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2013-11-05 03:07:17

Financial Accounting
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  1. Relevance (Passing Confirms Money)
    Financial info is relevant if it is capable of making a difference in the decisions made by users.

    • 1. Predictive Value
    • 2. Confirming Value
    • 3. Materiality
  2. Faithful representation (completely neutral is free from error)
    Financial information must faithfully represent the reported economic phenomena

    • 1. Completeness
    • 2. Neutrality
    • 3. Freedom from error
  3. Enhancing Qualitative Characteristics
    • 1. Comparability - consistency
    • 2. Verifiability
    • 3. Timeliness
    • 4. Understandability
  4. REGL ALE needs ID
    • 1. Revenue
    • 2. Expenses
    • 3. Gains
    • 4. Losses
    • 5. Assets
    • 6. Liabilities
    • 7. Equity
    • 9. Investments by Owners
    • 10. Distributions to Owners
  5. Five Elements of PV Measurement
    • 1. Estimate of future cash flows
    • 2. Expectations about timing variations of future cash flows
    • 3. Time value of money (risk free rate of interest)
    • 4. The price for bearing uncertainty (credit risk)
    • 5. Other factors (liquidity and market imperfections)
  6. IDEA
    • I - Income from Continuing Operations (show gross of tax, then net of tax)
    • D - Income from Discontinued Operations (net of tax)
    • E - Extraordinary items (net of tax)-must be unusual AND infrequent in occurrence
    • A - Cumulative effect of change in Accounting Principle (net of tax) - a change from one acceptable method of accounting to another (GAAP to GAAP)

    • IDE - Income statement
    • A - Retained Earnings
  7. Change in Accounting Estimate (prospective)
    • 1. Not an error - do not restate prior periods
    • 2. Fix it on a go forward basis and disclose in notes to financial statements
    • 3. Change in accounting principle that are inseparable from a change in estimate

    Example: changes in lives of fixed assets, adjustments of year end accruals, write downs of obsolete inventory
  8. Change in Accounting Principle (retrospective)
    • 1. Change in accounting from one accounting principle to another accounting principle (GAAP to GAAP; NonGAAP to GAAP = errors)
    • 2. Adjust prior years as if it was always used new method
    • 3. Cumulative Effect = if noncomparative F/S, cumulative effect of a change is equal to difference between amount of beg RE in period of change and what RE would have been if it was done right. If comparative F/S, cumulative effect of a change is equal to difference between beg RE in first period presented and what RE would have been if it was done right.
    • 4. General rule - adjust beg RE in earliest period presented for cumulative effect of change and if prior F/S are presented, they should be restated.
    • 5. Exceptions - to LIFO, prospective
  9. Changes in Accounting Entity (retrospective)
    • 1. Occurs when entity being reported has changed composition (consolidated/combined F/S)
    • 2. Restatement of all F/S to reflect info for the new entity (if comparative F/S)
    • 3. IFRS prohibited
  10. Error Correction (prior period adjustment - restate)
    • 1. Corrections of error in recognition, measurement, presentation or disclosure
    • 2. Includes math mistakes, mistakes in GAAP or IFRS, oversight or misuse of facts
    • 3. Includes change from nonGAAP to GAAP or cash basis to accrual accounting = errors
    • 4. Correct error in prior F/S if year is presented
    • 5. If not, adjust net of tax RE of earliest year presented
  11. PUFER
    • P - Pension Adjustments-change in funded status due to gains or losses, prior service costs, and net assets/obligations
    • U - Unrealized Gains and Losses (available for sale securities only)
    • F - Foreign Currency items-translation adjustments and gains and losses
    • E - Effective Portion of Cash Flow hedges-reported as a component of OCI until realized
    • R - Revaluation surplus (IFRS only)-gains recognized for intangibles and FA in OCI

    • *all belong to OCI, which is in SE on B/S*
    • *NI + OCI = Comprehensive income
  12. Thresholds for Reportable Segments (Materiality Test)
    10% Size Test

    • 1. Reported rev, intersegment transfers and sales are 10% of comibined revenue for all operating segments
    • 2. Reported GP or loss of all segments
    • 3. Assets are 10% or more of all assets

    • 75% Reporting Sufficiency Test
    • 1. If consolidated rev reported by operating segments is less that 75% of external rev, additional segments need to be identified as reportable segments, even if they don't meet the above tests

  13. Revenue recognition (US GAAP)
    • 1. Persuasive evidence of arrangement (contract)
    • 2. Delivery has occurred or services made
    • 3. Price is fixed and determinable
    • 4. Collection is reasonably assured
  14. Revenue recognition (IFRS)
    • 1. Rev and cost can be measured reliably
    • 2. Economic benefits will flow to entity
    • 3. Transferred risk and rewards to buyer
    • 4. Does not retain managerial involvement
  15. Cost Recovery Method
    • 1. No profit is recognized on a sale until all costs have been recovered.
    • 2. Expected profit on sale is recorded as deferred GP
    • 3. Collections are first applied to costs. After costs have been recovered, there is GP
  16. Expired vs. Unexpired costs
    • 1. Expired-costs that have expire during period and have no future benefit (insurance, COGS, period costs, start up costs) EXPENSE IT on I/S!
    • 2. Unexpired-capitalized and matched against future rev (FA and inv) STAY ON B/S!
  17. Intangible Assets (US GAAP)
    • 1. Purchased intangible assets - record at cost
    • 2. Internally Developed intangible assets - includes trademarks, cost of developing and maintaining goodwill EXPENSE!
    • 3. Legal fees, registration/consulting fees, design costs and other costs to secure asset are CAPITALIZED. 

    • *Patent is amortized over shorter of estimated life or remaining legal life*
    • *Cost - Amortization - Impairment
  18. R&D costs (IFRS)
    • 1. Research costs are EXPENSED
    • 2. Development costs are CAPITALIZED if technological feasibility, economic benefits, complete intangible assets, etc.
  19. Goodwill
    • 1. Goodwill - capitalized excess earnings power
    • 2. Acquisition method - excess of acquired FV over FV of entity's net assets, including identifiable assets
    • 3. Equity method - excess of stock purchase price over FV of net assets acquired
    • 4. Maintaining goodwill - EXPENSE!
  20. Revaluation model
    • 1. Revaluation model - FV on revaluation date - subsequent amortization - subsequent impairment
    • 2. Losses (FV on revaluation date<carrying value before revaluation) reported on I/S
    • EXCEPTION: revaluation loss reverses a previously recognized revaluation gain is recognized in OCI and reduces surplus in AOCI
    • 3. Gains (FV on revaluation date>carrying value before revaluation) reported on OCI EXCEPTION: revaluation gain reported on the I/S to the extent they reverse a previously recognized revaluation loss
    • 4. Impairment - if revalued intangible becomes impairment, the impairment is recorded by first reducing revaluation surplus to 0 with losses on I/S
  21. Franchisor vs Franchisee Accting
    • 1. Initial franchise fees (franchisor) - revenue when substantially performed
    • 2. Initial franchise fees (franchisee) - intangible asset amortized over life
    • 3. Continuing franchise fee (franchisor) - revenue when earned
    • 4. Continuing franchise fee (franchisee) - expense as incurred
  22. R&D costs (US GAAP)
    • 1. EXPENSE (planning, testing, design)
    • 2. CAPITALIZED on materials, equipment, facilities that have future uses or R&D costs undertaken on behalf of others
  23. Impairment of Intangible Assets other than Goodwill (2 step test)
    • Step 1. Carrying amount compared to undiscounted future net cash flows
    • Step 2. If exceeded, asset is impaired and impairment loss is equal to difference between carrying amount of asset and FV is recorded. (only method used for assets w/indefinite life)
  24. Cash basis to accrual basis
    • 1. Add increase in current assets and decrease in current liabilities
    • 2. Subtract decrease in current assets and subtract increase in current liabilities
  25. Completion Contract Method (US GAAP only)
    • 1. Recognizes income only on completion of contract
    • 2. Excess of accumulated costs>billing = current asset 
    • 3. Excess of accumulated billings>cost = current liability
    • 4. Applicable OH and direct costs should be charged to construction in progress (asset)
    • 5. Billings/cash received should be credited to advances on construction in progress (liability)
    • 6. Losses need to be recognized in full in the year it is discovered

    • Advantage - based on final results rather than estimates
    • Disadvantage - does not properly reflect matching principle when period extends over more than one accounting period
  26. Percentage of Completion Method (US GAAP & IFRS)
    • 1. Used when collection is assured
    • 2. Costs incurred/Total estimated costs 
    • 3. Estimated loss is recognized immediately it is discovered.

    • Advantage - accurate reporting of status of uncompleted contracts
    • Disadvantage - necessity of relying on estimates of ultimate costs
  27. Percentage of Completion Formula
    • 1. Contract Price - Estimated TC=GP of completed contract
    • 2. Total Cost to date/Total Estimated cost of contract=% of completion
    • 3. Step 1 x Step 2=GP earned (profit to date)
    • 4. PTD at current yr - PTD at beg of period=Current year to date GP
  28. Accounting for Installment Sales
    • -Used only when there is no reasonable basis for estimating the degree of collectibility.
    • -Rev recognized when cash is collected

    • 1. Sales - COGS=GP
    • 2. GP/Sales=GP %
    • 3. Cash collections x GP %=Earned GP
    • 4. Installment receivable x GP=Deferred GP
  29. Marketable Securities
    • 1. Trading - reported at FV on I/S
    • 2. Available for sale - reported at FV on OCI
    • 3. Held to Maturity - reported at amortized cost/carrying amount

    *FV - Cost = Unrealized gain/loss

    • -Under US GAAP, if the decline in FV is other than temporary (permanent), the cost basis is written down to FV as the new cost basis and amount of write down is recognized as a realized loss and included in I/S!
    • -Under IFRS, foreign exchange gains & losses are reported on I/S
  30. Cost Method
    • 1. <20%/does not exercise significant influence
    • 3. If company owns <20% but exercises significant influence, then equity method can be used.
    • 4. Investment in Investee - J/E account booked for FV - Cost including legal fees and marketable securities.
  31. Equity Method
    • 1. 20-50%/exercises significant influence
    • 3. Cost+Earnings-Dividends-undervalued equipment= B/S
    • 4. Earnings-undervalued equipment=I/S

    • On B/S
    • -J/E to record at cost
    • Investment in investee xx
    •               Cash                        xx

    • -J/E to recognize investee's NI (% x amount)
    • Investment in investee xx
    •            Equity in earnings/investee income xx

    • -J/E to record dep of undervalued equipment
    • (Amount/Yrs of life)
    • Equity in investee income xx
    •            Investment in investee xx

    • -J/E to recognize dividend paid by investee (% x amount)
    • Cash xx
    •       Investment in investee

    • On I/S
    • -J/E to record investee earnings
    • Investment in investee xx
    •        Equity in earnings/investee income xx

    • -J/E to record investee cash dividends
    • Cash xx
    •         Investee in investee xx
  32. Equity method formula
    • B - Beg balance
    • A - Add: investor's share of investee earning (like bank interest)
    • S - Subtract: investor's share of investee's dividends (like bank withdrawals)
    • E - ending balance

    • Goodwill - not impaired or amortized
    • FV x % owned - BV x % owned=Goodwill
  33. Consolidated F/S
    • 1. Control (over 50%)
    • 2. Must consolidate unless legal reorganization or in bankruptcy
  34. Acquisition method
    • 1. 100% of net assets acquired are recorded at FV with any unallocated balance remaining creating goodwill
    • 2. When companies are consolidated, the subsidiary's entire equity (CS, APIC, RE) is eliminated (CAR IN BIG)
    • 3. FV = Acquisition price = Investment in subsidiary

    • To find goodwill, you use the following:
    • Acquisition price of sub/percentage owned
    • -BV of asset
    • -Adj to FV
    • -Adj to FV of intangibles/R&D, PPE
    • =Goodwill (GAAP)

    • Acquisition Price
    • -(FV of assets - liabilities) x percentage owned
    • =Partial Goodwill (IFRS)

  35. CAR IN BIG
    • Acquiring corp should adjust during consolidation:
    • 1. CAR - CS, APIC, & RE of subsidiary are eliminated.
    • 2. I - Investment in subsidiary is eliminated (all expensed-legal fees, bond issue, stock reg)
    • 3. N - Noncontrolling interest is created (if not 100% owned)
    • 4. B - B/S of sub is adjusted to FV - 100% of assets and liabilities are adjusted to FV
    • 5. I - Identifiable intangible assets of the sub are recorded at their FV
    • 6. G - Goodwill is required if there is an excess of FV of sub over FV of sub's net assets

    • DR: CAR (assets - liabilities)
    • CR: I (expenses)
    • CR: N (Acq Price/Percentage owned=FV of sub) x noncontrolling interest %)
    • DR: B (adjust cost to FV)
    • DR: I (adjust FV of Intangible assets)
    • DR/CR: G - Goodwill/Gain
  36. Intercompany Transactions
    • -eliminate 100% of intercompany transactions
    • -DO NOT eliminate if not consolidated
  37. Factoring of A/R
    • 1. Without recourse (true sale) - sale is final and assignee assumes the risk of any losses on collections. 
    • 2. With recourse (factor has an option to resell any uncollectible receivables back to seller. Can be a sale OR a loan.
  38. Double declining balance method
    Depreciation exp = 2 x 1/N x (Cost - Acc Dep)

    • Asset subject to rapid obsolescence
    • Ignore Salvage Value!
  39. Sum of the Digits method
    • 1. Cost - SV=Depreciable base
    • 2. Find sum of the years = [Nx(N+1)]/2

    • Example:
    • 1+2+3+4= 10

    1st Yr = 4/10 x 10,000=4000

    For CV, use purchase cost - dep (no SV)
  40. Units of Production Method
    Depreciation to the estimated production capability of an asset

    • 1. Cost-SV/Estimated Units or hours = Rate for each unit
    • 2. Rate per unit x # of units = Dep expense
  41. Depletion
    Allocation of cost of wasting natural resources such as oil, gas, timber, and minerals to the production process.

    • 1. Calculate depletion base
    • Cost of land
    • +Development costs
    • +Restoration
    • -Residual value
    • =Depletion base

    • 2. Calculate depletion for Yr 1
    • Unit depletion x Units extracted

    • 3. Calculate COGS depletion
    • Unit depletion x Units sold
  42. FOB
    Free on Board - requires the seller to deliver the goods to the location indicated as FOB at the seller's expense.

    • Title passes from seller to buyer when:
    • 1. FOB shipping point - when seller delivers the goods to a common carrier. Buyer's inventory "freight in" added to cost of inventory and pays for shipping cost.
    • 2. FOB destination - title passes to the buyer when buyer receives the goods from common carrier. Seller's inventory "freight out" expense
  43. Goods & Materials included in inventory
    • 1. If seller ships wrong goods, title reverts to seller upon rejection by the buyer.
    • 2. If goods are sold but buyer has right to return the goods, then goods should be in seller's inventory. If amount can be estimated, transaction will have an allowance for estimated returns.
  44. Consigned goods
    • 1. Seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignor's behalf
    • 2.Belongs to consignor (seller) because title and risk of loss is retained by consignor
    • 3. Inventory cost includes shipping to consignee
  45. Lower Cost of Market
    • 1. Utility of goods is no longer as great as their cost so a departure from cost basis principle is required.
    • 2. This shows a lower ending inventory (conservatism) in period occurred (matching).

    • US GAAP
    • Compare: Cost with the median of the 3:
    • 1. Current replacement cost
    • 2. NRV = Price - costs to complete/dispose (Market ceiling)
    • 3. NRV - normal profit margin (Market floor)
    • Then: select the lower cost of the two

    • IFRS
    • Compare cost with:
    • 1. NRV
    • Then: select the lower cost of the two
  46. Periodic vs Perpetual Inventory
    • 1. Periodic inventory-quantity of inventory determined by physical count, usually annually. Therefore, units of inv and costs are counted at end of accounting period.
    • 2. Perpetual inventory - inventory record for each item of inventory is updated for each purchase and sale as they occur. Keeps a running total of inventory balances.

    • Periodic method
    • Beg Inv
    • +Purchases
    • =COGS available for sale
    • +Freight in
    • +Transportation
    • -Ending Inv (physical count)
    • =COGS
  47. FIFO
    • 1. Ending inventory is the same whether periodic or perpetual system is used.
    • 2. In period of rising prices, FIFO results in the highest ending inventory, the lowest COGS, and highest NI
    • 3. Ending inventory includes most recently incurred costs=replacement cost
  48. Weighted Avg Method (inventory)
    • 1. Used for periodic inventory system and homogeneous products
    • 2. At the end of period, average cost of each item in inventory would be the weighted avg of the costs of all items in inventory 

    • Total cost of inventory available
    • Total number of units available for sale
  49. LIFO
    LIFO = Lowest

    • 1. Not permitted under IFRS
    • 2. Better matches expense against revenue and eliminates holding gains and reduces NI during inflation.
    • 3. In period of rising prices, LIFO results in the lowest ending inventory, the highest COGS, and lowest NI
  50. Dollar value LIFO
    Inventory is measured in dollars and adjusted for changing price levels

    • 1. Price index=EI at current yr/EI at base yr
    • 2. Price index x base year layer
    • 3. Then add to end inventory
  51. Valuation of Fixed Assets (IFRS)
    1. Cost Model

    Historical cost - Acc Dep - Impairment

    • 2. Revaluation Model (class of fixed assets)
    • FV at revaluation date-Subsequent acc dep-subsequent impairment

    • Revaluation loss (FV<CV) report on I/S
    • Revaluation gain (FV>CV) - report on OCI
  52. Improvements & Replacements (FA)
    • 1. increase the usefulness & life of assets
    • 2. If carrying value of old asset is known, remove it and recognize any gain or loss. Capitalize the cost of the improvement.
    • 3. If carrying value of old asset is unknown, and the asset's life is extended,

    • DR Acc dep
    • CR Cash/AP

    Expense ordinary repairs
  53. Cost of Land
    • All costs incurred up to excavation are considered land costs:
    • 1. Purchase price
    • 2. Brokers commissions
    • 3. Title/Recording fees
    • 4. Legal fees
    • 5. Clearing of brush/trees/filling in/leveling
    • 6. Costs of razing (tearing down)
    • 7. LESS: Proceeds from sale of buildings

    • Land improvements are depreciable:
    • Sidewalks
    • Lighting
    • Paving
    • Landscaping

    Interest costs added to cost of land improvement
  54. Investment Property (IFRS)
    • 1. Land or buildings held by entity under a finance/capital lease to earn rentals or for capital appreciation
    • 2. Capitalize parts & servicing of property
    • 3. Expense legal fees, repairs, prop tax, other taxes.
    • 4. DO NOT depreciate using FV model, just use FV
  55. Capitalization of Interest Costs
    • 1. Construction period interest-should be capitalized using weighted avg as part of the cost of producing FA, such as:
    • -Buildings, machinery, or land improvements
    • -Fixed assets for sale or lease 
    • -Land improvements

    DO NOT capitalize on interest cost

    • Rule 1: ONLY capitalize on money actually spent, not on total amount owed.
    • Rule 2: The amount of capitalized interest is lower of actual interest cost incurred OR computed capitalized interest (avoidable interest)

    • Capitalization of interest period begins when:
    • 1. expenditures have been made
    • 2. activities to get asset ready for intended use are in progress
    • 3. interest cost is being incurred
    • Ends when asset is substantially complete and ready for use!
  56. Fixed Asset Impairment
    • US GAAP
    • 1. Test for Recoverability 

    If sum of undiscounted expected future cash flows < carrying amount, an impairment loss is recognized.

    2. If there is an impairment loss, then:

    • FV or PV future net cash flows
    • -Net carrying value
    • =Impairment loss (for assets held for use)
    • +Cost of disposal
    • =Total impairment loss (assets held for disposal)

    • IFRS
    • 1. Pick the greater of value in use (PVFCF or net assets) and the FV-costs to sell = recoverable amount
    • 2. Find impairment loss:

    • Recoverable amount
    • -Carrying Value
    • =Impairment loss
  57. Allowance for doubtful accounts
    1. When written off (has no effect on NI):

    • DR: Allowance for doubtful accounts (decrease)
    • CR: A/R (decrease)

    • 2. When restored:
    • DR: A/R (increase)
    • CR: Allowance for doubtful accounts (increase)

    • 3. To record cash:
    • DR: Cash
    • CR: A/R decrease)
  58. ABO vs PBO
    • 1. Accumulated Benefit Obligation - uses current and past compensation levels. Includes no assumption about future salaries
    • 2. Projected Benefit Obligation - only uses an assumption as to future compensation levels

    • Calculate PBO
    • Beginning PBO
    • +Service Cost
    • +Interest cost
    • +Prior Service cost from current period plan
    • +Actuarial losses incurred in the period
    • -Actuarial gains incurred in the period
    • -Benefits paid to retirees
    • Ending PBO
  59. Pension terms
    • 1. Service cost - PV of all pension benefits earned. Increases PBO
    • 2. Interest cost - increase in the PBO due to the passage of time. 
    • 3. Prior service cost - any cost before pension plan was created or increase in benefits. Unamortized is in AOCI.
    • 4. Actuarial Gains/Losses - gains decrease PBO and losses increase it
    • 5. Benefit payments - made to pension plan participants after retirement.

    Amortized of prior service cost=

    • Beg unrecognized prior service cost
    • Avg remaining service life
  60. Actual Return on Plan Assets
    • 1. Assets, generally stocks, bonds and other investments set aside to provide for pension benefits.
    • 2. Plan assets should be reported at FV.

    • Beg FV of plan assets
    • +Contributions
    • +Actual return on plan assets
    • -Benefits paid to retirees
    • =End FV of plan assets

    • FV of plan assets
    • -PBO
    • =Funded status 

    • (+) = overfunded (noncurrent asset)
    • (-) = underfunded (current/noncurrent/both)
  61. SIRAGE
    • S - Current service cost
    • I - Interest cost = beg PBO x discount rate
    • R - (Return on plan assets) = beg FV x expected rate
    • A - Amortization of prior service cost
    • G - (Gains) and losses
    • E - Amortization of existing net obligation/net asset
    • =Net periodic pension cost

    • SIR - presented on I/S
    • AGE - unamortized is in AOCI
  62. The Corridor Approach
    • Beg of yr unrecognized gain or loss
    • -10% of beg of yr PBO or market value, whichever is greater
    • Excess 
    • divide by: average remaining service life
    • Amortization of unrecognized gain or loss
  63. Permanent vs Temporary Differences
    • Permanent differences
    • 1. Affect current (taxable income)
    • 2. No deferred tax = only impacts "current" taxes.
    • 3. Nontaxable/Nondeductible/Special tax allowance
    • 4. Includes:
    • -tax exempt interest (municipal, state)add
    • -life insurance proceeds (add)/premium (subtract)
    • -penalties/investment/meal reimbursements (subtract)

    • Temporary differences
    • 1. Affect current & deferred tax computation.
    • 2. Differences between tax basis of asset/liability and its reported amount in that will result in taxable or deductible amounts in the future.
  64. Deferred tax Liabilities & Assets Recognition
    • DTL - future tax accounting income > future financial accounting income
    • Includes:
    • -installment sales
    • -contractor accounting
    • -equity method
    • -dep expense
    • -amortization
    • -prepaid expenses

    • DTA - future tax accounting income < future financial accounting income
    • Includes:
    • -prepaid items
    • -bad debt expense
    • -warranties
    • -start up expense
  65. PV of $1 vs FV of $1
    • 1. PV of $1 - amount that must be invested now at a specific interest rate so that $1 can be paid or received in the future. Used for capital lease buyouts and bond principal payoff at end of term.
    • 2. FV of $1 - compound interest. Amount that would accumulate at a future point in time if $1 were invested now. Used for bank savings account
  66. PV of an ordinary annuity vs FV of an ordinary annuity
    • 1. PV of ordinary annuity - current worth of a series of identical payments to be made in the future. Used for periodic lease and bond payments.
    • 2. FV of an ordinary annuity - sum to be received at some point in the future of identical periodic investments made from the present. Used for investing in an IRA
  67. PV and FV of annuity due
    • 1. Only difference is timing of the payments.
    • 2. the number of interest periods is one less than the number of payments because payment occurs at the beginning of the period.
  68. Lessee accounting
    • 1. Operating leases - uses the leased asset and pays periodic rent for such use. There is no transfer of ownership, or of any risk or benefit of ownership.
    • 2. Lease rent exp - records rent over the life of lease term
    • 3. Lease bonus - amortized over the life of lease
    • 4. Leasehold improvements - permanently affixed to the property and reverts back to the lessor at end of lease. Useful life is the LESSER of lease life/asset life
    • 5. Refundable deposit - asset until refunded
    • 6. Free or Reduced rent - divide reduced rent by number of years.
  69. Lessor accounting
    • 1. Depreciation is over the asset's useful life
    • 2. Nonrefundable security deposit - unearned revenue until lessor is earned
    • 3. Refundable security deposit - treat as a liability until deposits is refunded
    • 4. Lease bonus - unearned income and amortized over life of lease
  70. Capital/Finance Lease
    • 1. Transfers all benefits and risks inherent in ownership of property to the lessee
    • 2. Lessee accounts for this type of lease as acquisition of both an asset (leased asset) and a liability (obligation under lease)
    • 3. Lessor accounts for this type of lease as a sales type/direct financing lease (IFRS).
    • -Sales type lease - results in a profit or loss to the lessor.
    • -Direct financing lease - no profit or loss.
    • Lessee must meet one to capitalize:
    • 1. O - Ownership transfers at end of lease
    • 2. W - Written option for bargain purchase
    • 3. N - Ninety (90%) of leased property FV is equal/less than PV of lease payments
    • 4. S - Seventy five (75%) or more of asset economic life is being committed in lease term
    • 5. F - Fluctuation of gains/losses in FV accrue to lessee
    • 6. A - Ability to continue lease for a secondary period at a rent lower than market
    • 7. C - Cancellation of lease and lessor's losses borne by lessee
    • 8. S - Specialized nature that only lessee can use them without modification
  72. LUCS
    • Lessor must meet all 3 to capitalize as a sales type/direct financing lease:
    • 1. L - Lessee "OWNS" the leased property
    • 2. U - Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor
    • 3. C - Collectability of the lease payments is reasonably predictable.
  73. Lessee Capital (Finance) Lease calculation
    • Recording the lease
    • 1. Use the LESSER of FV of asset at inception of lease or cost (PV of minimum lease payments)
    • 2. Add (all payments that lessee is obligated to make including) including:
    • 3. Bargain Purchase option - PV of payment required or PV of minimum lease payments
    • 4. Guaranteed Residual value - PV of any guaranteed residual value or PV of any minimum lease payments
    • 5. Subtract executory cost - insurance, tax, maintenance. If paid by lessor, a portion is payment is excluded from lease payments.
    • 6. Subtract optional buyout

    • When calculating interest rate:
    • 1. Use LESSER of rate implicit in elease or lessee's incremental borrowing rate

    Cost+residual+BPO-executory costs x discount rate.
  74. Depreciation of leased assets
    • 1.Capitalized leased assets - SV = Dep basis
    • 2. Dep basis/period of benefit = Dep expense

    • Period of benefit
    • 1. OW - the estimated life of the asset is used if the lessee takes ownership of leased asset or if there is a bargain purchase option. Lessee keeps asset at end of lease so it will depreciate over the useful life
    • 2. NS - lessee uses lease term if lessee does not take ownership of asset  or if there is not a bargain purchase option. Lessor gets asset back so lessee will depreciate the asset over the lease term
  75. Lessor Sales Type/Direct Financing Accounting
    • Sales type & direct financing lease:
    • Lease payments
    • +Unguaranteed residual value
    • =Gross investment (lease receivable)
    • xPV
    • =Net Investment

    • Gross investment
    • -net investment
    • =Unearned interest revenue

    • For sales type leases ONLY, it includes:
    • Cost of asset
    • -PV unguaranteed residual value
    • =COGS

    • Cost
    • +Profit
    • =PV/Selling price/FV
  76. Sales Leaseback
    Lessee sells the property and simultaneously leases it back from the lessor

    • Selling Price
    • -Carrying Value
    • =Gain on sale
    • -Leaseback asset (capital) or PV min lease payment (operating)
    • Excess Gain

    • 1. PV of rent <10% = recognize gain or loss at time of sale leaseback
    • 2. PV of rent <90% but >10% of FV, defer gain up to PV of min lease payment
    • 3. PV of rent >90%=defer all gain and amortize over leased asset
  77. Types of Bonds
    • 1. Mortgage bonds - secured by property
    • 2. Convertible bonds - convertible into common stock at the option of bondholder (nondetachable warrant/detachable warrant)
    • 3. Participating bonds - bonds with stated rate and participate in income if earnings are obtained
    • 4. Term bonds - single fixed maturity date
    • 5. Serial bonds - issuer may call and redeem a portion by serial number (multiple maturity periods)
    • 6. Income bonds - pay interest if income objectives are met
    • 7. Zero coupon bonds - no interest rate but obtained at a discount and redeemed at face value
  78. Bonds issued at discount
    • 1. Market rate > stated rate, meaning bond sold for less than face of bond
    • 2. Increase interest expense as a result!
    • 3. Uamortized discount - presented as a direct reduction from the par value of bonds to get to carrying value
    • 4. Amortization of discount added to amount of cash paid at stated rate
  79. Bonds issued at premium
    • 1. Stated rate>market rate, meaning bonds will sell for more than the face value of bond
    • 2. Decreases interest expense as a result!
    • 3. Unamortized premium - direct addition to the par value of the bond to arrive at carrying value
    • 4. Amortization of premium subtracted from cash paid at stated rate
  80. Bond sinking fund
    • 1. Puts money on the side to pay debt later
    • 2. Noncurrent (restricted) asset.
    • 3. Earns interest or dividends over timie
    • 4. Bond sinking fund reserve is an appropriation of RE to show that RE are being accumulated
  81. Convertible Bond
    • 1. Often issued at more than face because of the value of the conversion feature.
    • 2. Issuance price allocated to bond because it is difficult to assign a specific value to conversion feature.
    • 3. Under book value method, no gain or loss is recognized.
    • 4. Under market value method, there is a recognized gain/loss.
  82. Common stock
    • 1. Basic ownership interest in a corp
    • 2. Bear the ultimate risk of loss and receive benefits of success
    • 3. NOT guaranteed dividends or assets upon dissolution.
    • 4. Have the right to vote, the right to share in earnings of corp, and right to share in assets upon liquidation after satisfaction of creditors' claims and preferred stockholders

    • BV per common share:
    • Common shareholders' equity
    • Common shares outstanding

    • Common stockholders' equity formula
    • Total shareholders equity (assets-liab)
    • -Preferred stock outstanding
    • -Cumulative preferred dividends in arrears
    • =Common shareholders' equity
  83. Preferred stock
    • 1. Include preference relating to dividends
    • 2. No voting rights
    • 3. Cumulative preferred stock - any preferred dividends not paid in any year accumulates & must be paid in the future (dividends in arrears)
    • 4. Noncumulative preferred stock - dividends don't accumulate in any year
    • 5. Participating preferred stock - fully participating means excess dividends shared between common stock and preferred stock shareholders. Partially participating means preferred shareholders participate in excess funds, but to a limited extent.
    • 6. Preference upon liquidation - shown in SE
    • 7. Convertible preferred stock - may be exchanged for common stock at a specified conversion rate
  84. Retained Earnings
    • 1. Accumulated earnings/losses during life of the corp that has not been paid out as dividends.
    • 2. Classified as appropriated or unappropriated. Purpose is to show that some of the RE are not available to pay dividends because they have been restricted for legal or contractual reasons
    • 3. Quasi-reorganization - purpose is to eliminate R/E deficit and restate overvalued assets. Requires formal approval of shareholders

    • NI
    • -dividends (cash/prop/stock) declared
    • +-prior period adjustments
    • +-accounting changes reported retrospectively
    • +adjustments from quasi-reogranization
    • =Retained earnings
  85. Treasury Stock
    • 1. Corporation's own stock that has been issued to shareholders and reacquired.
    • 2. Not entitled to any of the rights of common shareholders, such as voting or receiving dividends.
    • 3. Reduces SE (debit balance) and not included in NI
  86. Dividends
    • 1. Cash dividends - paid from R/E
    • 2. Property dividends - distribute noncash assets to its shareholders. They are non-reciprocal transfers of nonmonetary assets from company to shareholders
    • 3. Scrip dividends - note to pay at a later date.
    • 4. Liquidating dividends - occur when dividends to shareholders exceed RE. Reduces APIC and not RE
    • 5. Stock dividends - depends on size.
    • If <20-25%, it reduces RE by FMV of stock.
    • IF >20-25%, it reduces RE by par value of stock.
  87. Compensatory Stock Option/Purchase Plan
    • 1. Valued at FV of options issued.
    • 2. FV of option determined by an economic pricing model such as the Black Scholes method
    • 3. Vesting period - period over which the employee has to perform services in order to earn the right to exercise the option.
    • 4. Compensation expense - calculated on the grant date of options and is allocated over the service period
    • 5. Not affected by expiration of options

    Total compensation = Market price on date of grant x Number of restricted stocks

    Total compensation/years=compensation for year

    • Compensation exp xx
    •      APIC xx
  88. Simple Capital Structure (EPS)
    • 1. Entity that issues only common stock (no options, warrants, bonds, etc)
    • 2. Will present EPS on I/S

    • Basic EPS
    • NI - Preferred dividends (declared)
    • Weighted avg common shares outstanding

    • Noncumulative=dividends declared in period
    • Cumulative=dividends accumulated in period
  89. Weighted Avg Number of Common Shares Outstanding (WACSO)
    • 1. Average of shares outstanding for EPS
    • 2. Shares sold or reacquired during period should be weighted for the portion of the period they were outstanding.

    • Shares outstanding at beg of period
    • +Shares sold during period
    • -Shares reacquired during period
    • +Stock dividends and stock splits (retroactively adjusted)
    • -Reverse stock splits (retroactively adjusted)
    • =WACSO

    Stock dividends & stock splits = treat as if they occurred in the beginning of period. The shares outstanding before must be restated for the portion of the period before the stock dividend/split
  90. Complex Capital Structure (Basic & Diluted EPS)
    • 1. Has securities that can potentially be converted to common stock and would dilute (reduce) EPS of common stock
    • 2. Both basic and diluted EPS must be presented
    • 3. Objective of diluted EPS is to measure performance of an entity over the reporting period while giving effect to all potentially dilutive common shares outstanding.
    • 4. Includes convertible securities, warrants, contracts, contingent shares, etc.

    • Diluted EPS
    • NI - Preferred dividends + Interest on dilutive securities (net of tax for interest)
    • Weighted avg number of common shares (assuming all converted to CS)
  91. Treasury stock method
    1. Assumes that the proceeds from the exercise of stock options, warrants, etc will be used to repurchase treasury shares at the prevailing market price, resulting in an increase in shares outstanding.

    If average price > exercise price, warrants or options are exercised at beginning of period = dilution

    If average price < exercise price, warrants or options are not exercised = antidilutive or out of money

    • Number of shares
    • -(Number of shares x exercise price/avg market price)
    • =Additional shares outstanding
  92. Dilution from Convertible Securities
    • "If converted" method assumes that the securities were converted to common stock at beginning of the period
    • 1. Convertible bonds - add to the numerator (interest exp x (1-T)) and add to denominator (common shares with the assumed conversion).
    • 2. Antidilution - use the results of each assumed conversion only if it results in dilution. DO NOT include if antidilutive
    • 3. Convertible preferred stock - (NI - preferred dividends or just NI). Add the number of shares with assumed conversion
    • 4. Dilution from contingent shares -depends on future events/conditions being met.

    • -A reconciliation of the numerators and denominators must be disclosed.
    • -Cash flow per share should not be reported.
  93. Statement of Cash Flows
    • How you get cash and what you did with it. Purpose is to know if company can pay for obligations.
    • 1. Operating - cash receipts & disbursements from transactions on I/S, includes current assets and current liabilities. Excludes note payable & LT debt
    • 2. Investing - cash receipts from noncurrent assets
    • 3. Financing - cash receipts & disbursements from debt including noncurrent liabilities and equity
    • 4. Direct method is preferred by US GAAP and IFRS but indirect method mostly used
    • 5. If direct method is chosen, it will be on supplemental schedule. If indirect method is chosen, it will be on the body of formal statement.

    • Format (direct)
    • Net cash from operating activities (+)
    • Net cash from investing activities (-)
    • Net cash from financing activities (+/-)
    • Net increase (decrease in cash
    • +Cash/Cash equivalents, beg of year
    • =Cash/Cash equivalents, end of year
  94. Operating Activities
    1. All transactions not investing or financing.

    • ADD: current assets decrease
    • ADD: current liabilities increase
    • SUBTRACT: current assets increase
    • SUBTRACT: current liabilities decrease
  95. Investing Activities
    • 1. Cash flows from purchase or sale of noncurrent assets
    • 2. Collection of loans and making loans to other entities
    • 3. Purchasing or disposing of trading securities, available for sale securities and held to maturity investment securities
    • 4. Acquiring or disposing of PPE
    • 5. Acquiring another entity under the acquisition method using cash
  96. Financing Activities
    • 1. Cash flows from noncurrent and equity activities
    • 2. Issuing stock (inflow)
    • 3. Paying dividends or repurchasing stock
    • 4. Issuing bonds, notes, other borrowings
    • 5. Payments of principal (interest on operating activities) on amount borrowed
  97. Noncash Investing and Financing
    • 1. No cash receipts or payments
    • 2. Should be provided in a supplemental disclosure
    • 3. includes conversion of bonds to equity, exchange of noncash asset for another
  98. IFRS Differences in reporting Cash Flows
    • 1. Interest received-CFO(GAAP), CFO/CFI
    • 2. Interest paid-CFO(GAAP), CFO/CFF
    • 3. Dividends received-CFO(GAAP), CFO/CFI
    • 4. Dividents paid-CFF(GAAP), CFO/CFF
    • 5. Taxes paid-CFO(GAAP), CFO/CFF/CFI
  99. Government Funds (GRASPP)
    • 1. Government funds are accounted for using the modified accrual basis of accounting and use the current financial resources measurement focus. This helps determine their financial position determination
    • 2. Main F/S is statement of revenues, expenditures and changes in fund balance

    • G - General fund - money from taxes and other general revenues. Only contains current assets and liabilities. No fixed or LT assets
    • R - Special revenue fund - specific taxes to finance certain activities (restricted)
    • And
    • S - Debt service fund - for payment on interest and principal on general obligation debt (for government funds only)
    • S - Capital Projects Fund - money for construction of capital assets, except those projects financed by an enterprise or by a special assessment
    • P - Permanent fund - income, NOT principal, used for supporting the reporting government programs (for the benefit of the public)

    • Financial Statements:
    • 1. Balance Sheet
    • 2. Statement of Revenue, Expenditures and Changes in Fund balance
    • 3. NO Cash Flows!
  100. Proprietary Funds (SE)
    • 1. Uses the full accrual accounting and economic resources measurement focus on NI and capital maintenance
    • 2. Accounts for business type activities and similar to commercial accounting.

    • S - Internal service funds - account for goods and services provided by designated departments on a cost reimbursement fee basis to other departments (internal) 
    • E - Enterprise funds - account for acquisition and operating of governmental facilities and services (external). Often used for utilities (water and sewer), airports, and transit systems.

    • Enterprise funds are required when one:
    • 1. Activity of fund is financed by debt secured by a pledge of free revenue
    • 2. Laws require collection fees adequate to recover costs
    • 3. Pricing policies are established to produce fees for costs

    • Financial Statements:
    • 1. Statement of Net Assets
    • 2. Statement of Revenue, Expenses and Changes in Fund Net Assets
    • 3. Statement of Cash Flows
  101. Fiduciary Funds (PAPI)
    • 1. Uses the full accrual accounting and economic resources measurement focus on NI and capital maintenance
    • 2. Accounts for assets received where the government acts in the capacity of a trust or agency fund

    • P - Pension trust funds - defined benefit plan
    • A - Agency trust funds - tax collected for some other entity
    • P - Private purpose fund - money used for specific individual/entity/government. Needs to record escheat property
    • I - Investment trust fund - external investment pool

    • Financial Statements:
    • 1. Statement of Fiduciary Net Assets (current assets = current liabilities)
    • 2. Statement of Changes in Fiduciary Net Assets
    • 3. NO cash flows!
  102. Measurement Focus vs Economic Resources
    • 1. GRASPP - seeks to value and report fund balances as a measure of available, spendable, or appropriate resources. ONLY current assets and liabilities are reported.
    • 2. SE-PAPI - seeks to determine the cost of services and the efficiency and effectiveness with which invested capital has been used. ALL assets and liabilites reported between restricted, unrestricted and invested.
  103. Modified Accrual Accounting
    • 1. Modified Accrual (GRASPP) - revenue is recognized when measurable and available to finance expenditures of the current period
    • 2. Available - collectible within the current period or 60 days after year end
    • 3. Measurable - quantifiable in monetary terms
    • 4. Expenditures usually recorded when related fund liability is incurred.
  104. Constraints on Government fund balance
    • 1. Nonspendable - current assets that cannot be spent
    • 2. Restricted - restricted by external authorities usually by law or creditor
    • 3. Committed - plan to use funds by govt highest decision maker
    • 4. Assigned - intention without commitment
    • 5. Unassigned - unrestricted, general fund has a positive balance only
  105. BAE - BAE
    When you book and close:

    • B - Budget - control spending
    • A - Activity - flow of financial resources
    • E - Encumbrance - record PO

    • Book
    • DR: Estimated rev control 
    • DR: Estimated transfers from other funds 
    • DR: Budgetary fund balance
    • CR: Appropriations control (approved) 
    • CR: Estimated transfers to other funds (transfer out) 
    • CR: Budgetary fund balance

    • At the end of the year, the budget is reversed and closed using the same amounts:
    • DR: Appropriations
    • DR: Estimated transfers to other funds
    • DR: Budgetary Fund balance
    • CR: Estimated revenue control
    • CR: Estimated transfers from other funds
    • CR: Budgetary fund balance (negative)
  106. GRASPP Revenue
    GASP 33 - transaction in which a government gives or receives value without directly giving or receiving equal value in return

    • 1. Derived tax revenue - comes from sales and income taxes. Recognized when measurable and available
    • 2. Imposed non-exchange revenues - fines and property taxes. Recognized when billed/recorded
  107. GRASPP Expenditures
    • 1. Any money spent is expenditure
    • 2. NO asset for depreciation
    • 3. Transfers between funds - use of financial resource (interfund transfers)
    • 4. Debts - proceeds from long term debts (other financing sources)

    • When purchased/consumed:
    • DR: Expenditure
    • CR: Vouchers payable/cash

    • REVERSE if not used during period
    • DR: Expenditure
    • CR: Non-spendable account
  108. Encumbrances
    • 1. Encumbrances are open purchase orders or commitment of available appropriations of a government.
    • 2. Government accounting systems must reflect not only expenditures, but the obligations to spend

    • Book:
    • DR: Encumbrances
    • CR: Reserve for encumbrances

    • Reverse when expenditure is booked:
    • DR: Reserve for encumbrances
    • CR: Encumbrances 

    • DR: Expenditures
    • CR: Vouchers payable

    • To close budgetary accounts for outstanding POs:
    • DR: Reserve for encumbrances
    • CR: Encumbrances 

    • DR: Unassigned fund balance
    • CR: Fund balance, committed
  109. General fund
    General fund - created at beginning of government unit and exists throughout life. It funds general activities of a government that are not accounted for by any other fund

    • 1. Taxes - revenue when recorded/billed
    • 2. Public safety/regulation - fees/taxes/licenses
    • 3. Intergovernmental - shared or grant revenues from other governments
    • 4. Charges for services
    • 5. Other revenue - investment earnings, etc
    • 6. Bond proceeds/transfers in/out - under other financing sources
  110. Special revenue fund
    Special revenue fund accounts for rev and expenditures that are legally restricted or committed for specific purposes OTHER than debt service or capital projects

    • 1. Sales tax fund
    • 2. Gasoline tax fund
    • 3. Funds for special fees, admission, parking fees
    • 4. Grant funds (state, federal, expendable trusts)

    • Expenditures include:
    • 1. Current operating expenditures
    • 2. Capital outlays (highway construction)
    • 3. Expendable trusts - funding whose principal and income may be expended in the course of their designated operations so they are depleted by end of their designated lives
    • 4. Grants - monitoring grant is a special revenue fund. Nonmonitoring is an agency  trustfund
  111. Debt service fund
    Debt service is created to account for the accumulation of resources and payment of currently due interest and principal on long term debt by setting aside cash equivalents

    • 1. Pays off debt of GRASPP funds only!
    • 2. Principal and interest should be recorded when they are legally payable. No accrual!
    • 3. No amortization of a premium/discount

    • DR: Cash
    • CR: Interfund transfers

    When activity is closed for actual amount:

    • DR: Bond issue proceeds
    • DR: Transfers from special rev fund
    • DR: Transfers from capital projects fund
    • DR: Other rev
    • CR: Fund balance, restricted for debt serv
    • CR: Expenditures: interest
    • CR: Expenditures: principal
  112. Capital Projects
    Capital projects established for the construction or purchased or leasing of fixed assets (used by GRASPP only). The life of project fund is short and limited to 1-3 yrs.

    • 1. Generally funded by bond proceeds that are to be used to complete a project.
    • 2. Capital grants received in advance are often recorded as a liability and displayed as earned as they are expended. 

    • Unrestricted=revenue
    • Restricted = deferred revenue

    3. Special assessments - defined as taxes or fees levied against property owners who will directly benefit from the project (sidewalks and street lights)
  113. Permanent Funds
    Permanent funds should be used to report resources that are legally restricted to the extent that only earnings, NOT principal, may be used for purposes that support the reporting government's programs

    • 1. Benefits the public
    • 2. No encumbrance
  114. Internal service fund
    Internal service funds are established to finance and account for services and supplies provided exclusively to other departments within a government unit, on a cost reimbursement basis.

    • 1. Restricted revenue - recognized in the year money is spent
    • 2. Operating revenue - recognized when earned. Billings for services rendered to other departments
    • 3. Net assets include unrestricted, restricted, invested
    • 4. Used as reconciling items between government funds and government wide financial statements
  115. Enterprise Fund
    Enterprise funds account for operations that are financed and operated in a manner similar to a private business enterprise.

    • Enterprise funds are required when one:
    • 1. Activity of fund is financed by debt secured by a pledge of free revenue
    • 2. Laws require collection fees adequate to recover costs
    • 3. Pricing policies are established to produce fees for costs

    Includes: Public utilities, hospitals, schools, transportation systems, parking, lotteries, public benefit corps, golf courses

    • 4. Operating revenue - defined by main purpose of fund (greens fee for golf course)
    • 5. Nonoperating revenue - earnings/non exchange transactions (shared revenue collected between governments and interest/investment income).
    • 6. Municipal landfills - need to account for costs of equipment, gas monitoring system. Equipment reduces the liability and doesn't increase assets.
  116. INCASET
    • Proprietary fund line items
    • I - Income (operating)
    • N - Non-operating income
    • C - Capital contributions
    • A - Additions to endowments
    • S - Special items
    • E - Extraordinary items
    • T - Transfers
  117. Pension Trust fund
    • 1. Statement of changes in plan net assets - represent the increase/decrease in net plan asserts from beginning to end of year
    • 2. No statement of cash flows required!
    • 3. Notes to financial statement - plan description, contributions, significant accounting policies, and risk!
    • 4. Required Supplementary - benefits, actuarial and economic assumptions.
  118. Agency Trust Fund
    An agency fund collects cash to be held temporarily for an authorized recipient to whom it will be later disbursed. 

    • 1. No revenue and expenses in agency funds
    • 2. Due to other funds when collection of taxes/fees for other departments
    • 3. Clearance funds - food stamps, traffic citations, alimony (nonmonitoring)
    • 4. Special assessments - when government is not obligated to debt
  119. Private Purpose Fund
    Private purpose fund designated fund for reporting all other trust arrangements which principal and income are for the benefit of specific individuals, private organizations, other governments

    • 1. Includes escheat fund & employee retirement systems
    • 2. Capital gains and losses - recorded as adjustments to fund principal and not to income, unless grantor specified otherwise
  120. Investment Trust Fund
    Government entity that sponsors one or more external investment pools should report the external portion of each pool as a separate trust fund
  121. Government wide financial Statements
    GASB 34 requires use of economic resources measurement focus and the full accrual basis of accounting for both statements

    • Management's Discussion and Analysis (Required supplementary inf)
    • 1. Statement of Net Assets (B/S)
    • 2. Statement of Activities
    • 3. Fund Financial Statements for GRASPP & SE-PAPI
    • 4. Notes to the Financial statements
    • 5. Required supplementary information
    • 6. Statistical Section (optional)
  122. Statement of Net Assets (B/S)
    • 1. Invested in capital assets, net of related debt, restricted net assets and unrestricted
    • 2. Capitalization of assets (infrastructure)
    • 3. Artwork and historical treasures - don't need to capitalize if ALL are met:
    • -collection is held for public exhibition, education, research
    • -collection is protected and cared for
    • -sales of collection is used to acquire other items
  123. Statement of Activities & SOC (I/S)
    • 1. Based on programs (government, business type, component units)
    • 2. Expenses are full accrual
    • 3. Program revenue - directly related to function or program on the full accrual basis

    • SOC away these revenues
    • S - Charges for services to customers, other governments for goods or services (fines)
    • O - Operating grants and contributions restricted for use in a particular program
    • C - Capital grants and contributions
    • Internal fund activities should be reported
  124. Major Fund reporting criteria
    Reporting by major fund provides more meaningful information. Must meet the following:

    • 1. Meet the 10% Test - GRASPP funds are individually compared to the total of all government and enterprise funds. Must be 10% or more of total revenue, expenses, assets or liabilities of all government funds OR enterprise funds AND:
    • 2.  Meet the 5% test, must be 5% of all revenue, expenses, assets, or liabilities of all government funds AND all enterprise funds
    Reconcile the funds and net assets in government wide financial statement

    • Balance Sheet
    • G - GRASPP fund balance
    • +A - Assets (noncurrent)
    • -L - Liabilities (noncurrent)
    • +S - Service (internal) fund net assets

    • Adjust
    • B - Basis of Accounting
    • A - Accrued
    • R - Revenue
    • E - Expenses

    • Statement of Revenue, Expenditures and Changes in Fund Balance
    • G - GRASPP net change in fund balance
    • -O - Other financing sources
    • +E - Expenditure (capital outlay net of dep)
    • +S - Service (internet) fund net income

    • Adjust
    • B - Basis of Accounting
    • A - Additional accrued
    • R - Revenue
    • E - Expenses
  126. Statement of Cash Flows (fund financial statements)
    • 1. Direct method is required
    • 2. Reconicilation of operating income (not NI) to net cash provided by operations is required
    • 3. 4 Categories: Operating, investing, capital & financing, noncapital
    • 4. Interest income/receipts - "investing"
    • 5. interest expense & payments are either capital and related financing Or noncapital financing
    • 6. Capital asset purchased are reported as "financing," not investing.
    • 7. Noncapital financing activites - cash receipts from grants/subsidies, cash received from property taxes, operating transfers!
  127. Interfund Activity
    • Reciprocal interfund activity - exchange type transactions between funds
    • 1. Interfund loans - temporary extensions of credit to other funds that are expected to be repaid
    • 2. Interfund services provided and used - revenue and expenses/expenditures

    • Non-reciprocal interfund activity - nonexchange transactions between funds
    • 1. Interfund transfer - other financing sources. Transfers are displayed as other financing sources after nonoperating revenue and expenses
    • 2. Interfund reimbursements - payment of expense made by one fund on behalf of another
  128. Not for Profit Organizations
    • FASB not GASB!
    • Divided into:
    • 1. Health care organizations
    • 2. Educational institutes
    • 3. Voluntary health and welfare organizations
    • 4. Other private (not governmental) nonprofit

    • 1. Use full accrual basis of accounting - overall emphasis is on basic information for the organization as a whole
    • 2. Classification of net assets as unrestricted, temporarily restricted, and permanently restricted
    • 3. Revenue recognition related to unconditional pledges and support
    • 3. Distinguish between restricted revenue and conditional pledges
    • 4. Distinguish between restricted revenue and absence of variance power
  129. Required Financial Statements for Nonprofit
    • 1. Statement of Financial Position - B/S
    • 2. Statement of Activities - I/S
    • 3. Statement of Cash Flows
    • 4. Statement of Functional Expenses, for voluntary health and welfare organizations. Not required for others, but encouraged
  130. Statement of Financial Position (nonprofit)
    • Net Assets
    • P - Permanently Restricted - limited by donor imposed stipulations that neither expire by passage of time NOR can be fulfilled or otherwise removed by actions of the organization
    • U - Unrestricted - available to finance general operations of the particular organization (internal board designated funds are unrestricted)
    • T - Temporary restricted net assets - similar to permanently restricted net assets, EXCEPT donor imposed stipulations either expire by passage of time or can be fulfilled and removed by actions of the organization
  131. Statement of Activities (I/S for nonprofit)
    Shows the changes in total net assets, unrestricted net assets, temporarily restricted net assets, and permanently restricted assets

    • 1. Unrestricted - free of donor restrictions on usage
    • 2. Temporarily restricted - generally for specific purpose, time or acquisition of plant
    • 3. Permanently restricted - contributions with restrictions that can never be removed

    • Timing
    • 1. Contributions with donor imposed restrictions are recorded as restricted revenue in period they are received. They increase temporarily/restricted net assets
    • 2. When a donor restriction is satisfied, a reclassification is reported on statement of activities.
    • 3. Donor imposed restrictions are met in the same period they are received may be recorded as unrestricted support (contribution revenue).

    • Expenses
    • 1. Program services - expenses which are related to the programs (education for schools, patient care for hospitals, child care for day care)
    • 2. Support services - fundraising, administration, management and general, and membership development
    • 3. Combined costs - fundraising with education
  132. Statement of Cash Flows (nonprofit)
    • Either direct/indirect method can be used
    • 1. Operating activities - applicable agency transactions, gross receipts, program income, contribution, dividend income. Includes receipts of unrestricted resources designated
    • 2. Financing activities - related to borrowing and cash related to restricted contributions, such as purchases of assets, increases in endowment, annuity agreement
    • 3. Investing activities - proceeds from sale of works of art or purchases, investment in equipment, proceeds from sale of assets received in prior periods
  133. Statement of Functional Expenses
    Mandatory for voluntary health and welfare but optional for all others. Most common group of functional classifications:

    • 1. Program support expenses - expenses directly related to the program
    • 2. Fundraising expenses - classified functionally and includes cost of appeals to public, salaries of personnel with fundraising, unsolicited merchandise
    • 3. Management and general costs - overall direction of organization, like general record keeping, business management, budgeting, board activites
    • 4. Multiple cost items - allocate cost on reasonable basis
  134. Contributions and Recognition (nonprofit)
    Contribution - unconditional transfer of cash or assets in a manner which is voluntary and is nonreciprocal

    • 1. Cash contribution - should be recognized as revenue or gain in period in which they are received, and they should be measured at their FV at date of gift
    • 2. Unconditional promises - pledge/promise to give contribution and recorded as revenue at its FV when promise is made. May be written or verbal
    • 3. Conditional promises - give/pledge a transaction that depends on an occurrence of a future and uncertain event. Recognition does not occur until conditions are met and promise becomes unconditional. Good faith deposits is a refundable advance in liability
    • 4. Multi year pledges - recorded at NPV at date pledge is made. Now is revenue but future collections are considered temporarily restricted revenue.
    • 5. Allowance for uncollectible pledges
  135. Donated services
    Donated services should be recorded as contribution revenue and expense at FV if services create or enhance financial assets and requires specialized skill.

    • Contributions are recognized some of the time:
    • S - Specialized skills required by donor
    • O - Otherwise needed by organization
    • M - Measurable
    • E - Easily at FV

    Costs of soliciting contributed services are considered fundraising expenses regardless of whether they meet the SOME criteria
  136. Donated Collection Items
    • Donated materials at FV
    • DR: Asset
    • CR: Contribution - support

    If the donation passes through to an organization or beneficiary (used clothing), it should not be recorded unless amounts are substantial. Then it should recorded as:

    • DR: Expense
    • CR: Unrestricted contributions - supplies
  137. Unrestricted Contributions
    Unconditional promises to contribute in the future are reported as restricted support

    • Unrestricted pledges (time restriction):
    • DR: Pledge receivable - temporary restricted
    • CR: Allowance for Doubtful accounts
    • CR: Contributed Revenue - temporarily restricted

    • When collected,
    • DR: Cash - temporarily restricted
    • CR: Pledge receivable - temporarily restricted
    • DR: Satisfaction of time restriction - temporarily restricted
    • CR: Cash - temporarily restricted

    • Unrestricted
    • DR: Cash - unrestricted
    • CR: Satisfaction of time restriction - temporarily restricted
  138. Restricted contribution
    A contribution may be restricted by donor.

    • Restricted net assets:
    • DR: Pledge receivable - temporary restricted
    • CR: Allowance for doubtful accounts
    • CR: Restricted revenue - temporarily restricted

    • Later after receivable is collected and when money is spent on restricted purpose:
    • DR: Reclassifcation - satisfaction of restriction
    • CR: Cash/Restricted net assets

    • Unrestricted net assets
    • DR: Unrestricted net assets
    • CR: Reclassification - satisfaction of restriction
    • DR: Operating expense
    • CR: Cash/Unrestricted net assets
  139. Exchange transactions (nonprofit)
    • 1. Reciprocal transfers in which each party receives and sacrifices something of equal value
    • 2. The cost of premiums or cost of gifts given to potential donors as part of a fundraising appeal is fundraising exp

    • Amount transferred
    • (FV dues/Purchase)
    • =Contribution revenue
  140. Variance Power (recipient accounting)
    • 1. Without variance power - nonprofits act as agents and have no benefit or power. They use or manage assets on behalf of beneficiary. Assets are recognized as refundable advance!
    • 2. Granted variance power - accepts assets from a donor and agrees to use or manage them on behalf of beneficiary but is granted the authority to redirect assets to another beneficiary. Recognized as contribution revenue when received!
    • 3. Financially Interrelated - able to influence the operating and financial decisions of the other and an ongoing economic interest in the net assets of the other. Contribution revenue when received.

    • DR: Asset
    • CR: Refundable advance/Contribution rev

    Assets valued at FV for all!
  141. Health Care Organizations Revenue
    • 1. Patient service revenue - full amount should be recorded even though deductions are made from gross revenue. Central transactions include medical services, room and board, doctor, surgery, room
    • 2. Charity Care - NOT recorded as receivable or revenue
    • 3. Deductions - contractual adjustments, policy discounts, administrative adjustment
    • 4. Other operating revenue - tuition from schools, grants, supplies, educational programs, parking, cafeteria, gift shop
    • 5. Nonoperating revenue and support - unrestricted interest, unrestricted gifts, unrestricted grants, unrestricted income from board fees, DONATED services
  142. Colleges/Universities Revenue recognition
    • ALL increases in unrestricted net assets
    • 1. Student tuition and fees should be reported at GROSS amount.
    • 2. Scholarships, tuition waivers, reductions are expenditures reducing revenue
    • 3. Government aid, grants and contracts
    • 4. Gifts and private grants

    • Assessed student tuition fees
    • -Cancelled classes/refunds
    • =Gross revenue from tuition and fees
  143. Cash Flows to remember!
    • Cash Collections from customers:
    • Sales
    • + Decrease in A/R
    • + Increase in unearned revenue

    • Cash paid to suppliers
    • COGS
    • + Increase in Inventory
    • + Decrease in A/P

    • Cash paid for other expenses
    • Other Operating expenses
    • +Increase in prepaid
    • +Decrease in accrued liabilities