities are encouraged but not required to disclose quantitative
information
IFRS entities are required to disclose information about market risk, credit risk,
and liquidity risk

Derivative Instrument
A financial instrument that derives its value from the value of some other
instrument and has all three of the following characteristics:
o One or more underlyings and one or more notional amounts/payment
provisions
o Requires no initial net investment
o Terms require or permit net settlement
Underlying a specified rate, price or other variable (what we are gambling on)
Notional amount specified unit of measure (used to calculate gain/loss)
Value/Settlement amount Notional amount * Underlying
Payment provision a specified settlement that is to be made if the underlying
behaves in a specified way
Hedging the use of a derivative to offset anticipated losses or to reduce earnings
volatility
o When effective, the change in the value offset the change in value of the
hedged item or cash flows of the hedged item

Common Derivatives (OFFS)
Option Contract a contract between two parties that gives one party the right,
but not the obligation, to buy or sell something to the other party at a specified
price (strike/exercise price) during a specified period of time
o Call option the right to buy (hope price goes up)
o Put option the right to sell (hope price goes down)
o Gain/Loss = (Underlying FV) * number of shares cost (initial net
investment)
Futures Contract an agreement between two parties to exchange a commodity or
currency at a specified price on a specified future date
o Long position (buy profit when price goes up)
o Short position (sell profit when price goes down)
o Profit/loss = (FV underlying) * notional amount
No cost to enter futures contract
Forward Contract similar to futures contracts except that they are privately
negotiated between two parties rather than on a clearing house
Swap Contract a private agreement between two parties to exchange future cash
payments
o Hope that what you get is greater than what you receive

Accounting for Derivative Instruments
All derivative instruments are recognized in the balance sheet as either assets or
liabilities (depending on the rights/obligations of the contract) and measure at fair
value
Gains and losses:
o No hedging destination recognized in earnings
o Fair value hedge designed as a hedge to changes in fair value of an
asset/liability
Recognized in earnings
o Cash flow hedge hedges the exposure to variability in expected future
cash flows
Ineffective (within 1/5) recognized in earnings
Effective recognized in OCI until the transaction impacts earnings
o Foreign currency hedge designated as hedging the exposure to
variability in foreign currency
FC fair value hedge income statement
FC cash flow hedge ineffective in IS, effective in OCI
FC net investment hedge OCI
Liquidation Basis of Accounting
When liquidation is imminent, the liquidation basis is applied prospectively

Criteria for Imminent Liquidation
The likelihood of the entity returning from liquidation is remote AND
A liquidation plan is approved by the individuals who have authority OR
A liquidation plan is imposed by other forces

Liquidation Measuring Assets, Liabilities, and Accruals
Assets the amount of cash proceeds expected from liquidation
Liabilities according to the GAAP that otherwise applies to them
Accruals must be presented separately and at non-discounted values

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