Financial 1Source of GAAP and Basic Framework and ConceptsBOSSII: Bulletins, Opinions, SFAS, Staff Positions, Interpretations, Implementation IssuesConcepts= Basic reasoning Constraints: Materiality and Cost/BenefitRelevance: Predictive Value, Feedback Value, TimelinessReliability: Neutrality, Representational Faithfulness, VerifiabilityComparability and Consistency Financial Statements: Balance Sheet, Income Statement, Comprehensive Income, Statement of Cash Flows, Changes in Owners’ Equity Assumptions: Entity, Going Concern, Monetary Unit, Periodicity, Historical Cost, Revenue recognition, Matching, Accrual Accounting, Full Disclosure, Conservatism Elements: Comprehensive Income (NI+PUFE), Revenue, Expenses, Gains, Losses, Assets, Liabilities, Equity, Investments by owners, Distributions to ownersPresent Value Measurement: Future cash flow, timing variations, time value of money, uncertainty, other

Reporting Net IncomeIDEA: Income from continuing operations (gross), Income from discontinued operations (net), Extraordinary items (net), Cumulative effect of change in accounting principle (net) (reported on retained earnings statement)Single Step: total expenses subtracted from total revenues Multiple Step: Operating revenues and expenses are separate from non operating revenues and expenses and other gains and losses

DiscontinuedHeld for sale= plan to sell, immediate sale, active program to locate buyer, sale is probable within one year, actively marketed, and unlikely that there will be significant changes.

Extraordinary: unusual and infrequent: natural disasters (depending on location), expropriation of a plant by the government, prohibition of a product line by a newly enacted law or regulation, certain gains or losses from extinguishment of long term debt, provided they are not part of the entity’s recurring operations. Not: gain or loss from sale of PPE used in business, large writedowns, gain or loss from foreign currency transactions or translation, losses from major strike, long term debt extinguishments that are part of a common management strategy

Comprehensive Income=Net income +OCI (Pension minimum liability adjustments, Unrealized gains and losses (AFS securities), Foreign currency items, Effective portion of cash flow hedges)Presentation: 1. Below total NI, 2. In a separate statement of comprehensive income beginning with NI, 3. In a statement of changes in equity

Accounting Changes and Prior Period Adjustments Change in Estimate Change in

Accounting Principle (GAAP to GAAP)

Change in Entity

Prior Period Adjustment

Prospective Retrospective Retrospective Error Correction

Adjust accounts so that only current and subsequent income statements will be affected

Yes No No No

If comparative FS, restate prior period FS

No Yes Yes Yes

If not comparative FS, restate Retained Earnings only

No Yes N/A Yes

Cumulative Effect of change of GAAP should be shown in the Retained Earnings Statement of the earliest period presented as an adjustment to beginning retained earnings

No Yes No No

Examples: Change in lives, adj. of y/e accrual of officers’ salaries, write downs, IRS adj., settlement of litigation, changes in accounting principle that are inseparable from a change in estimate

Exceptions: Impracticable (LIFO, treat prospective), change in depreciation method (treat as estimate)

Interim Financial ReportingEstimate income tax expense using the estimated average tax rate that will apply for the entire year.

Segment ReportingOperating segment= engages in business activities from which it may earn revenues and incur expenses, operating results are reviewed by chief operating decision maker, has traceable cash flowReportable if: 1. 10% Size test

1. Revenue (10% or more of the combined revenue of all operating segments)2. Reported Profit or Loss (10% or more of the greater of a) combined reported

profit of all operating segments that did not report a loss or b) the combined reported loss of all operating segments that did report a loss)

3. Assets (assets = 10% or more of the combined assets of all operating segments)2. 75% reporting sufficiency test= if total external revenue is less than 75% of external revenue, additional operating segments need to be identified as reportable segments, even if they don’t meet above tests.

Development Stage EnterprisesStart up costs= expense immediately under GAAP

Fair Value MeasurementsFair value is an exist price, not an entrance pricePrincipal market= greatest volume or level of activityTransaction costs are used to determine the most advantageous market (best price if no principal market), but they are no included in the final fair value measurement. Valuation Techniques: 1. market approach (uses prices from market transactions involving identical or comparable a/l) 2. income approach (converts future amounts to single discounted amount) 3. cost approach (uses current replacement cost) Hierarchy of Inputs: 1. quoted prices in active markets for identical a/l 2. similar a/l, not active markets, other observable inputs 3. unobservable assets

Financial 2Timing Issues: Matching of Rev and Exp, Correcting and Adjusting Accounts1. Assets2. Liabilities 3. Revenues: recognize when earned and realized or realizable.

- Sale of product: date of sale; - others using asset: as time passes; - performing services: once services are rendered

Exceptions: Deferred credits, installment sales, cost recovery method, nonmonetary exchanges, involuntary conversions, net method for trade discounts, percentage of completion contract 4. Expenses 5. Realization= convert to cash 6. Recognition= record in records7. Matching= recognize expense in same period as related revenue 8. Accrual= record as events occur9. Deferral= cash is received or expended, but is not recognizable for f/s purposes10. Accrued assets and liabilities= assets: revenue recognized but not yet paid to entity; liabilities: expenses recognized but not yet paid by the entity11. Costs that may be applicable to past, present, or future periods:

a. Expired costs= have no future benefit, expense on income statement (prepaids)b. Unexpired costs= capitalized and matched against future revenues, if

uncertain expense (deferred charges)

Royalty Income= recognized when earned; earns royalties based on stated percentage of sales. Unearned Revenue= recorded as a liability. i.e. rent received in advanceRevenue Recognition when the right of return exists= only recognize if: sales price is fixed, buyer assumes risks, buyer has paid consideration, sale is substantially complete, future returns can be reasonably estimatedFranchises

Initial franchise fees= revenue when substantially performed Continuing franchise fees= revenue when earned

Expense RecognitionPurchased intangible assets= record at costInternally developed intangible assets= expense; exceptions: successfully defended legal fees, registration fees, design costs, other direct costs to secure an asset= capitalize Amortize assets over period estimated to be benefited. Amortize patent over shorter of estimated life or remaining legal lifeIf deemed worthless= expenseIf impairment loss= expenseChange in useful life= recalculate amortizationSale= compare CV to SP= gain/loss FranchiseeInitial franchise fees= intangible asset and amortizeContinuing franchise fees= expense as incurred

Start up costs= expense Legal Fees: to obtain= capitalize; successfully defend= capitalize; unsuccessfully defend= expense Goodwill: Cost-FV= goodwill; The costs for maintaining, developing, or restoring goodwill are expensed. Internally generated= expensed R&D Costs:General rule: expense Exceptions: PP&E that have alternate future uses: depreciate over useful life (not life of R&D project); costs undertaken on behalf of others (expense as cost of sales)Don’t include: routine design changes; marketing research; quality control testing; reformulation of chemical compound Computer Software DevelopmentTo be sold: technological feasibility= completion of design/ working modelExpense before TF, capitalize after TFAmortize: greater of: 1. total capitalized amt * (current gross rev/total project gross rev) or 2. total capitalized amount * (1/estimate of economic life) Capitalized costs are reported at LCM (M=NRV)For internal use: Expense before TF, capitalize after TFAmortize: straight lineIf sell later: proceeds should be applied first to carrying amount of the software, then recognize as revenueImpairmentFinite life: Undiscounted future net cash flows – CV= + (no impairment) – (impairment)Finite and infinite life: FV or PV future net cash flows – CV = impairment loss (add cost of disposal if applicable) Goodwill ImpairmentReporting unit FV- reporting unit BV= - Goodwill FV- Goodwill BV= impairment loss

Long-Term Construction ContractsCompleted Contract Method: Contract price- Total costs= Gross profit or loss Recognize losses in year they are discovered Percentage of Completion Method: Step 1: Contract price- estimated total cost= gross profitStep 2: Total cost to date/ total estimated cost of contract= % of completion (if loss recognize immediately) Step 3: Step 1* Step 2= Profit to dateStep 4: PTD at current FYE – PTD at beginning of period= Current year to date GP

Accounting for Installment SalesStep 1: Sale- CGS= Gross profitStep 2: Gross profit/ Sale= GP %Step 3: Sale on installment- ending installment AR= collections * Step 2= GP earnedStep 4: Ending installment AR * Step 2= Deferred GP

Cost Recovery MethodCollections after all costs have been recovered are recognized as profit.

Accounting for Nonmonetary exchangesCommercial Substance= if future cash flows change as a result of the transaction. Always recognize gains and losses (FV-BV). Record at FVLacking Commercial Substance= Recognition of gains depends on several factors (realized losses are always recognized)If boot is paid, no gain is recognizedIf no boot is received, no gain is recognizedIf boot is received and the boot is less than 25% of the total consideration received, then a proportional amount of gain is recognized. A ratio of the total boot received divided by the total consideration is calculated, and that proportion of the total realized gain is recognized. If boot is received and the boot equals or exceeds 25% of the total consideration received, the transaction is viewed as a monetary exchange, and 100% of the realized gain is recognized. Record the asset received on the balance sheet at the NBV of the asset surrendered, minus any boot received on the transaction, plus any gain recognized on the transaction.

Involuntary Conversions= recognize gain/loss

PartnershipsAdmission of New PartnerAssets= FV, Liabilities= PVCreation of New Partnership1. Exact Method 2. Bonus Method= A+B+C= Balance * interest= C’s capital – Cash= split between partners 3. Goodwill Method= C/interest= implied value- A+B+C= Goodwill P&L distributionGuaranteed payments: bonus, interest, salary= balances, distribute based on ratios= total distribution Withdrawal of a Partner1. Bonus Method= 1. Revalue assets to reflect FV 2. Pay off withdrawing partner2. Goodwill Method= 1. Revalue assets 2. Record goodwill 3. Payoff withdrawing partnerLiquidation= pay off creditors then partners’ capital

Financial Reporting and Changing PricesHistoric Cost and Current Cost (appreciation)Nominal Dollars and Constant dollars (inflation)

Monetary purchasing power Gain/loss

Non-monetary holding gain/loss

Inflation AppreciationHC/ND No NoHC/CD Yes NoCC/ND No YesCC/CD Yes Yes

Purchasing power gains Purchasing power lossesHolding monetary assets During deflation During inflationHolding monetary liabilities During inflation During deflation

Foreign Currency Accounting Transactions= buying/selling with a foreign entity to be settled in foreign currencyTranslation= conversion of f/s of foreign entity into f/s expressed in $ Remeasurement= restatement of f/s denominated in a foreign currency to the functional currency prior to the translation process

Method Step 1 Step 2 Plug ReportedTranslation I/S @ weighted

averageB/S @ year end rate; C/S and APIC @ historical rate; roll forward R/E

Equity: Accumulated OCI

PUFE

Remeasurement B/S: Monetary @ year end; Nonmonetary @ historical

I/S: @ weighted average; historical for B/S related accounts

G/L so I/S is at amount necessary for RE plug

IDEA

Individual Foreign TransactionsIf purchase on credit, at year end compare purchase rate to year end rate; when pay for goods compare year end rate to current rate.

Financial 3

Marketable Securities:1. Trading= current; FV; unrealized g/l on I/S; operating or investing2. Available for Sale= non current; FV; unrealized g/l to OCI (PUFE); investing3. Held to Maturity= non current; only bonds; amortized cost; investing

Dr. Unrealized loss on securityCr. Valuation account (fair value adjustment)

ReclassificationFrom To TRF Acct For Unrealized Holding

G/LTrading Any other FV It has already been

recorded in income so no adjustment is necessary

Any other Trading FV Recognized in current earnings

Held to Maturity Available for Sale FV Record in OCIAvailable for Sale Held to Maturity FV Amortize gain or

loss from OCI with any bond premium/discount amortization

Impairment of SecuritiesIf the decline in FV is other than temporary (permanent), the cost basis of the individual security is written down to FV as the new cost basis and the amount of the write down is accounted for as a realized loss and included in earnings.

Sale of SecurityTrading: Dr. Cash Cr. Trading Security Cr. Realized gain on trading security (IDEA)AFS: Dr. Cash Dr. unreal. gain on AFS (PUFE) Cr. AFS Cr. Real. gain on AFS (IDEA)

Income tax effects= when sold

Business Combinations/ ConsolidationsCriteria: Consolidate all majority owned subsidiaries to have one management and one economic entity (over 50% of the voting interest). Do not consolidate when control is not with owners. Different year ends= ok

Cost Method (do not consolidate) <20%, does not exercise significant influenceBalance Sheet:Record at cost: Dr. Investment in investee Cr. CashMarketable securities- adjust to FV:

For a decrease in FV Dr. unrealized holding losses Cr. Investment in investeeFor an increase in FV Dr. investment in investee Cr. Unrealized holding gains Reduce Investment in Investee for Return of Capital Distributions:Dr. Cash Cr. Investment in investee Income Statement:Record cash dividends from the investee’s earnings and profits. Do not recognize stock dividends. Dr. Cash Cr. Dividend IncomeDistributions that exceed investor’s share of the investee’s RE: Dr. Cash Cr. Investment in Investee

Equity Method (do not consolidate) 20-50%, exercise significant influence (i.e. largest shareholder, majority of board) (Beg bal+ investee’s earnings – dividends= end bal)Balance Sheet:Record at cost: Dr. Investment in investee Cr. CashIncrease by the parent’s ownership % of earnings of investee: Dr. Investment in investee Cr. Equity in investee incomeDecrease by the parent’s ownership % of cash dividends from investee: Dr. Cash Cr. Investment in investeeDecrease by amortize FV>NBV: Dr. Equity in earnings Cr. Investment in investee Income Statement : Investee earnings: Dr. Investment in investee Cr. Equity in investee incomeInvestee cash dividends: Dr. Cash Cr. Investment in investee Asset amortize FV>NBV: Dr. Equity in earnings Cr. Investment in investee

Goodwill Excess= $ Purchase price FV X%= $NBV X%= $

Amortize Asset FV difference over related asset life: (not for land) Dr. Equity in investee income Cr. Investment in investee

Change from cost method to equity method:Apply the new method (equity) to the prior period’s old percentage (1-20%)

Consolidated Financial Statements: Control over 50%Acquisition Method: Acquisition for cash; Dr. Investment in subsidiary Cr. CashAcquisition for parent common stock: (at date transaction closes) Dr. Investment in sub Cr. CS Cr. APIC100% of net assets acquired are recorded at FV with any unallocable balance remaining creating goodwill When companies are consolidated, the sub’s entire equity is eliminatedFV= Acquisition price= Investment in Sub

Common Stock- Sub (Dr)APIC- Sub (Dr)

Retained earnings- Sub (Dr)Investment in Sub (Cr)Noncontrolling interest (Cr) Balance sheet of subsidiary is adjusted to FV (Dr)Identifiable intangible assets of the subsidiary are recorded at FV (Dr)Goodwill (or Gain) (Dr)

Sub’s Total (100%) FVGoodwill NCIIdentifiable Intangible Assets FV Investment in Subsidiary (Acquisition

Price)Balance Sheet FV AdjustmentBook Value (CAR)Dr Cr

Acquisition Date Calculation of CAR:Reverse the activity in the sub’s RE in order to squeeze back into BV at the acquisition date: Beg RE + income – dividends= End RE (work backwards from here).

Investment in Sub: Original cost is measured by FV of the consideration givenDirect out-of-pocket costs= expensedStock registration and issuance costs are a direct reduction of the value of the stock issued (Dr. APIC)Indirect costs= expensedBond issue costs= capitalized and amortized.

Step acquisition- Consolidated to deconsolidatedOwner % change Accounting TreatmentNon control Control -Remeasure previously held equity interests

to FV-I/S reflects adjustment (g/l)

Control more or less control Equity transaction (no g/l recognition)Control non control -Recognize g/l of sale

-Remeasure the remaining non-consolidating interest to FV-Recognize adjustment to FV on the I/S

Non-Controlling InterestReported at FVIncome Statement: The consolidated income statement will include 100% of the sub’s revenues and expenses (after the date of acquisition). NCI should be allocated within a sub account of RE. Balance Sheet: includes 100% of sub’s assets and liabilities. NCI share should be presented as part of stockholders’ equity= NCI

Balance sheet adjustment to FV, identifiable intangible asset adjustment to FV and goodwill is recognized for any excess/ negative in gain

B adjust to FV and recalculate depreciationI adjust to FV; finite life amortize over remaining life; indefinite life do not amortize G subject to impairment test or if negative balance record as Gain

Intercompany TransactionsEliminate 100% for external reportingBalance Sheet:

- Dr. accounts payable Cr. Accounts receivable- Dr. Bonds payable Cr. Bonds investment- Dr. Accrued bond interest payable Cr. Accrued bond interest receivable- Dr. Dividends payable Cr. Dividends receivable

Income Statement:Eliminate all intercompany gross profit sitting in ending inventory and fixed assets of parent or subsidiary

Do not eliminate intercompany accounts if you do not consddolidate

Workpaper elimination entry for intercompany merchandise transactions:Dr. Intercompany salesDr. Retained earningsCr. Intercompany CGS (sales= cost + (% above cost* cost)Cr. CGS (BI+ purchases-EI=CGS * intercompany profit based on markup on selling price) (markup on selling price= markup on cost/ 1+ markup on cost)Cr. Ending inventory (EI* markup)

Intercompany bond transactions: if one member of the consolidated group acquires an affiliate’s debt from an outsider, the debt is considered to be retired and a gain/loss is recognized. Dr. Bonds payableDr. PremiumCr. Investment in parent bondsCr. Gain on extinguishment of bonds

Eliminate intercompany accounts such as interest expense, interest income, interest payable, and interest receivable

Eliminate amortization of the discount or premium. The unamortized discount or premium on the intercompany bond is eliminated.

The elimination for realized but unrecorded g/l on extinguishment of bonds in subsequent years would be adjusted to retained earnings. NCI would be adjusted if the bonds were originally issued by the subsidiary.

Intercompany sale of land= intercompany g/l on the sale of land remains unrealized until the land is sold to an outsider. Dr. intercompany gain on sale of land Cr. Land

Intercompany profit on sale of depreciable fixed assets: unrealized until sold, recalculate depreciation; Dr. Intercompany gain on sale of machinery Cr. Machinery Cr. Accumulated depreciation and Dr. Accumulated depreciation Cr. Depreciation expense

Combined Financial Statements/ Push down accountingCombined financial statements of a group of related companies= companies under common control or management or unconsolidated subsidiaries

Push down accounting reports assets and liabilities at fair value in separate financial statements of the subsidiary. In effect, consolidation adjustments are pushed down into the records of each subsidiary.

Pooling of Interests Method 90%

Acquisition PoolingFV Assets NBVFV Liabilities NBVParent only Retained Earnings BothAfter Acquisition Income Whole year/retroactiveExpense Acquisition Cost ExpenseYes Goodwill NoYes (1-49%) Minority Interest Yes (0-10%)Eliminate Investment in Sub EliminateDepreciate Asset Adjustment N/AAmortize Identifiable Intangible

AssetsN/A

Impairment Test Goodwill Adjustment N/AEliminate Intercompany Transactions Eliminate

Financial 4

Working Capital= current assets- current liabilities (higher WC= lower risk)Current ratio= current assets/ current liabilities (higher CR= lower risk)Quick ratio= cash + net receivables + marketable securities/ current liabilities

Current Assets= cash, trading securities, ST investments, accounts and notes receivable, trade installment receivables, inventories, ST receivables, prepaid expenses, cash surrender value of life insurance

Current Liabilities= trade accounts and notes payable, current portions of LT debt, cash dividends payable, accrued liabilities, payroll liabilities, taxes payable, advance from customers (deferred revenues)

A ST obligation may be excluded from current liabilities and included in non current debt if the company intends to refinance it on a LT basis and the intent is supported by the ability to do so as evidenced either by: the actual refinancing prior to the issuance of the F/S or the existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing.

Cash and Cash Equivalents= currency on hand, petty cash, checking accounts, savings accounts, money market funds deposits held as compensating balances against borrowing arrangements with a lending institution that are not legally restricted, negotiable paperNot= CD’s (if original maturity is over 90 days), legally restricted deposits held as compensating balances against borrowing arrangements with a lending institution.

Restricted cash= cash that has been set aside for a specific purpose. Unrestricted cash= used for all current operations.

Bank Reconciliations:Simple Reconciliation: calculate true balanceDeposits in transit: add to bank balanceOutstanding checks: subtract from bankService charges: subtract from booksBank collections: add to booksErrors: read factsNonsufficient funds: subtract from booksInterest income: add to books

Reconciliation of cash receipts and disbursements: 4 column approach, need prior month ending balance as well as present month information

Accounts ReceivableBeginning balance+ Credit sales- write offs

- conversion to note - cash collected= ending balance

The NRV of accounts receivable is the balance of the accounts receivable account less receivables that may be uncollectible determined by an aging of year end receivables.

Valuation of accounts receivable with discounts and returnsDiscounts (Speed): 2/10, n/30= 2% discount of the sales price if the payment is made within 10 days. If the discount is not taken, the entire amount is due in 30 days. Gross Method: records sales without regard to the available discount, if payment is received within the discounted period, a sales discount contra account is debited. If payment received after the period, normal entry (Dr. cash Cr. AR)Net Method: records sales and AR net of available discount, no adjustment needed if payment is received within the discount period. If payment is received after the discount period, a sales discount not taken account must be credited. Sales Returns and AllowancesGoods returned= deductions form AR and sales. Dr. Sales returns (contra sales) Cr. Allowance for sales returns (contra AR)

Estimating Uncollectible Accounts ReceivableDirect Write Off Method (Not GAAP) Dr. Bad debt expense Cr. AR Allowance Method (GAAP)1. Percentage of sales method: income statement approach, emphasizes matchingBeg + C/Y bad debt (% sales) – Write offs = end (plug) Question will say, company estimates that x% of its sales on credit will not be collected. Dr. bad debt expense Cr. Allowance for uncollectible accounts2. Percentage of Accounts receivable at year end method: balance sheet approachBeg + C/Y bad debt (plug) – Write offs = end (% of AR)Question will say, company estimates the balance of the allowance account must be x% of year end AR. 3. Aging of Receivables Method: balance sheet approach, emphasizes asset valuationBeg + C/Y bad debt (plug) – Write offs= end (per aging)

Bad Debt ExpenseIncludes the provision made during the period and an adjustment made at year end to increase/ decrease the balance in the allowance for uncollectible accounts, if needed.

Write Off of a specific account receivable: Dr. Allowance for doubtful accounts Cr. ARThis entry has no effect on NI or on NRV

Subsequent Collection of Accounts Receivable Written Off1. Direct Write off method; Dr. Cash Cr. Uncollectible accounts recovered2. Allowance methodDr. AR Cr. Allowance for uncollectible accounts Dr. Cash Cr. AR

Pledging (footnote only)

Factoring of Accounts Receivable:; convert receivables into cash 1. Without Recourse= true sale Dr. Cash Dr. Due from Factor Dr. Loss Cr. AR2. With Recourse= sale or loan

Transfers and Servicing of Financial AssetsRecognize the assets it has control overDerecognize those assets only when control has been surrenderedFinancial Components approach= Assets and liabilities may be divided into many components that have different accounting methodsSurrender of Control= assets isolated from transferor, transferee has right to pledge, transferor doesn’t maintain controlControl surrendered- no continuing involvement: entire transfer is recorded as a saleControl surrendered- continuing involvement: retained interest is on books of t’orNo control surrendered- account for transfer as a secured borrowing with pledged collateral Servicing assets and liabilities: amortized in proportion to estimated net servicing income. FV determined at regular intervals.

Notes Receivable: Valuation: at present valueDiscounting: holder endorses not to third party and receives cash. 1. With recourse: reported on the balance sheet with corresponding contra account 2. Without recourse: true sale; holder assumes no further liability and removed from the balance sheet

Inventories1. Retail inventory; finished goods only2. Manufacturing inventory; RM, WIP, FG

F.O.B. Shipping point (buyer pays all shipping costs, title passes when goods are shipped)F.O.B. Destination (seller pays freight out; title passes when buyer receives the goods)

Sales with a right of return: goods should be included in the seller’s inventory, if the amount of the goods likely to be returned cannot be estimated. If they can be estimated, the transaction will be recorded as a sale with an allowance for estimated returns recorded.

Consigned Goods: Seller includes consigned goods in its inventory because title and risk of loss is retained. Revenue will be recognized when the goods are sold to a third party.

DM=Raw materials (freight in, insurance for goods in transit, storage, import duties, purchasing department costs, receiving department costs)DL= labor

OH= indirect costsPeriod costs= marketing costs, freight out, re-handling costs, abnormal spoilage, idle plant capacity costs Valuation= inventory should be stated at cost.Exceptions: 1. LCM: conservative Market value: median of inventory item’s replacement cost, market ceiling, and market floorReplacement cost= cost to purchase the item as of valuation dateMarket ceiling (NRV, net of discount)Market floor (NRV- profit margin, based on selling price only)Then compare median to cost, take lower of 2 2. Precious metals and farm products: value at NRV

Periodic Inventory System: uses purchases, shortages are part of CGSBI + purchases (net of returns and discounts) = CGAFS – Ending inventory = CGSPerpetual Inventory System: no purchases, the actual CGS is determined and recorded with each sale

GAAP Inventory Cost Flow Assumptions:Specific Identification: The cost of each item in inventory is uniquely identified to that item. The cost follows the physical flow of the item in and out of inventory to CGSFIFO: Prices A= L+E Rev-Exp = profit thus tax liability Periodic= perpetual Weighted Average: Periodic, total costs of inventory available/ total number of units of inventory available Multiply that by CGS units or EI unitsMoving Average Method: Perpetual, computes weighted average cost after each purchaseTotal amount/ total units= unit cost LIFO: periodic is NOT the same as perpetual Prices A= L+E Rev- Exp = Profit thus taxes EI= old, cheapBetter matching Dollar Value LIFO: Price index= EI at current year cost/ EI at base year cost Price index* layer added= LIFO layer addedBeginning inventory + LIFO layer added= ending inventory When the price index is given in the problem, the year end price index is multiplied by the LIFO layer at the base year cost to calculate the LIFO layer added at dollar value LIFO Gross Profit Method: Periodic, used for interim financial statements Retail Method: Perpetual; records inventory at the retail price and converts the retail price to GAAP cost through the application of a cost complement percentage. 1. Conventional Retail Inventory Method: approximates the results that would be obtained by taking a physical inventory count and pricing the goods at LCM. Subtracting the markdowns from total AFS results in a lower cost complement percentage, which leads to lower EI. (Computation of the ratio excludes markdowns) (Beginning inventory is included in the cost to retail ratio calculation)

2. FIFO/ Cost retail inventory method: EI comes from current period purchases, including markups and markdowns. 3. LIFO: net markups and net markdowns are included in the cost to retail ratio calculation; beginning inventory is excluded from the cost to retail ratio calculation4. LIFO/Cost retail: ratio comes from beginning inventory only 5. Dollar value LIFO/ Cost retail: count inventory at year end as retail; convert year end balance to base year amounts via price indices; compute the yearly increment; convert each yearly increment from base year amounts to year end prices; convert retail prices to cost6. Retail Method: Freight costs are added to the cost of purchases; purchase returns and allowances are reductions of both the cost and retail amounts; sales returns and allowances are subtracted from sales; employee discounts are deducted from retail in a manner similar to sales discounts; shrinkage is the difference between book EI and the amount per physical count Relative Sales Value: used when costs cannot be determined individually. Individual amount/ total amount * purchase priceDisclosures: inventory detail, significant finance arrangements, pledged inventory, valuation method, cost flow method

Fixed Assets: for use in operations, LT and subject to depreciation, physicalLand, buildings, equipment, accumulated depreciation account (contra asset), fixed assets are nonmonetaryValuation: If purchased= historical cost, if donated= fair value Cost of equipment= invoice price, less cash discounts, add freight in, add installation charges, add sales and federal excise taxes, possible addition of construction period interestCapitalize vs. Expense: Summary Chart Expense Capitalize Reduce

Accumulated Depreciation

Additions: Increase Quantity XImprovement/ Replacement

Increase Life XIncrease Usefulness

X

Ordinary Repair: XExtraordinary Repair:

Increase Life XIncrease Usefulness

X

Cost of Land: All costs incurred up to excavation= purchase price, brokers’ commissions, title and recording fees, legal fees, draining of swamps, clearing of brush and trees, site development, existing obligations assumed by buyer, costs of razing, less proceeds from sale of existing buildings, etc, land improvements, Interest costs during construction period should be added to cost of land improvement based on weighted average of accumulated expenditures.

Cost of Buildings: Excavation forward= purchase price, repair charges, alterations and improvements, architect’s fees, possible addition of construction period interest

Basket Purchase: allocate purchase price based on ratio

Fixed Assets Constructed by a company= DM, DL, repairs and maintenance that add value, OH, do NOT include profit General rule: interest is expensed as incurredException: Construction period interest should be capitalized Interest cost: Do NOT capitalize on: inventory routinely manufactured, fixed assets held before or after construction period, during intentional delays in construction. Do capitalize on special order goods on hand for sale to customers and during ordinary delays in construction.

Computing Capitalized CostRule 1: Only capitalize interest on money actually spent, not on the total amount borrowedRule 2: The amount of capitalized interest is the lower of: 1. Actual interest cost incurred, or 2. Computed capitalized interest (avoidable interest).

Summary Before Construction During Construction After ConstructionBorrowed funds (not used)

Expense Expense Expense

Borrowed funds (weighted average of accumulated expense

N/A Capitalize Expense

Excess expenditures (weighted average interest rate)

N/A Capitalize Expense

Disclose: 1. Total interest cost incurred during the period 2. Capitalized interest cost for the period

Depreciable Assets and DepreciationIf an asset is put in place during the year it requires computing depreciation for a part of the year rather than the full year.

Component Depreciation: More accurateComposite (dissimilar assets) or group (similar) depreciation: depreciates entire class over a single life= more simple. No g/l is recognized when one asset in the group is retired. Dr. Cash (sp) Dr./Cr. Accum Dep (plug) Cr. Original CostComposite rate= annual depreciation/ total cost

Methods

Straight Line: Cost- SV/ Estimated useful life= depreciation per period Simple, consistent; does not accurately matchSum of the Years Digits: ex. For 5 years 5+4+3+2+1= 15 in year 2: 4/15* depreciation base= depreciation S= N* (N+1)/ 2Declining Balance: 1/N *2 (double, or 1.5 for 150%) for assets subject to rapid obsolescenceConstant rate * Cost- AD= annual expense Ignore salvage value but do not depreciate below this number Matches costs to revenues; does not reflect changes in activity, complexUnits of Production: Service potential declines with use Cost-SV/estimated units or hours= rate per hour * # units produced= depreciation expense Matches costs with revenues, reflects activities; if no activity, no depreciation, can’t be used for buildings, complex

Disposals: 1. sale of an asset during its useful life: Dr. Cash received from sale Dr. Accumulated depreciation of sold asset Cr. Sold asset at cost Cr/Dr. the difference is g/l2. write-off fully depreciated asset: Dr. Accumulated Depreciation Cr. Old asset at full cost3. Total and permanent impairment: Dr. Accumulated depreciation Dr. Loss due to impairment Cr. Asset at full cost4. Partial impairment: Dr. Loss due to impairment Cr. Accumulated depreciation

Disclosure: Allowances for depreciation and depletion should be deducted from the assets to which they relate.

Depletion:Depletion base= cost + development costs to prepare the land for extraction + any estimated restoration costs - residual value (REAL)Methods:Cost: Depletion base/ current estimated recoverable units= cost depletion Percentage: based on % of sales; can exceed cost depletion; limited to 50% of NI from the depletion property computed before the percentage depletion allowance. Unit depletion rate * units extracted= total depletion

Fixed Asset ImpairmentThe carrying amounts of fixed assets held for use/ disposal need to be reviewed at least annuallyStep 1: Sum of undiscounted expected cash flows < carrying amount= impairmentStep 2:a. held for use: FV-CV= impairment loss Original cost- CV= AD to dateOriginal cost- (AD to date + impairment loss) = New BVb. Held for disposal: FV- CV= impairment loss + cost of disposal= total impairment loss Reporting: as a component of income from continuing operations before income taxes

Financial 5

Present Values and AnnuitiesConcepts:1. PV of $1= amount to be invested now at a specific interest rate so that $1 can be paid or received in the future2. FV of $1= the amount that would accumulate at a future point in time if $1 were invested now. 3. PV of an ORDINARY annuity (in arrears)= start later= end of the years= current worth of a series of identical periodic payments to be made in the future4. FV of an ordinary annuity= sum to be received at some point in the future, of identical periodic investments made from the present until that future point5. PV of an annuity DUE (in advance)= start now6. FV of an annuity dueAnnuity= multiple payments or receipts. Annuity due- 1= ordinary annuity Periodic payments: beginning= PV annuity due; ending= PV ordinary annuityBargain/ guaranteed residual= PV of $1

Accounting for LeasesRental Sale (in substance)

Lessee Operating Lease Capital LeaseLessor Operating Lease Sales type or direct

financing type

Operating Leases= rental= no transfer/risk/benefit of ownership Lessee:Records rent expense over the lease term Prepayment= asset (deferred charge)= amortize itLeasehold improvements:

1. Value of leasehold improvement should be capitalized and added to PP&E2. Leasehold improvements should be depreciated over lesser of 1) lease life or

2) asset/ improvement lifeRent kicker= period expenseRefundable security deposit= asset until refunded by the lessorFree or reduced rent consideration= Lessee must take total rent expense to be paid for the entire lease term and divide it evenly over each period Lessor:The cost of the property is included in PP&EDepreciate over the asset’s useful lifeRental income= use straight lineSecurity deposits:

1. Nonrefundable= deferred by lessor and capitalized by lessee until the lessor considers the deposit earned

2. Refundable= treated as a liability by lessor until deposit is refunded to the lessee. Lessee treats as receivable.

Revenue is only recognized when the earning process is complete; we never anticipate revenue. Temporary Difference: GAAP= report prepaid rental income when earned (tax when received)Lease bonus= deferred and amortized over life of the leaseFree or reduced rent consideration= lessor must take total rental income to be received over the entire lease term and divide it evenly over each period.

Capital Leases= purchase/ ownershipLessee:Must meet ONE of the following criteria to CAPITALIZE:Ownership transfers at end of lease (keep forever); capitalized cost= PV of payments and required buyoutWritten option for bargain purchase (legal transfer of title keep forever); capitalized cost= PV of payments and bargain buyoutNinety (90%) percent of leased property FV<PV of lease payments (treat like it’s yours); capitalized cost= PV of paymentsSeventy-five (75%) percent or more of asset economic life is being committed in lease term (treat like it’s yours during period); capitalized cost= PV of payments

Recording:Capitalized AmountThe lessee records the lease as an asset and a liability at the lesser of: 1) FV of the asset at the inception of the lease or 2) Cost= PV of the minimum lease payments

Includes: required payments bargain purchase option, guaranteed residual valueExcludes: Executory costs, optional buyout

Interest rateLessee uses incremental borrowing rate, determined as the lesser of: 1) rate implicit in the lease or 2) rate available in the market to the lessee Formula for depreciation:Capitalized lease assets Less salvage value = Depreciable Basis / periods of benefit= Depreciation Expense per periodO/W=depreciate over asset life N/S= depreciate over lease life

Lease Amortization- Liability and Asset on Lessee’s BooksDate (1) Annual

Lease Payment(2) Interest on Unpaid Obligation (%*(4))

(3) Reduction of Lease Liability ((1)-(2))

(4) Carrying Amount of Lease Obligation

Year 0 - - - Lesser of FV or PV of minimum lease payments

Year 0 Amount per yr - 1-2 4-3Year 1 Same as above %*4 1-2 4-3

Asset Retirement Obligation: (ARO)For lessees: If ARO is included in minimum lease payments, no separate accounting. If ARO is imposed otherwise, then ARO accounting appliesFor lessors: ARO accounting appliesARO Accounting:Initial B/S recognition: Dr. asset retirement cost Cr. AROPeriod to period I/S: depreciate expense and accretion expenseIf reasonable estimate of FV can be made use FVIf reasonable estimate cannot be made liability will be recognized when it can bePeriod to period changes in the ARO liability result from passage of time and revisions in timing or estimated cash flows (upward= current rate; downward= historical rate)

Disclose everything

Summary of Lessee Capitalization RulesCapitalize: as PP&E, the leased asset at lesser of:1. Cost (PV of future lease payments + guaranteed residual and Bargain purchase option exclude executory cost= insurance, taxes, and repair & maintenance) Discount rate: incremental borrowing rate is lesser of implicit rate or rate available in market2. FV (given)

Lessor:Must meet all 3 of the following criteria to be classified as sales type or direct financingLessee “OWNS” the leased property (meets 1 of the 4 lessee’s criteria)Uncertainties do not exist regarding any unreimbursable costs to be incurred by lessorCollectibility of the lease payments is reasonably predictableSales Type Lease: 2 profits= gain on sale and interest incomeDirect Financing Lease: 1 profit= interest income

Recording Sales type:Gross investment= Lease payment + unguaranteed residual value Net investment= Gross investment * PVUnearned Interest revenue= Gross investment – Net investmentCost of goods sold= Cost of asset- PV unguaranteed residual value Sales revenue= PV of minimum lease payments: includes guaranteed RV but not unguaranteed RVCost+ profit= PV=SP=FVRecording Direct Financing Lease:PV= Carrying amount of receivable= cost of asset sold

Sale-LeasebackProfit/loss is deferred and amortizedOperating Lease Excess Profit: Sales price- Asset NBV= Tentative gain – PV min. lease payments= excess gainCapital Lease Excess Profit: Sales price- Asset NBV= tentative gain – leaseback asset= Excess gain

Leaseback asset= lesser of 1) FV of leased property or 2) the PV of minimum lease payments

Rights to Remaining Use of Property Retained by Seller-Lessee:1. Substantially All rights retained (greater than 90%)= major= PV is =/> 90% of FV= capital leases. 2. Rights Retained are less than substantially all but greater than minor (between 90-10%)= middle= PV is less than 90% FV but greater than 10% FV of property at the lease inception= capital or operating, depending on criteria. 3. Minor portion of rights retained by seller-lessee (Less than 10%)= minor= PV is less than 10% of FV of property or lease period is 10% or less of asset’s remaining life= operating leases. Capital Leaseback= any g/l on sale is deferred and amortized in proportion to amortization of the leased asset. Deferred gain= unearned profit on sale-leaseback. Unearned profit on sale leaseback= valuation accountOperating Leaseback= any g/l is deferred and amortized in proportion to the gross rental expense over the life of the lease. Deferred gain= unearned profit. Unearned profit= deferred credit in B/S

Major (90% or more)

Middle 90-10% Minor 10% or less (life or sales price)

Gain Defer All (amortize over leaseback)

Defer (up to PV of leaseback) Gain in excess= recognize immediately

No deferral

Loss (NBV>FV) (real economic losses)

Recognize immediately

Recognize Immediately

Recognize Immediately

Other losses (artificial losses)

Defer all (amortize over leaseback)

Defer all (amortize over leaseback)

Recognize Immediately

SubleasesLessor classifies in same category as original leaseFor lessee: If original lease was operating sub lease is operatingIf original lease was capital due to O/W capital leaseIf original lease was capital due to N/S operating lease

Investment in Debt SecuritiesMeasured at amortized cost= carrying amount Bond indenture= contract between issuer and bondholdersFace value= total dollar amount of the bond (basis for periodic interest)Stated interest rate= interest to be paid to investors, specified in bond contractMarket interest rate= rate actually earned by the bondholder Treasury bonds= reacquired by issuer Cost of Investment= 1) PV of principal or 2) Face + PV of series of interest payments to be received during the term of the bond

PV is calculated based on market rate at date of purchaseDiscount= market rate> stated rate. Bonds sell for less than face to make up for lower returnPremium= market rate < stated rate. Investor will pay more than face due to higher return offered

Long-Term Liabilities and Bonds PayableLT liabilities= probable future expenditures associated with current obligations that are not payable within the current operating cycle or reporting year, whichever is greater. Debentures= unsecured bondsMortgage bonds= secured by real propertyCollateral Trust bonds= secured bondsConvertible Bonds= convertible into common stock of the debtor

1. Nondetachable warrants= bond itself must be converted into capital stock2. Detachable warrants= bond is not surrendered upon conversion, only warrants

plus cash Participating Bonds= have stated rate of interest and participate in income if certain earnings levels are obtainedTerm bonds= single fixed maturity date. Entire principal is paid at the end of this period.Serial bonds= pre-numbered bonds that issuer may call and redeem a portion by serial number (often redeemed in a series of annual installments)Income bonds= only pay interest if certain income objectives are metZero coupon bonds= sold with no stated interest but rather at a discount and redeemed at the face value without periodic interest paymentsCommodity Backed bonds= redeemable either in cash or a stated volume of a commodity, whichever is greater. Bonds payable should be recorded as a LT liability at face and adjusted to the PV of their future cash outflows by either subtracting unamortized discounts or adding unamortized premiums. Coupon rate= stated interest rateBond interest= coupon rate* face

When a bond is issued, the price is computed as the sum of the PV of the future principal payment + the PV of the future periodic interest payment. Both are discounted at the prevailing market rate of interest The stated rate of interest is typically printed on the bond, it will not change. If market rate > stated rate on the bond, the bonds will sell at a discount. Unamortized Discount is a contra to bonds payable; a direct reduction from face of the bonds to arrive at CVAmortization of the discount over the life of the bond, with amortized amounts increasing interest expense each period.If market rate < stated interest rate, the bonds will sell at a premium Unamortized premiums: direct addition to face of the bonds to arrive at bond’s CVAmortization of the premium: over the life of the bond, with amortized amounts decreasing interest expense each period. Carrying value= Face + unamortized premium – unamortized discount

Bond Issue Costs: transaction costs of the bond issue. i.e. legal fees, account fees, underwriting commissions, printing, etc Record as a deferred charge and amortize from date of issuance into expense

Methods of Discount and Premium AmortizationAmortize over period bonds are outstanding, not sold1. Straight line:Premium or discount/ # of periods bond is outstand= periodic amortizationInterest expense= (face * stated rate)- premium amortization or + discount amortization2. Effective Interest method:GAAP interest expense= CV at beginning of the period * effective interest rateAmortization of discount= GAAP interest – cash paid at the stated rateAmortization of premium= Cash paid at the stated rate – GAAP interest expense I/S: Net carrying value * effective interest rate= interest expenseLess: B/S: Bond face * coupon rate= interest paid= Amortization

Bonds issued between interest dates= the amount of interest that has accrued since the last interest payment is added to the price of the bond. (If issue on April 1, accrue for 3 months from January to April)Year End Bond Interest Accrual: When date of scheduled interest payment and year end do not agree, accrue interest by an adjusting entry on the issuer’s books at year end. Take into account pro-rated share of discount or premium amortization. Bond Sinking Funds: A fund that a company contributes money to so that at maturity they can pay off a liability= non current asset. Only current to extent it offsets current liability. Use FV of an annuity of $1. Record sinking fund and interest payment to the fund.Bond maturity value= periodic payments * FV of an annuity of $1Serial Bonds:Alternative to sinking funds. Have principals that mature in installments. PV of each maturity is calculated separately. When underwriters bid on an entire serial bond issue at one average interest rate, an average yield can be used for all maturities in the series to calculate interest expense. 2 methods of amortization: 1. effective interest 2. bonds outstanding method, like sum of the years digits (premium * fraction of total bonds outstanding) Interest expense= interest payment- premium amortization

Convertible Bonds: Often issued at more than face because of value of conversion. 1. Book Value Method: no gain or loss recognized. At conversion, bond payable and premium/discount are written off and CS is credited. APIC is credited for the excess of the bond’s CV over stock’s par less any conversion costs. 1. Pay accrued interest 2. amortize bond disc/ prem 3. amortize bond issue costs 4. record difference as APIC

2. Market Value Method: recognize gain/loss. At conversion, bonds payable and related premium are written off, CS is credited. The credit to APIC is the excess of the market price of the stock over par. Difference between market value of stock and book value of bonds is recognized g/l

Bonds Sold with Detachable Stock Purchase Warrants: A conversion feature that is separate from a security should be accounted for separately, and a value should be assigned to it= relative FV, credited to APIC- warrants If FV of only the warrants is known= warrants only methodIf FV of both the warrants and bonds are known= market value method 1. Separate warrants from debt at date of issuance of the bonds2. Allocate amount received upon issuance separately to debt and to the detachable warrants according to their relative FV at date of issuance. If warrants only method, allocate the known FV to the warrant, and allocate the remainder of the proceeds to the debt3. Amount allocated to warrants is credited to APIC- warrants4. Any difference between amount allocated to bonds and face is discount or premium on bonds payable5. Exercise of the warrants: additional cash is received

Extinguishment of Debt:Consider extinguished if: debtor pays the creditor and is relieved of its obligation or debtor is legally released. In-substance defeasance= arrangement where a company places purchased securities into an irrevocable trust and pledges them for the future principal and interest payments on its LT debt. This is not considered extinguished.

1. Adjust items in F/S: bond issue costs, related unamortized disc/prem, difference between face and reacquisition proceeds2. Gain/loss= reacquisition price- net carrying amount Net carrying amount= Face – unamortized discount + unamortized premium – unamortized issue cost The g/l can be treated as extraordinary

Troubled Debt Restructurings Creditor cuts debtor some slack. Transfer of Assets:Ordinary g/l= FV asset transferred- NBV asset transferredPossibly extraordinary gain = (Face of payable + accrued interest) – FV asset transferredTransfer of Equity Interest:Possibly extraordinary gain= FV equity transferred – Face of payable Modification of Terms: Total future cash payments= principal and any accrued interestInterest Expense: computed by a method that causes a constant effective rate. Future payments: When total future cash payments are less than the carrying amount, the debtor should reduce the carrying amount accordingly and recognize the difference as a gain. Combination: FV of any asset or equity is used first to reduce CV of payable. Difference between FV and CV of any assets is transferred and recognized as g/l. No gain on restructuring can be recognized unless the CV of the payable exceeds total future cash payments.

Impairment of Loans by Creditors: measured based on PV of expected future cash flows discounted at the loan’s effective interest rate. When the creditor receives assets or equity as full settlement of a receivable, they are accounted for at their FV. The excess of the recorded receivable over the FV of the asset received is recognized as an ordinary loss.

LiabilitiesCurrent liabilities are valued at settlement values= NRVTrade Accounts Payable: amounts owed for goods, RM, and supplies that are no evidenced by a promissory note. Gross: records purchase without regard to discount. Net: purchases and accounts payable are recorded net of the discountDividends Payable: Upon declaration, debit to RE. Upon payment, Debit dividends payable Cr. CashReturnable Deposits: i.e. return of security depositSales and Use Taxes PayableProperty Taxes Payable: accrued prior to receipt of tax invoice and matched in year for which invoice pertains OR recorded as a payable upon receipt of tax invoice and expensed in year of receipt.Accrued Salaries and Wages payable: Unpaid because of pay periods that overlap the balance sheet date. Accruals are calculated as the ratio of days occurring prior to the B/S date divided by the total day s in the pay period times the amount of the affected payrollPayroll Deductions: SS, Medicare, income taxes= withheld from employees out of the gross pay on their paychecks. Unemployment taxes and the employer’s share of payroll taxes: should be accrued by the employer as an expense. Compensated Absences: accrued if: 1. employee has performed services to which the vacation or sick pay is attributable; 2. the liability is vested or accumulated; 3. payment is probable; and 4. the amount can be reasonably estimated. Employee Bonuses: recorded as an expense and a current liability in the year in which the services that qualified for the bonus were renderedOne time termination benefits/ contract termination costs: may not be recognized until the liability is actually incurred. Measured initially at FV on date the liability is incurred.

Imputing Interest on Payables (and Receivables)Must be recorded at the true PV at the date of issuance. If note is non interest bearing or rate is unreasonable, the value of the note must be determined by imputing the market rate of the note and by using the effective interest method. Any discount or premium resulting from imputing interest on a note must be amortized over the life of the note using the effective interest method= payment on a note would be divided between an interest component and principal component. Premium/ discount is inseparable form the related asset. Discounts/ premiums resulting from imputing interest must not be classified as deferred charges or credits.

Notes Payable1. Interest bearing= if at market rate for loans of similar risk: recorded at face, and interest payable is accrued at stated interest rate. If interest rate varies from market rate:

adjust to true PV and the effective interest method should be used to amortize the discount. 2. Non-interest bearing= recorded at PV by discounting the face of the note using an appropriate interest rate and amortizing the difference using the effective interest method.

Financial 6Pension Plans = an agreement in which the employer provides employees with defined or estimated retirement benefits in exchange for current or past services. Accounting for pension plans is concerned primarily with determining the amount of: 1) pension expense that appears on the sponsor company’s I/S and 2) any related pension accounts that appear on the sponsor company’s balance Sheet. Necessary use of estimates and assumptions, which affect the timing and measurement of pension costs, g/l and liabilities

Types of Plans:1. Pay-as-you-go: cash basis, not GAAP2. Terminal funding: lump sum; cash basis, not GAAP3. Defined Contribution Plan= specifies the periodic amount of contributions to the plan and the way that the contributions should be allocated to employees. Factors include: length of service and compensation amounts4. Defined Benefit Plan= defines the benefits to be paid to employees at retirement. Factors include: employees’ compensation levels at or near retirement, number of years of service, number of years until retirement, number of years the plan expects to pay benefits after the employee retires.

Accumulated Benefit Obligation (ABO): Use current salaryProjected Benefit Obligation (PBO): Use future salaryVested Benefits: benefits that already belong to employees who have earned their benefits by reason of having reached retirement age and/or who otherwise meet unique pension plan requirements.Prior Service Cost: The cost of benefits based on past service granted for: a) service prior to the initiation of a pension plan that employees retroactively receive credit for when the plan is implemented and b) subsequent plan amendment, reflecting new or increased benefits, that also is applied to service already provided. PSC should be amortized over the future periods benefited.Service Cost: PV of all pension benefits earned by company employees in the current year. Increases the PBO and is unaffected by the funded status of the plan. Interest Cost: The increase in PBO due to the passage of time. Increases the PBO.Actual Return on Plan Assets: Returns on all of the assets held by the pension plan. Calculated based on FV of plan assets at the beginning and ending of the period, adjusted for contributions and benefit payments (a squeeze).

Income Statement Accounting For The Employer’s Net Periodic Pension CostCurrent Service CostInterest Cost(Expected Return on Plan Assets)Amortization of prior service cost(Gain) Loss amortizationAmortization of Existing net obligation or net asset= Net Pension Expense (current expense)SIRAGE

TO record the net pension expense on the I/S and record the liability:Dr. Net periodic pension cost Cr. Pension benefit asset/ liabilityDr. Pension benefit asset/ liability Cr. Cash Current Service Cost= PV of all benefits earned in the current periodInterest Cost= Beginning of period PBO * discount rate(Expected Return on Plan Assets)= Beginning FV of plan assets * expected rate of return on plan assets

Beginning FV of plan assets+ Contributions + Actual return on plan assets (squeeze)- Benefit payment= Ending FV of plan assets

Amortization of Unrecognized Prior Service Cost= change in liability/ average remaining service life (Gains) or losses (Unrecognized)= arise from difference between expected and actual return on plan assets and changes in actuarial assumptionsMinimum reportable amount= Unrecognized g/l Less: 10% of PBO or Market related value (greater)= excess / average remaining service life Amortization of Existing Net Obligation or Net Asset at Implementation= If PBO>FV= underfunded, amortization of the difference will increase pension expenseIf PBO<FV= overfunded, amortization of the difference will decrease pension expensePBO- FV= initial unfunded obligation / 15 years OR average employee job life (greater)= minimum amortization

Accounting for defined benefit pension plans:- report the funded status of all pension plans on the balance sheet- recognize changes in the funded status of a pension plan due to g/l, PSC, and

net transition assets or obligation sin OCI in the year the changes occur- adjust OCI when the g/l, PSC, and net transition assets or obligations are

recognized as components of net period benefit cost through amortization- measure the funded status of the plan as of the date of the year end statement

of financial position, with limited exceptions

Balance Sheet Reporting for Pension PlansFunded stats= FV of plan assets- PBO (overfunded= asset, underfunded= liability)Pension plan asset= noncurrentPension plan liability= current, noncurrent, or bothAccumulated OCIPension losses, PSC, and net transition obligations will increase pension expense when recognized for tax purposes. They will result in a deferred tax asset when recorded: Dr. OCI Dr. Deferred tax asset Cr. Deferred tax benefit- OCI Cr. Pension benefit a/lReclassification adjustment: Dr. Net periodic pension cost Dr. Deferred tax benefit- OCI Cr. Deferred tax benefit- NI Cr. OCI

The beg/ending funded status of a defined benefit pension plan can be reconciled as follows: Beg funded status + contributions – S – I + R – A+ G – net losses incurred during the current period= Ending funded status

B/S: Accumulated OCI has unamortized AGE when it is amortized, AGE moves to I/S which then moves to the liabilities section of the balance sheet and affects NI which in turn affects RE

Measurement Date: The measurement of the plan assets and benefit obligations of a defined benefit pension plan must be aligned with the date of the employer’s balance sheet. EXCEPTIONS: sub with a different year end from parent, measure as of sub’s B/S date. When a plan is sponsored by an equity method investee that has a different fiscal year end from the investor’s fiscal year end, then the investee’s plan assets and benefit obligations can be measured as of the date of the investee’s financial statements used to apply the equity method.

Settlements: occur when the pension plan assets increase in value to the point that sale of the pension plan assets allows a company to purchase annuity contracts to satisfy pension obligations. Curtailments: events that reduce the expected remaining years of service for present employees or eliminate accrual of defined benefits for future services of a significant number of employees Termination Benefits: arise when employees are paid to terminate their rights to future pension payments. Lump sum payments + PV termination benefit= special term benefit

Disclosures: Everything, but do NOT 1. repeat information 2. predict/ project good info Do disclose: reconciliations of beg/end balances; funding and plan assets; components of net periodic pension cost (SIRAGE + amount of g/l recognized due to a settlement or curtailment); impact on OCI; rates and assumptions; amortization methods; assumptions and commitments; termination benefits; disclosure requirements for nonpublic entities

Accounting for Postretirement Benefits other than pensionsBenefits include: health care insurance, life insurance, welfare benefits, tuition assistance, legal services, day careAccrual requirement: 1. obligation is attributable to employees’ services already rendered; 2. employees’ rights accumulate or vest; 3. payment is probable; and 4. the amount of the benefits can be reasonably estimated. GAAP Method: cost must be projected and accrued during the period the employee works= attribution period (date hired to date fully eligible)Substantive Plan: postretirement planAccumulated Postretirement Benefit Obligation (APBO)= PV of future benefits that have vested as of the measurement dateExpected Postretirement benefit obligation (EPBO)=PV of all future benefits expected to be paid as of the measurement date= APBO + PV of expected future benefits that have not yet vested

Income Statement1. The benefit-years-of-service approach= EPBO is attributed to each year of service in the attribution period2. The postretirement benefit obligation is accrued during the period the employee works (attribution period).

Current Service CostInterest Cost (on APBO)= beginning APBO * discount rate, less benefit payments(Actual Return) (squeeze)Amortization of PSC= amortization of the cost of retroactive benefits(Gain) Loss Amortization= result from changes in APBO due to changes in assumptions or experienceAmortize/ Expense transition amount (net obligation)= APBO- FV= initial unfunded / (20 years OR average employee job life (greater))= minimum amortization OR expense full amount= Net postretirement benefit expense/ cost

Balance SheetFunded status= FV- APBOPostretirement benefit plan asset= noncurrent= overfundedPostretirement benefit plan liability= current, noncurrent or both = underfundedAccumulated OCI= companies must report postretirement benefit g/l, PSC, and transition net assets or net obligations in OCI when incurred.

Disclosures: reconciliations of beg/end balances of the APBO and FV of plan assets; funded status; components of expense; impact on OCI; assumed discount rate; assumed healthcare cost trend rate. Do NOT repeat info or predict future contributions

Accounting for Postemployment Benefits= paid by companies to former or inactive employees during the period after their employment and before their retirement= salary continuation; severance benefits; continuation of other fringe benefits; job training; disability relatedCriteria: 1. relating to employees’ rights to receive compensation for future absences is attributable to services already rendered 2. related to rights that vest or accumulate 3. payment is probable 4. and reasonably estimated. Disclose when all 4 criteria are not met.

Estimated Liability= probable future charge that results from a prior act (warranties, coupons)= looking forwardAccrued Liability= expense recognized or incurred but not yet paid (accrued interest, accrued wages, etc)= looking back

ContingenciesClassification:Probable= record in F/SReasonably possible= discloseRemote= ignore

Loss ContingenciesProbable: Record. Provision should be accrued by a charge to income as long as it is probable and reasonably estimated Reasonably Possible: Disclose. Nature and nature of possible loss or range or that estimate cannot be madeRemote: ignore, unless: Debts of others guaranteed (officers/ related parties)Obligations of commercial banks under standby letters of credit Guarantees to repurchase receivables or (related property) that have been sold or assignedUnasserted Claims= treat like an other loss contingencyGeneral or Unspecified Business Risks : no loss accrual or disclosure requiredAppropriation of Retained Earnings: must be shown within equity section and clearly identifiedSubsequent Events : 2 types: 1. Relates to pre existing event= accrue and disclose 2. Important new event= disclose

Gain ContingenciesFinancial Statements= wait; contingencies are not reflected because this might cause recognition of revenue prior to its realizationDisclosures= Adequate disclosures should be made of contingencies that might result in gains, but be careful to avoid misleading implications as to the likelihood of realization.

Contingency Treatments Accrue Amounts

Disclose Amount

Disclose Nature

Ignore

1. LOSS contingency that is probable and: a. Amount or range can be reasonably estimated

X (or minimum)

X

b. Amount cannot be reasonably estimated

X

2. LOSS contingency that is a reasonable possibility

X

3. LOSS contingency that is remote X a. but is guaranteed for others X X4. Gain contingencies that are probable or reasonably possible

X X

5. Gain contingencies that are remote X

Accounting For Income TaxesIntraperiod Tax Allocation= apportioning the total tax provision for financial accounting purposes in a period between the income or loss from: IDEA and OCI (PUFE) and components of stockholders’ equity (RE for prior period adjustments and accounting principle changes and items of accumulated OCI)Comprehensive Interperiod Tax AllocationCurrent year taxes (payable or refundable) and future year taxes (deferred tax liability/ asset) B/S liabilities= Owe now + owe later= I/S expense

Differences between pretax GAAP and taxable income:1. Permanent differences do not affect the deferred tax computation. They do not affect future financial or taxable income= tax-exempt interest (municipal, state); life insurance proceeds on officer’s key man policy; life insurance premiums when corporation is beneficiary; certain penalties, fines, bribes, kickbacks, etc; nondeductible portion of meal and entertainment expense; dividends-received deduction for corporations; and excess percentage depletion over cost depletion 2. Temporary differences affect the deferred tax computation. 4 causes:

a. F/S income first, tax return income later future tax liability = installment sales; contractors account; equity method

b. Tax return income first, F/S income later prepaid tax benefit= prepaid rent; prepaid interest’ prepaid royalties

c. F/S expense first, tax return expense later future tax benefit = bad debt expense; estimated liability/ warranty expense; start up expenses

d. Tax return expense first, F/S expense later future tax liability = depreciation expense, amortization of franchise, prepaid expenses

Comprehensive AllocationThe asset and liability method= B/S approach is required by GAAP Interperiod tax allocation is applied to all temporary differences.

Accounting for Interperiod Tax AllocationTotal income tax expense or benefit= current income tax expense/benefit + deferred income tax expense/ benefit

Tax Return Temporary Difference Financial Statement* Current Tax Rate * Future (enacted) tax rateCurrent Liability + Deferred liability = Total Tax Expense

- Deferred Asset

Deferred Tax Liabilities= tax deductible first, financial statement expense laterTax depreciation > book depreciation addition, because less depreciation will be deducted on the tax return in future years, compared to the financial statements.

Deferred Tax assets= arise when the amount of taxes paid in the current period exceeds the amount of income tax expense in the current period. i.e. gift certificates. Subtract

Valuation Allowance (contra account): If it is more likely than not that part or all of the deferred tax asset will not be realized, a valuation allowance is recognized. The net deferred tax asset should equal that portion of the deferred tax asset that is more likely than not to be realized.

Uncertain tax Positions (Fin 48)= aggressive tax positions; uncertainty of the sustainability of a tax positionScope= income taxes (not sales or payroll)Two Step Approach:

Step 1: Recognition of the tax benefit (test more likely than not). The evaluation is based on the expected outcome in the court of last resortStep 2: Measurement of the tax benefit (recognize largest amount of tax benefit that has greater than 50% likelihood of being realized). The evaluation is based on the expected outcome in a settlement with the taxing authority.

Enacted Tax Rate: used for temporary differences. Do NOT use anticipated, proposed, unsigned

Treatment of and Adjustment for changes (in future years) Changes in tax laws or rates are recognized in the period of change (IDEA)

Net Temporary Adjustment (from beginning balance)Ending balance – current balance= adjustment required

Balance Sheet Presentation= classified based upon what gave birth to it (i.e. deferred asset related to warranty liabilities is current, deferred tax liability related to asset depreciation is noncurrent); deferred tax items not related to an asset or liability should be classified based on the expected reversal date of the temporary differenceAll deferred tax assets and liabilities classified as current must be netted and presented as one amount All deferred tax liabilities and assets classified as noncurrent must be netter and presented as one amount

Operating Loss Carrybacks= 100% collectible (no valuation allowance); tax carrybacks that can be used to reduce taxes due to receive a refund for a prior period are a tax benefit and should be recognized in the period they occur. Operating Loss Carryforwards= Valuation allowance may be requiredIf an operating loss is carried forward, the tax effects are recognized to the extent that the tax benefit is more likely than not to be realized. Recognized as deferred tax assets in the period they occurDeferred tax asset will reduce tax payable in a future periodTax benefit would reduce the net operating loss of the current period

Investee’s Undistributed EarningsIncome tax return= dividend income GAAP F/S= percentage of sub’s earningsTemporary difference: all undistributed earnings will reverse.

DisclosuresB/S: all deferred tax l/a, valuation allowance; net change during year in total valuation allowance and tax effect of each type of temporary difference and carryforwardI/S: amount of income tax expense allocated to continuing operations and the amounts separately allocated to other items; significant components of income tax expense attributable to continuing operations; tax benefits of operating loss carryback or forward; recognition of income tax expense

Other LiabilitiesPremiums: offers to customers for the purpose of stimulating sales. Total number of coupons issued * Estimated redemption rate= Total estimated coupon redemptions Warranties: promise to correct any product defects. Sales * total estimated expense= total liabilityTotal liability – actual expenditures= balanceService Contracts: Include cash received prior to the period in which the related expense occurs= unearned revenue, estimated and accrued in the F/S. When services are performed, unearned revenue is debited and revenue is credited. Bonuses: based on company profits. Bonus= % of NI (NI- taxes) Taxes = tax rate (NI- Bonus)Bonus= 5 of NI (NI- tax rate (NI-Bonus) Solve for bonus Compensation for Future Absences Accrued vacation = current salary rate * number of weeks of accumulated vacation Dividends Payable classified as current obligations; become a legal liability on the date dividends are declaredPurchase Commitments Dr. Estimated loss on purchase commitment Cr. Estimated liability on purchase commitment

Subsequent EventsAn event or transaction that occurs after the B/S date but before the F/S are issued. 1. Additional information about conditions that existed at the B/S date. Recognize the effects of these.2. Provide information about conditions that occurred after the B/S date and did not exist at the B/S date. Do not recognize these in the F/S.

Amortization of PSC, g/l, and transition amounts do not affect the PBO in the current period (even thought they affect pension expense)

Financial 7

Financial InstrumentsTypes:Cash, foreign currency, demand deposits; evidence of an ownership interest in an entity (i.e. stock certificates; contracts which result in an exchange of cash or ownership interest in an entity (bonds); derivatives (options)

FV disclosures required: in body of F/S or notes; applies to all entities

Disclosures about Concentration of credit risk: Credit risk is the possibility of loss from the failure of another party to perform according to the terms of a contract. Concentration of credit risk occurs when an entity has contracts with one or more parties in the same industry or region. Must disclose.

Disclosure about Market Risk: Market risk is the possibility of loss from changes in market value; i.e. stock market tanks. Not required to disclose.

Derivative Instruments and Hedging Activities: Derivative instrument= financial instruments that derives its value form the value of some other instrument and has all 3 of the following characteristics: 1. one or more underlyings and one or more notional amounts or payment provisions. 2. It requires no initial net investment 3. its terms require or permit a settlement

Underlying= specified price, rate (i.e. interest rate, security or commodity price, etc)Notional amount= unit of measure (currency units, shares, etc) used to calculate g/lValue or Settlement amount= amount determined by notional amount * underlyingPayment provision= determinable settlement that is to be made if the underlying behaves in a specified way. Examples: options, forwards, futures, swaps

Accounting for Derivative instruments including hedges:Balance Sheet: all derivatives are measured at Fair ValueNo hedging designation: gains and losses not designated as a hedging instrument are recognized currently in earningsFair Value Hedge: hedges the exposure to changes in FV of an asset or liability. G/L on these instruments as well as the offsetting g/l on the hedged item are recognized in earnings in the same accounting period. (If stock price falls, gain on put option offsets loss on sale of stock). Cash Flow Hedge: hedges the exposure to variability in expected future cash flows attributed to a particular risk. Effective portion deferred and reported in OCI. Ineffective potion reported in current earningsForeign Currency Hedge: hedges the exposure to variability in foreign currency in a variety of foreign currency transactions. FV: g/l in earnings; cash flows: g/l effective OCI, g/l ineffective current earnings; net investment: OCI as part of the cumulative translation adjustment.

Type of Hedge Instrument Accounting for Changes in FVNo Hedge Designation Included in current earningsFV hedge Included in current earnings (changes in the

value of the offsetting a/l are also included in current earnings)

Cash flow hedge: Effective portion Included in OCI Ineffective portion Included in current earningsForeign exchange hedge: FV hedge Included in current earnings (changes in the

value of the offsetting a/l are also included in current earnings)

Cash flow hedge Included in OCI (effective portion) Net investment hedge Included in OCI, as cumulative translation

adjustment

Stockholders’ EquityOwners’ claim to the net assets of a corporation. It is generally presented on the statement of financial position as the last major section. Capital Stock = the amount of capital that must be retained by the corporation for the protection of creditors. The par of both PS and CS is legal capital. Par Value= minimum price stock is to be issued for. Any excess APICAuthorized Issued and Outstanding: authorized= amount that can legally be issued; issued= issued; the amount of issued capital stock in the hands of shareholders= outstanding. Number of shares of each class of stock must be disclosedCommon Stock: basic ownership interest in a corporation. Common shareholders have the right to vote, the right to share in earnings of the corporation, and the right to share in assets upon liquidation after satisfaction of creditors’ claims and those of preferred shareholders. BV per CS= Common shareholders’ equity/ Common shares outstandingTotal SE – PS outstanding – cumulative preferred dividends in arrears= common SEPreferred Stock: preferences relating to dividends and liquidation. 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= dividends in arrears. Not a liability, but must be disclosedNon cumulative Preferred Stock: dividends not paid in any year do not accumulate. The preferred shareholders lose the right to receive dividends that are not declaredParticipating Preferred Stock: First share equally, then pro rate. Fully participating means that preferred shareholders participate in excess dividends without limit. Partially participating = participate in excess dividends, but to a limited extent. Non-participating Preferred Stock: They do not share in excess dividendsPreference Upon Liquidation: PS may include a preference to assets upon liquidation. Must be disclosed in equity section of the B/S not in the notesConvertible PS: may be exchanged for common stock (at the option of the stockholder). Callable PS: may be repurchased at a specified price at the option of the issuing corporation.

APIC= contributed capital in excess of par. But it can arise from other transactions like the sale of TS at a gain, quasi-reorganization, the issuance of liquidating dividends, conversion of bonds and the declaration of a small stock dividend.

RE= accumulated earnings during the life of the corporation that have not been paid out as dividends. NI – dividends +/- prior period adjustments +/- accounting changes reported retrospectively + adjustment from quasi-reorganization = RE

Appropriating retained earnings= disclose to the shareholders that some of the RE are not available to pay dividends because they have been restricted for legal or contractual reasons or as a discretionary act of management for specific contingency purposes.

Quasi-reorganization: revises the capital structure of a corporation as though it had been legally reorganized. If there is a deficit in RE it eliminates that deficit. Revalue assets to current FVs and liabilities to PVs. Bring RE to zero against APIC. Then RE on B/S must be dated to show the date of the adjustment and that date must continue to be disclosed.

Accumulated OCI: PUFE, not included in determining NI and do not enter into RE. Treasury Stock: corporation’s own stock that has been issued to shareholders and subsequently reacquired. Not considered to be outstanding shares. 2 methods: 1. Cost method: TS are recorded and carried at their reacquisition cost. A g/l will be determined when the TS is reissued or retired, original issue price and BV of the stock do not enter into the accounting. APIC is credited or debited when price differs from original selling price. Losses may also decrease RE if the APIC from TS does not have a big enough balance. NI or retained earnings will NEVER be increased through TS stock transactionsRecord purchase: Dr. TS Cr. Cash Record Resale: Dr. Cash Cr. TS Cr. APIC or Dr. Cash Dr. APIC Dr. RE Cr. TS

2. Par Value Method: TS are recorded by reducing the amounts of par value and APIC received at the time of the original sale. Record the purchase of TS:Dr. TS Dr. APIC Dr. RE Cr. Cash or Dr. TS Dr. APIC Cr Cash Cr TS-PICRecord the resale: Dr Cash Cr. TS Cr. APIC

Retirement of TS Dr. CS Dr. APIC Cr. TS Cr. APIC from TS

Donated Stock: company’s own stock received as a donation from a shareholder. There is no change in total shareholders’ equity as a result of the donation. Record at Fair Value. Dr. Donated TS Cr. APIC (no change in total equity)If sell donated stock: Dr. Cash Dr. APIC Cr. APIC Cr. Donated TS

Accounting for a stock Issuance to Non-employeesSold above par: APIC will be creditedAt par: no entry to APIC

Below par: APIC debitedStock subscriptions: contractual agreement to sell a specified number of shares at an agreed upon price on credit. Upon full payment of the subscription, a stock certificate evidencing ownership in the corporation is issued. Record subscriptions receivable: Dr. Subscriptions receivable Cr. CS Cr. APICCollection of subscriptions: Dr. Cash Cr. Subscriptions receivables Issuance of stock previously subscribed: Dr. CS subscribed Cr. CS

Stock RightsProvides an existing shareholder with the opportunity to buy additional shares. Issuance= memo onlyExercise of stock rights: Dr. Cash Cr. CS Cr. APIC

Other: Stock issued for outside services should be recorded at FV of the stock= trading price

Distributions to Shareholders= a dividendDate of declaration= board of directors approves dividend (liability is created and RE is reduced)Date of record= no J/E, the date the board of directors specifies as the date the names of the shareholders to receive the dividend Date of payment= the date on which the dividend is actually disbursed by the corporation (Dr. Dividends payable Cr. Cash)

Cash Dividends= distribute cash to shareholders; paid from REProperty Dividends= distribute non-cash assets. On date of declaration, the property to be distributed should be restated to FV and any g/l should be recognized in income. The dividend liability and related debit to RE should be recorded at the FV of the assets transferredScrip Dividends= notes payableLiquidating Dividends= occur when dividends to shareholders exceed RE; reduce total PICStock Dividends= no dividend income reported by investor. Small stock dividend <20-25% reduces retained earnings by FMV Large stock dividend >20-25% reduces RE by par value of stock Stock dividends on TS= only done if the company is maintaining a ratio of TS to shares outstanding in order to meet certain commitments

Stock Splits= No J/E, no change in total BV of the shares outstanding, does not affect RE or SEReverse stock splits= involve reducing the number of shares outstanding and increasing the par value proportionately. Stock splits on TS= not usually applied but done when maintaining a ratio of TS to shares outstanding in order to meet stock option or other commitments.

Disclosure= for all entities; rights and privileges; # shares authorized, issued and outstanding; liquidation preference of preferred stock; redeemable by issuer

Accounting for stock issued to employees:1. Non Compensatory stock option: no J/E until options exercised, upon exercise: Dr. Cash Cr. CS Cr. APICSubstantially all full time employees meeting limited employee qualifications; stock is offered to eligible employees equally; time permitted to exercise the rights is limited to a reasonable period; any discount from the market price is no greater than would be a reasonable offer of stock to shareholders or others. 2. Compensatory stock option/ purchase plans: given stock options in lieu of cash. Valued at the FV of the options issued. Option price: price at which the underlying stock can be purchased pursuant to the option contractExercise date: date by which option holder must use the option to purchase the underlying FV: determined by an economic pricing model Grant date: date the option is issued Vesting period: the period over which the employee has to perform services in order to earn the right to exercise the options. Compensation is recognized over the service period. Compensation expense=Compensation expense, calculated on the grant date of the options is allocated over the service period. Compensation cost= should be recognized as an expense over the periods of employment attributable to the option. Dr. Compensation Expense Cr. APIC- Stock options = to allocate. To exercise: Dr. Cash Dr. APIC- Stock options Cr. CS Cr. APIC

Expiration of Options= requires a reclassification of the remaining balance in the APIC-SO account. Dr. APIC-SO Cr. APIC- expired SO

Stock Appreciation Rights (SARS)= Incentive where officers are given cash if the stock price increases above a hurdle price. This excess * number of rights outstanding is the compensation expense of the corporation. Dr. Compensation expense Cr. Liability for SAR planExercise: Dr. Liability for SAR plan Cr. Cash

Earnings Per Share: required for all public entities to present EPS on the face of the I/S Simple capital structure= Basic EPS only= no options, warrants, convertible PS, or convertible bondsBasic EPS= Income available to common shareholders/ Weighted average number of common shares outstandingIncome available to common shareholders= NI- preferred dividendsNI less 1) dividends declared in the period on non-cumulative preferred stock (regardless of whether they have been paid) and 2) dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been declared)

WACSO: Shares sold or reacquired during the period should be weighted for the portion of the period they were outstanding.Shares outstanding at the BEGINNING of the period+ shares sold during the period -Shares reacquired during the period + stock dividends and stock splits-reverse stock splits= WACSO

Stock dividends and stock splits: must be treated as though they occurred at the beginning of the period. The shares outstanding before the stock dividend or stock split must be restated for the portion of the period before the stock dividend/split.

Complex Capital structure= basic and diluted EPS= when an entity has securities that can potentially be converted to CS and would therefore dilute EPS. Convertible securities; warrants and other options; contracts that may be settled in cash or stock; contingent shares Diluted EPS= Income available to CS shareholder + interest on dilutive securities/ WACSO

Dilution from Options, Warrants, and their equivalentsThe TS method assumes that the proceeds from the exercise of stock options, warrants and their equivalents will be used by the company to repurchase treasury shares at the prevailing market price. Options and similar instruments are only dilutive when the average market price of the underlying CS exceeds the exercise price of the option or warrants. Dilutive= Average price > option priceAntidilutive= Average price < option price not exercised; out of the money

Number of shares – ((number of shares * exercise price)/ average market price)= additional shares outstanding (add to WACSO)

Dilution from Convertible Securities (bonds or preferred stock)The “if converted” method assumes that the securities were converted to CS at the beginning of the period. Convertible Bonds:Add to the numerator the interest expense, net of taxAdd to the denominator the number of CS associated with the assumed conversionIf the convertible bonds were issued during the period assume the stock was issued at that date for the weighted average calculationAnti-dilution= use the results of each assumed conversion only if it results in diluation. Do not include the results of the assumed conversion if it is antidilutive. Basic < Dilutive means that the bonds are antidilutive and would be excluded. Convertible Preferred StockJust net incomeAdjust the numerator (no Preferred dividends)

Add to the denominator the number of shares associated with the assumed conversion Antidilution rules apply

Disclosures: cash flow per share should not be reported

Weighted Average

Options and Warrants

Convertible Bond

Convertible PS

Contingent Issues

Basic Yes N/A N/A N/A Conditions have been fully satisfied

Diluted Yes Average market value > exercise priceTS Method“Pretend”Repurchase common stock at the average price

Any dilutiveIf Converted Method“Pretend”Adjust Ni for interest expense (not incurred) reduced by taxes

Any dilutiveIf Converted Method“Pretend”Do NOT reduce NIAT by the preferred stock dividend (pretend they are converted)

Based upon conditions having been met to date

Statement of Cash FlowsRequired for all business enterprises. The purpose of the statement of cash flows is to provide information about the sources of cash and cash equivalents and the uses of cash and cash equivalents. 3 Categories: Operating, investing, financing

Cash and cash equivalents: Cash= Cash; Cash equivalents= ST, liquid investments

Methods: Direct: Shows major classes of operating cash receipts and disbursements. A reconciliation of net income to net cash flows from operating activities is required to be provided in a separate scheduleIndirect: adjusts net income to reconcile it to net cash flows from operating activities

Operating: CA- other than cash and cash equivalents and CL other than notes, bonds, etc. =working capitalDirect: reconciliation will appear in a separate schedule to the statement (as opposed to the body of the formal statement); major classes are presented in their gross amounts and totaled to arrive at net cash flow provided by operating activities. Categories: 1. Cash received from customers (increases cash) 2. Interest received (increases cash) 3. Dividends receipted (increases cash) NOTE: dividends paid=

financing 4. Other operating cash receipts such as the receipt of insurance proceeds and lawsuit settlements (increases cash) 5. Cash received from the sales of securities classified as trading securities, if appropriate, based on the nature and purpose for which the securities were acquired (increases cash) 6. Cash paid to suppliers and employees (decreases cash) 7. Interest paid (decreases cash) NOTE: paying off principal is financing 8. Income taxes paid (decreases cash) 9. Cash paid to acquire securities classified as trading securities, if appropriate, based on the nature and purpose for which the securities were acquired (decreases cash) 10. Other operating cash payments (decreases cash)

Cash Collections= cash from current year’s sales and cash collected from prior yr’s sales Sales to customers - increase in receivables+ Decrease in receivables+ increase in unearned revenue- decrease in unearned revenue= cash collections

Cash sales plus: T account for AR:Beg Write offsCredit Sales Cash Collected (plug)End

Cash Paid to Suppliers and Employees: CGS + Increase in inventory- Decrease in inventory+ Expenses+ Increase in prepaid- Decrease in prepaid- Increase in accounts payable or other liability+ Decrease in accounts payable or other liability= Cash paid to suppliers and employees

Step 1: BI + purchases= AFS – EI = CGSStep 2: Cash purchases plus: T account for APCash Paid Beg

Credit purchasesEnd

Indirect:Net income is adjusted to arrive at net cash flows from operating activities. Supplemental disclosure of cash paid for interest and income taxes is required.

The adjustment to net income is performed by removing the effect on NI of: deferrals of past operating cash receipts and disbursements; accruals of expected future operating cash receipts and disbursements; all items that are included in net income that do not affect operating cash receipts and disbursements

NI+ depreciation and amortization+ losses (Sales)- gains/ amortization premiums- undistributed earnings of affiliate+ decrease in CA- Increase in CA+ increase in CL- Decrease in CL= Cash flows from operating activities

An increase to an asset or a debit balance account will have the effect on the statement of cash flows as a decrease to cash (indirect effect) (accounts receivable)A decrease to an asset of a debit balance account will have the effect on the statement of cash flows as an increase to cash (indirect effect) (inventory)An increase in a liability, an equity, or a credit balance account will have the effect on the statement of cash flows as an increase to cash (direct effect) (accounts payable)A decrease in a liability, an equity, or a credit balance account will have the effect on the statement of cash flows as a decrease to cash (direct effect) (allowance for doubtful accounts)

Changes in debit balance accounts will have the opposite effect on cash flows (because cash is a debit balance account). Changes in credit balance accounts will have the same effect on cash flows

Increase DecreaseCurrent Assets Subtract AddCurrent Liabilities Add Subtract

Gains and losses: Gains are adjusted out of the operating activities section into the investing activities section by subtracting their effects from NILosses are adjusted out of the operating activities section and into the investing activities section by adding their effects to NICost- AD= NBVSP- NBV= gain/loss

Investing Activities Making loans to other entities (cash outflow)Purchasing (cash outflow) or disposing of (cash inflow) trading securities, available for sale securities and held to maturity investment securities of other entities

Acquiring (cash outflow) or disposing of (cash inflow) PP&E Non current assets: increasing buy- outflow; decreasing sell- inflow

Financing ActivitiesPrincipal on notes, bonds, mortgages; your own stock; pay dividendOwner oriented activities= obtaining resources from owners, such as issuing stock (inflow); providing owners with a return on their investment, such as paying dividends or repurchasing stock (outflow)Creditor oriented activities= obtaining resources from creditors, such as issuing bonds, notes, and other borrowings (inflow); payments of principal (not interest, which is part of the operating activities section) on amount borrowed (outflow)

Non-Cash Investing and Financing Activities:Information about material non cash financing and investing activities should be provided separately in a supplemental disclosure. Any part of the transaction that does involve cash would be included in the statement of cash flows. Ex. Purchase of fixed assets by issuance of stock; conversion of bonds to equity; acquiring assets through the incurrence of a capital lease obligation; exchange of one non-cash asset for another non-cash asset

Ratio AnalysisLiquidity ratios measure a firm’s ST ability to pay maturing obligations.Activity ratios measure how effectively an enterprise is using its assetsProfitability ratios are measures of the success or failure of an enterprise for a given time period.Investor ratios measure interest to investorsLT debt paying ability= coverage ratios= measures of security for LT creditors/investors

Liquidity:Working capital= CA- CLCurrent ratio= CA/CLAcid test ratio= Cash equivalents + marketable securities + net receivables/ CLCash ratio= cash equivalents + marketable securities/ CL

Activity:Accounts receivable turnover= net credit sales/ Average net receivables Accounts receivable turnover in days= 365/accounts receivable turnoverInventory turnover= CGS/ average inventory Inventory turnover in days= 365/ inventory turnoverOperating cycle= AR turnover in days + inventory turnover in days Working capital turnover= sales/ average working capitalTotal asset turnover= net sales/ average total assets

Profitability: Net profit margin= NI/net salesReturn on total assets= NI/ average total assets

DuPont return on assets= Net profit margin * total asset turnoverReturn on investment= NI + interest expense (1-tax rate)/ average (LT + equity)Return on common equity= NI- preferred dividends/ average common equity

Coverage:Debt/Equity= total liabilities/ common stockholders’ equityDebt ratio= total liabilities/ total assetsTimes interest earned= recurring income before taxes and interest/ interestOperating cash flow/ total debt= operating cash. Total debt

Financial 8

Governmental AccountingResources= governmental entities often derive their revenues from taxes or answer to public authorities, not for profit entities often derive their income from contributions or fees and are not taxable and commercial entities usually derive their income from sales or fees and are usually taxable.

Objective= demonstrate operational accountability for the entity taken as a whole and their fiscal accountability for specific fundingF/S: 1. timeliness 2. consistency 3. comparability

Purpose= fund accounting enables service and mission-driven organizations to easily monitor and report compliance with spending purposes (fund restrictions), spending limits (budget), and other fiscal accountability objectives

Governmental Accounting Principles and Standards are Established by:The Governmental Accounting Standards Board (GASB)= governmental counterpart to FASBNot-for-profit organizations, accounting principles and standards are established by FASBThe Government Accountability Office (GAO) governs audits under the federal “Single Audit Act”.

Fund= 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 and constituting an independent fiscal and accounting entity. Each fund is a self-balancing set of account. =like a checkbook

Fund Structure: fund financial statements should be separately presented for:1. Governmental funds2. Proprietary funds3. Fiduciary fundsTo report additional and detailed information about the primary government

External reporting: government-wide presentations (consolidated F/S) uses full accrual accounting, economic resources measurement focus. Major fund F/S= like segment reporting; presented using the basis of accounting and measurement focus unique to each category of fund. Reconcile these 2 F/SFiduciary funds are excluded from the government-wide presentation.

Governmental funds: modified accrual accounting; current financial resources measurement focus; no profit motive 1. General Fund: set up to account for the ordinary operations of a governmental unit that are financed from taxes and other general revenues. Current (no fixed assets or LTD)

2. Special Revenue Funds: set up to account for revenues from specific taxes or other earmarked sources that are designated to finance particular activities of government. 3. Debt Service Funds: set up to account for the accumulation of resources and the payment of interest and principal on all general obligation debt other than that serviced by enterprise funds or by special assessments in another fund. 4. Capital Projects Funds: set up to account for resources used for the acquisition or construction of major capital assets by a governmental unit, except those projects financed by an enterprise fund or by a special assessment. 5. Permanent Fund: used to report resources that are legally restricted to the extent that income and not principal, may be used for purposes that support the reporting government’s programs (i.e., for the benefit of the public)

B/S= CA-CL= Fund balanceOnly current; no fixed assets; no noncurrent liabilities I/S= Statement of Revenues, Expenditures, and Changes in Fund Balance= Rev-Exp+ Other financing sources (uses)= Net change in fund balanceRevenue is recognized when measurable and available to finance the expenditures of the current period. Available= collectible within the current period or within 60 days after year endExpenditures are recorded when related fund liability is incurredGRaSSP

Proprietary Funds: treat like customer/ not citizen; full accrual; economic resources measurement focus1. Internal Service Funds: set up to account for goods and service provided by designated departments on a fee basis to other departments and agencies within a single governmental unit or to other governmental units i.e. central motor pool or building maintenance department 2. Enterprise Funds: set up to account for the acquisition and operation of governmental facilities and services that are intended to be primarily (over 50%) self-supported by user charges i.e. utilities, airports, transit systems. Required when: 1. activity is financed by debt secured by a pledge of fee revenue, 2. laws require collection fees adequate to recover costs, or 3. Pricing policies are established to produce fees that recover costs.

B/S= Statement of net Assets= All assets- All liabilities= Net AssetsAll assets and liabilities; fixed assets; non current liabilities are reportedI/S= Statement of Revenues, Expenses, and Changes in Fund Net Assets= Operating revenue- Operating expenses+ Non-operating revenue (expenses)= change in net assetsRevenue is recognized when earned; expenses when incurredSE

Fiduciary Funds: trust accounts; full accrual; economic resources measurement focus1. Pension Trust Funds: account for resources of defined benefit plans, defined contribution plans, post retirement benefit plans, and other LT employee benefit plans2. Agency Trust Funds: account for resources in the temporary custody of a governmental unit (e.g. taxes collected for another governmental entity)

3. Private Purposes Trust Funds: designated funds for all other trust fund arrangements under which principal and income are for the benefit of specific individuals, private organizations, and other governments. i.e. escheat property= property that has been forfeited as a result of the passage of time or process of law4. Investment Trust Funds: account for external investment pools

B/S= Statement of Fiduciary Net Assets= All Assets- All Liabilities= Net AssetsAll assets and liabilities; fixed assets; non current liabilities are reported I/S= Statement of Changes in Fiduciary Net Assets= Additions- Deductions= Change in Net AssetsRevenue is recognized when earned; expenses when incurred PAPI

MAC-GRaSPPSPACE (C= carry fixed asset and LTD)

GRaSPP: Modified Accrual AccountingNo profit motive no I/S no matching no accrual use modified accrual= Budgetary (emphasized in order to control spending); Activity (emphasizes flow of current financial resources); Encumbrances (used to record purchase orders)Book and close for same amount each period

Budgetary Accounting: Revenue: taxes- income and sales; taxes- property and real estate; fines and penaltiesOther Financing Sources: Debt proceeds (bonds and notes); interfund transfersJournal Entries: Budgetary accounts are estimated accounts; posted twice during the yearDr. Estimated revenue control Dr. Estimated transfers from other funds (transfer in)Dr. Budgetary fund balance (negative/ deficit)

Cr. Appropriations controlCr. Estimated transfers to other funds (transfer-out)Cr. Budgetary fund balance (positive/surplus)

End of the year the budget is reversed and closed, for the same amount

Activity:Revenue: recorded when measurable and available. Billed/Recorded= Revenue (Real estate taxes; fines and penalties)Received= Revenue (income taxes, sales taxes)Earned= Revenue; deferred revenue when collected (real estate taxes paid in advance; restricted grants) Expenditures: Both capital purchases and operating expenditures are considered spending of funds and are treated as expenditures. To record the purchase of a capital item: Dr. Expenditure Cr. Vouchers Payable

2 Alternatives for expenditure recognition: Purchase method (expenditure current assts when purchases; reverse for items still on hand at end of period) and Consumption method (set up as a current asset when purchased; expenditure items as consumed)

Purchase ConsumptionBuying item Dr. Expenditure Cr.

Vouchers payableDr. Supplies inventory Cr. Vouchers payable

Use of item No entry Dr. Expenditure Cr. Supplies inventory

On hand at year end Dr. Supplies inventory Cr. Reserve for supplies

No entry

Transfers between Funds= not an expenditure, but represent the use of financial resources. Classification of governmental expenditures: within the fund, the expenditures are further classified as:1. Function or Program: overall purpose of the expenditures (i.e. public safety)2. Organizational Unit: corresponds to the organizational structure of the governmental entity. (i.e. police department)3. Activity: economy and efficiency of operations can be measured at this level (i.e. an event, task or unit of work)4. Character: refers to determining the basis of the fiscal period the expenditures are presumed to benefit. Classifications: 1. current expenditures; 2. capital outlays; 3. debt service; 4. inter-governmental 5. Object classes: expenditure according to the type of items purchased or services obtained (i.e. personnel services, supplies, and principal and interest pmts for debt service expenditures)

Fixed Assets: not capitalized on the fund’s books. Considered an expenditure of the funds. The fixed assets are reported on the government wide financial statements. Dr. Expenditure Cr. Vouchers payable SE-PAPI funds will capitalize fixed asset acquisitions and depreciate them consistent with the economic resources measurement focus

Debts: Recorded in the governmental funds as Other Financing Sources, do not record or carry the LTD. The LTD is recorded on the government wide financial statements. Dr. Cash Cr. Other financing sources The debt service fund will pay the currently due interest and principalSE-PAPI funds record LTD consistent with the economic resources measurement focus, and will directly pay the interest and principal

Encumbrances:Obligations to spend (purchase orders); prevents overspending of appropriations Set up: Dr. Encumbrances Cr. Reserve of encumbrances reverse when actually spend and record actual expenditure with Dr. Expenditure Cr. Vouchers payable Not used for recurring expenditures

If an encumbrance is still outstanding at year end and appropriations do not lapse: Dr. Reserved for encumbrance Cr. Encumbrances. Outstanding encumbrances at year end will be carried forward as a reserve of fund balance with a corresponding reduction of unreserved fund balance, if the appropriations do not lapse: Dr. Unreserved fund balance Cr. Fund balance reserved for encumbrances

In the following year, the use of these amount will be recorded as an expenditure of the prior year: Dr. Expenditure- p/y Cr. Vouchers payable

General Fund: Revenue: 1. Taxes: property taxes; franchise and public service taxes2. Public safety and regulation: fees and fines; license and permit revenue3. Intergovernmental: shared or grant revenues from other governments4. Charges for services: exchange revenues that support general fund activities5. Other revenues: investment earnings; miscellaneous earningsExpenditures:1. General government: administrative functions such as the city manager, finance, etc2. Public safety: police, fire, jail and building inspections3. Culture and recreation: parks, libraries, etcAccounting: Current items only; no fixed assets (expenditure) Financial Statements: B/S (CA=CL + Fund balance); Statement of Revenues, Expenditures, and Changes in Fund Balance: no depreciation expense; required budgetary comparison schedule

Special Revenue Fund:Account for revenues and expenditures that are legally restricted for specific purposes. i.e. Sales tax fund, gasoline tax fund, special fees (school programs), admission fees, parking fees, grant funds (state grants and federal grants)Revenue:1. Intergovernmental Revenues: specific taxes and share taxes; grants2. Fees: fees; other earmarked revenue sourcesExpenditures: Character: current operating expenditures (street maintenance); capital outlays (highway construction) or bothFunction: consistent with the purpose of the revenueAccounting: Expendable trusts= principal and income may be expended in the course of their designated operations so they are depleted by the end of their designated lives; donations Dr. cash Cr. Revenue (may be donor/grantor/government restricted)Grants=recipient government monitors and/or determines eligibility (if nonmonitoring= agency trust fund); recognize revenues and expenditures equally based on payments of the grantor

Debt Service Fund:Created to account for accumulation of resources and the payment of currently due interest and principal on LT general by setting aside cash and cash equivalents. Only pays off debt of the GRaSPP funds! i.e. central city development debt service fund; community redevelopment debt service fund; convention center development bond debt service fund; general revenue bond debt service fundRevenue:Resources for new debt are derived from allocated portions of property taxes and transfers from other funds. Refinanced debt results in proceeds from general obligation refunding bonds. To record transfer from general fund: Dr. Cash Cr. Interfund transfers from the general fund Any income from the investment of resources: Dr. Cash Cr. Revenue- Investment IncomeExpenditure:Principal and interest on general obligation LTD. When the interest payment is legally due, the debt service fund recognizes principal and interest expenditures. To record payment of interest: Dr. Expenditures Cr. CashEncumbrances are not usedTo record the payment of principal: Dr. Expenditures Cr. Cash Closing Entries:To close budget: Dr. Budgetary fund balance Dr. Appropriations Cr. Estimated revenues controlTo close activity for actual amount: Dr. Bond issue proceeds Dr. Transfers from the special revenue fund Dr. Transfers from the capital projects fund Dr. Other revenue Cr. Fund balance, reserved for debt service Cr. Expenditures- Interest Cr. Expenditures- principal No encumbrances

Capital Projects Fund:Established for the construction or purchase or leasing of significant fixed assets. The life of the capital projects fund is short and is limited to a construction period of 1-3 years. i.e. Convention center construction fund; municipal stadium construction fund; county courthouse construction fund; construction fund accounting for a special assessment projectRevenues and Other Financing Sources:Funded by bond proceeds, transfer from another fund, specific tax revenues or capital grants. Investment earnings may also appear in this fund although the disposition of those earnings may be either to retain them in the fund for the benefit of the project or to immediately transfer them to a debt service fund for the benefit of the bond holders. 1. Investment Earnings2. Tax Revenues 3. Capital Grants:

Unrestricted Dr. Cash Cr. RevenueRestricted Dr. Cash Cr. Deferred revenueRecognize revenue restricted by a cost reimbursement contract Dr. Expenditure

Cr. Vouchers payable AND Dr. Deferred revenue Cr. Revenue

4. General fund transfers (other financing sources): Dr. Cash Cr. Other financing sources5. Special Assessments: taxes or fees levied against property owners who will directly benefit from the project

-Primarily or Potentially liable for debt often associated with the assessment: 1. account for the capital project and debt related transactions through the appropriate government or proprietary fund 2. If governmental fund debt proceeds associated with special assessments for which the governmental unit is either primarily or potentially liable should be classified as contribution from property owners on the operating statement to distinguish it from bond proceeds; 3. assets and liabilities should be reported in the government wide financial statements under the governmental or business type activities column as appropriate

-Not primarily or potentially liable: 1. transactions should be reported in an agency fund and 2. assets and liabilities should be excluded from government wide presentations. 6. Bond Issue Proceeds: presented on I/S as other financing sources To record bond proceeds: Dr. Cash Cr. Other financing sources- bond issue proceeds Cr. Other financing sources- premium on bondsTo transfer the bond issue premium to debt service fund: Dr. Interfund transfer debt service Cr. Cash To record investment in CD: Dr. Investment in CD Cr. CashTo record interest revenue earned: Dr. Cash Cr. Revenue- interest incomeTo record the transfer of the interest to the debt service fund: Dr. Interfund transfer to debt service fund Cr. Cash

Expenditure and Encumbrance Types:Expenditures are usually entirely classified as capital outlay. During construction, encumbrances are recorded as commitments are incurred. Vouchers are recorded when a liability is incurred. As vouchers are recorded, the encumbrance entry is reversed. Cash is credited and vouchers payable is debited as payments are made To record several contracts: Dr. Encumbrances Cr. Reserved for encumbrancesTo reverse the encumbrances: Dr. Reserved for encumbrances Cr. EncumbrancesTo record purchased assets: Dr. Expenditures Cr. Vouchers PayableTo record capital lease equipment: Dr. Expenditures Cr. Other financing sources

To report fixed assets in government wide financial statements: Purchase= Cost to buyConstruction= cost to constructCapital lease= PV lease paymentsDonated= FMVForfeiture= LCM

Unique Accounting Issues:Bond liability is not recorded in the capital projects fund

Closing Entries:1. Close budget: Dr. Appropriations Cr. Estimated revenue

2. Actual activity closed: Dr. Other financing sources—bond issue proceeds Dr. Investment revenue Dr. Other financing sources- bond premium Cr. Expenditures Cr. Interfund transfers to debt service, investment revenue Cr. Interfund transfer to debt service, bond premium Cr. Unreserved fund balance3. Encumbrances closed: Dr. Fund balance reserved for encumbrances Cr. Encumbrances3b. Outstanding encumbrances at year end: Dr. Unreserved fund balance Cr. Reserved for encumbrances

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 gov’t’s programsi.e. a public cemetery perpetual care fundRevenues: include investment earnings from the trustExpenditures: related to the operating purpose of the fund (e.g. cemetery maintenance) Accounting: Investments are accounted for at FV

Proprietary FundsInternal Service FundsFinance and account for services and supplies provided exclusively to other departments within a government unit or to other governmental units, typically on a cost-reimbursement basis. i.e. Central janitorial departments; central garages and motor pools; central printing and duplicating services; central purchasing and stores departments; central repair shops; central computer processing department; self insuranceRevenues: 1. Restricted Grant: recognized as revenues in the year monies are spent2. Operating revenues: recognized when earned Dr. Cash Cr. Billings to other departments (operating revenue) 3. Non-operating revenues: i.e. interest earnings Expense Types: 1. Operating 2. Non-operating Accounting: Accrual; LT liabilities and fixed assets are recorded in the internal service funds; fixed assets are recorded and depreciated in the internal service funds; no budgetary accounts or encumbrances are recorded; net assets are classified in a manner consistent with other proprietary funds and display 3 categories of equity, unrestricted, restricted, and invested Establishing an Internal Service Fund: To record contributions from other funds: Dr. Cash Cr. Interfund transferTo record sale of general obligation bonds: Dr. Cash Cr. Long term bond payableTo record a long term payable to another fund: Dr. Cash Cr. Due to other fund Reconciling Item: S is often combined with GRaSPP for purposes of displaying governmental activities in the government wide financial statements since they are often set up to primarily service the governmental funds of the government.

Enterprise Fund:Public utilities; public hospitals; public universities; public transportation systems; airports; public benefit corporations; dock and wharf facilities; off street parking lots and garages; public housing; golf courses and pools; lotteries

Revenue:Must be presented by major source and distinguished between operating and non-operating. Operating Revenues: Defined by main purpose of the fund. i.e. charges for services (water and sewer billings; greens fees) or miscellaneous operating revenuesNon-operating Revenues: Shared revenues= revenues collected by one government and shared on a predetermined basis with another gov’t; interest and investment incomeExpense Types:Operating expenses= classified by object to include such major categories as Personal services, utilities, and depreciationNon-operating expenses= interest expenseAccounting: Record LT liabilities and fixed assets; depreciate; net assets has 3 parts: Invested, restricted, unrestricted

Order of presentation of line items on a proprietary fun Statement of Revenues, Expenses, and Changes in Fund Net Assets:IncomeNon-operating income and expenseCapital contributionsAdditions to endowmentsSpecial line items (unusual or infrequent)Extraordinary itemsTransfersINCASET

Establishing an Enterprise Fund:To record capital contributions: Dr. Cash Cr. Interfund transfers To record issuance of general obligation bond to be paid from proprietary fund revenues: Dr. Cash Cr. LT bond payable

Municipal Landfills:Cost components:1. Cost of equipment expected to be installed and facilities expected to be constructed near or after the date that the MSWLF stops accepting solid waste and during the post closure period 2. Cost of a gas monitoring and collection system3. Cost of final cover expected to be applied near or after the date that the MSWLF stops accepting solid waste4. This estimate should be adjusted annually.

Statement of Cash Flows:Cash flows from operating activitiesCash flows from noncapital financing activitiesCash flows from capital and related financing activitiesCash flows from investing activitiesReconciliation of operating income to net cash provided by operating activities

Fiduciary FundsPension TrustEmployee retirement plan, deferred compensation planRevenue (addition) Sources:1. Employer and Employee Contributions—Restricted Account: to record the receipt of money from other funds Dr. Cash Cr. Additions: employer contribution- restricted2. Other fund transferring money to this fund:

GRaSPP: Dr. Expenditures Cr. CashSEPAPI: Dr. Expenses Cr. Cash

3. Income from investments= recorded as revenue and is closed to the proper employee restricted accounts at year end

Expense (deduction) types:Expenses of pension trust funds include benefits payments, refunds, and administrative expenseAccounting:Accrual; capitalize fixed assets and record related depreciation expense; carry LTD and pay both principal and interest Net asset accounting: Dr. Reserve for employer’s contributions Dr. Actuarial deficiency in reserve Dr. Reserve for employees’ contributions Cr. Pension net assets Notes: plan description, summary of significant accounting policies, contributions and reserves including funding policy, required contribution rates under the funding policy, description of terms or LT contracts, and balances in legally required reserves, and risk concentrationsRequired supplementary information: computation is based on several components: benefits to be included, actuarial assumptions, economic assumptions, actuarial cost method, actuarial value of assets, annual required contributions, contribution deficiencies or excess contributions

Agency Trust Fund= MailmanNo income statement, no statement of cash flowsCollects cash to be held temporarily for an authorized recipient to whom it will be later disbursed. i.e. tax collection funds, clearance funds, special assessmentsRevenues: Not recognizedExpenses: Not recognizedAccounting:1. Tax collection funds exist when one local government collects a tax for an overlapping governmental unit and remits the amount collected, less administrative charges, to the recipient unit. (sales agency fund, payroll withholding agency fund; real estate taxes agency fund) To record the county collections and retaining a fee: Dr. Cash Cr. Due to other units Cr. Due to county general fund 2. Clearance funds are used to accumulate a variety of revenues from different sources and apportion them to various operating funds in accordance with a statutory formula or procedure. Cash conduit arrangements (no monitoring): passthrough grants, food stamps, traffic citations, alimony, child supportIf monitoring= special revenue fund

3. Special assessments: when the governmental unit is not otherwise obligated for the debt, the receivables and debt service transaction are appropriately accounted for in the agency fund. If a governmental unit has liability, accounting is made through the capital projects and debt service funds Financial Statements: Statement of Fiduciary Net assets: CA= CL; no year end balance

Private Purpose TrustNot general public use; designated fund for reporting all other trust arrangements under which principal and income are for the benefit of one of the following: specific individuals, private organizations, other governments. i.e. escheat property fundRevenues:The income from the principal of a private purpose trust may be placed with another fundGeneral fund records:Record the transfer of income to the general fund: Dr. Due from private purpose trust Cr. Transfer from the private purpose trustTo record transfer of cash to the general fund: Dr. Cash Cr. Due from the private purpose trust Private Purpose records:To record obligation to transfer income to general fund: Dr. Interfund transfer to the general fundTo record transfer of funds to the general fund: Dr. Due to the general fund Cr. Cash

Expense Types:Expenses relate to the specific purpose of the trust and may relate to benefits or administrative chargesCapital gains and losses are recorded as adjustments to fund principal and not to income, unless the grantor specified otherwise

Accounting for restricted funds:Fund Use SpendingSpecial revenue fund Public Interest and principal

(expendable)Permanent fund Public Interest only

(nonexpendable)Private purpose fund Private Interest and/or principal

(expendable)

Investment Trust Funds:Investment trust fundRevenues (addition) sources: contributions; net appreciation of the FV of the plan assets; and premiums and discounts on debt securities, which should not be amortized as part of investment incomeExpense (deduction) types: payments to beneficiaries and administrative expensesAccounting: net assets are reported on a fair value basis Financial Statements: Statement of Fiduciary Net Assets; Statement of changes in fiduciary net assets

Governmental Proprietary Fiduciary

G R S P P S E P A P IGeneral Reserve

(special)Service (debt)

Projects (capital)

Permanent Service (internal)

Enterprise Pension Agency Private Purpose

Investment

Balance Sheet(CA, CL, fund balance)

X X X X X

Statement of Net Assets (A, L, Net assets)

X X

Statement of Fiduciary Net Assets

X X X X

Statement of Revenues, Expenditures, and Changes in Fund Balance (Rev, Expend, Other Financing Sources)

X X X X X

Statement of Revenues, Expenses, and Changes in Fund Net Assets (operating Rev, op. exp., non-op rev and exp)

X X

Statement of changes in fiduciary net assets (additions, deductions)

X - X X

Statement of cash flows (operating, investing, capital financing, non-capital financing)

X X

Full Accrual X X X X X XModified Accrual

X X X X X

Budget X X X X XActivity X X X X XEncumbrances X X - X -

Financial 9Governmental Accounting Operational Accountability: the focus of government-wide F/S is to report the extent to which the government has met its operating objectives efficiently and effectively.Financial Accountability: the focus of the fund F/S is to demonstrate that the government entity’s actions in the current period have complied with public decisions concerning the raising and spending of public funds in eh ST Integrated approach: Management’s discussion and analysis (MD&A), Basic financial statements=

Gov’t wide (statement of net assets, statement of activities)Fund F/S (Gov’t funds: B/S, statement of revenues, expenditures, and changes in

fund balances; Proprietary funds: Statement of net assts, statement of revenues, expenses, and changes in fund net assets, statement of cash flows; Fiduciary funds: statement of fiduciary net assets, statement of changes in fiduciary net assets)

Notes Required supplementary information (other than MD&A): pension, budget, infrastructureOther supplementary information (optional)= combining non major funds statements, variance between originally adopted budget and final amended budget, variance between final amended budget and actualRequires a reconciliation of the fund F/S to the government-wide F/S

Optional: Comprehensive Annual Financial Report (CAFR):Introductory section; Basic F/S and required supplementary information; Statistical section

The Financial Reporting EntityPrimary Government Entities: state governments; general purpose local governments; special purpose local government that meets the following:

1. has a separately-elected governing body2. is legally separate3. is fiscally independent of other state and local governments

Component Unit= a legally separate organization for which the elected officials of the primary government are financially accountable. Blended Presentation: when component units are so intertwined with the primary government that they are the same combine financial informationUse when: 1. a board of the component unit is substantively the same as that of the primary government or 2. the component unit serves the primary government exclusively or almost exclusivelyDiscrete Presentation: separate; F/S of the reporting entity should provide an overview of the entity based on financial accountability; board of education or rescue squad

The Financial ReportsMD&A= required supplementary informationDescription:1. easily readable analysis

2. condensed F/S information3. analysis of overall financial position and results of operations including reasons for changes from the prior year4. analysis of balances and transactions of individual funds including limitations on future uses of funds 5. analysis of significant variations between original and final budget

Government-wide F/S (statement of net assets)Fiduciary funds are excluded, component units are includedAssets- Liabilities= net assets3 components of net assets:1. invested in capital assets, net of related debt2. restricted net assets 3. unrestricted net assets Capital Assets- capitalization and depreciationCapitalized assets: capital assets, including infrastructure assets, be included in the government-wide F/S. The term infrastructure asset refers to streets, bridges, gutters, and other assets of the government. They are only reported on the government-wide financial statements. Depreciation: Required Approach: depreciation expense that can be specifically identified with a functional category should be included in the direct expenses of that functionModified Approach: infrastructure assets that are part of a network are not required to be depreciated provided they meet 2 requirements:1. inventory is up to date; a summarized condition assessment is performed, each year an estimate is made of the amount necessary to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by the government2. a complete condition assessment of eligible infrastructure assets must be performed at least every 3 years; reasonable assurance that the eligible infrastructure assets are being presented approximately at the condition level established and disclosed by the governmentUnder the modified approach, infrastructure expenditures are typically reported as expenses, unless the outlays result in additions or improvements, in which case they would be capitalized Requiredmodified= change in estimate Modified required= change in estimateGovernments are required to determine if impairment of an asset has occurred. Insurance recoveries are netted against the loss Artwork and Historical Treasures:Capitalize at historical cost or FV at date of donation. Governments are encouraged, but not required, to capitalize a collection, when they meet the following:1. The collection is held for public exhibition, education, or research in furtherance of public service, rather than financial gain2. the collection is protected3. the 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.

Government-wide Financial Statements (statement of activities)Functions/programs: 1. primary government governmental activities (GRaSPP+S)2. primary government business type activities (E)3. component units (rescue squad and/or board of education) Expenses: reported by function on full accrual basisProgram revenue: full accrual basis Category types:1. charges for service: to customers or applicants who directly benefit from goods or services; to other governments; fines and forfeitures2. operating grants and contributions: restricted for use in a particular program3. capital grants and contributions

Net (expense) revenue and changes in net assets: gov’t, bus type, total, component unitsEliminations: elimination of internal transactions that artificially double up on activity should be preparedInternal service funds: activity should be reported in the governmental activities column unless the government’s enterprise funds are the primary recipient of internal service fund services.

Fund Financial Statements: Government Funds: Balance SheetMajor fund rules: 1. 10% or more of the corresponding total revenues, expenditures/expenses, assets or liabilities of: all government funds OR all enterprise fundsAnd2. 5% or more of revenues, expenditures/expenses, assets or liabilities of: all government funds AND all enterprise funds Aggregate fund balance/ equity is NOT used in either test

Full accrual= modified accrual +/- adjustments

Reconciliation of Governmental Fund F/S to Government-wide F/SThe financial statements must reconcile: 1. the difference in the fund balances of governmental funds and net assets in the government-wide financial statements and 2. the differences in the net change in fund balances of governmental funds and the change in net assets for governmental activitiesBalance Sheet:GRaSPP- fund balance+ Assets (non current)- Liabilities (non current)+ Service (internal) fund net assetsBasis of accountingAccruedRevenues andExpensesGALS BARE

Fund Financial Statements: Government Funds: Statement of Rev, Exp & Changes Revenues, Expenditures, Other Financing Sources sections

Reconciliation:Statement of Revenues, Expenditures, and Changes in Fund BalanceGRaSPP- net change in fund balance-Other financing sources+ Expenditure- capital outlay (net of depreciation)+ Service (internal) fund net incomeBasis of accountingAccruedRevenues and ExpensesGOES BARE

Fund Financial Statements: Proprietary Funds: Statement of Net AssetsAssets, liabilities, net assets: invested, restricted, unrestricted sectionsBusiness type activities enterprise funds, governmental activities internal service funds columns

Fund Financial Statements: Proprietary Funds: Statement of Rev, Exp & ChangesOperating revenue, operating expenses non operating revenues (expenses) sectionsBus type and internal service funds columns

Fund Financial Statements: Proprietary Funds: Statement of Cash Flows1. Direct method is required2. A reconciliation of operating income (not net income) to net cash provided by operations is required3. 4 categories: operating, investing, capital and related financing activities, non capital financing activities4. interest income/ cash receipts are reported as investing activities (not as operating activities)5. interest expense/cash payments are either capital and related financing or non capital financing6. capital asset purchases are reported as financing activities (not as investing activities)

Fund Financial Statements: Fiduciary Funds: Statement of Fiduciary Net AssetsAssets, liabilities, net assets

Fund Financial Statements: Fiduciary Funds: Statement of changes in fid. Net assets: Additions, deductions

Notes to Financial Statements:Essential to fair presentation and considered integral to the financial statements

Generic disclosures should include: a description of government-wide activities noting the exclusion of fiduciary funds; policies relating to elimination of internal activity; description of the modified approach for reporting infrastructure, if used

Specific disclosures:The length of time used to define available in determining revenue recognition under the modified accrual basis (60 days)Actions taken to correct material non compliance with finance related or legal compliance

Required Supplementary InformationBudgetary Information:-Budgetary comparison schedules that show the original budget, the final amended budget, and actual amounts (inflows/ outflows and balances) use budgetary basis-Computation of variances is optional. Computation of differences between original and final amended budget is optional-Budgetary comparison may use either GAAP or budgetary formats, or basis of accounting, but must include a reconciliation to GAAP-Financial statements prepared in accordance with the provisions of GASB 34 possibly include budget versus actual comparisons including display of the originally adopted budget and the changes that resulted in the final amended budget. Budgeted amounts (original and final), actual amounts columns with an options variance with final budget positive column

Infrastructure information:Include schedules that disclose: assessed condition of infrastructure and estimated annual amount to maintain and preserve infrastructure for each of the past five years

Pension information:Full pension reporting requires presentation of 6 years of data Schedule of funding progress; schedule of employer contributions; notes to schedule

Other Supplementary Information (Optional)Detail is optional Combining statements for non major funds

Interfund ActivityRepresents the flow of resources between funds and between the primary government and its component units Reciprocal Interfund ActivityIncludes exchange type transactions between fundsInterfund Loans; interfund services provided and usedNon-reciprocal Interfund ActivityInterfund transfers: normally displayed as other financing sources and sues after non-operating revenues and expenses; interfund reimbursements Financial Statement Display and Disclosure

Displays:-Within the governmental activities column of the government-wide FS: activities within a particular column displayed on the F/S should be eliminated-Within the business type activities column of the government-wide financial statements: should be eliminated-Between the governmental activities and business type activities displayed on the government wide financial statements: the internal balances should be displayed as an internal balance on the face of each financial statement and aligned with each other to eliminate for purposes of total primary government financial statements-Between the primary government and its fiduciary funds: the transactions should be reported as if between external parties Disclosures: Interfund loans and transfers

Not-For-Profit OrganizationsUse FASB not GASBHealth care organizations; educational institutions; voluntary health and welfare organizations; other private (not governmental) NFP organizations (i.e. cemetery organizations, fraternal organizations, labor unions, museums, libraries, professional organizations)Full accrual basis of accounting: the overall emphasis for not for profit F/S is on basic information for the organization as a whole

Key issues:Classification of net assets as unrestricted, temporarily restricted and permanently restricted; Revenue recognition concepts related to unconditional pledges and support;Distinguishing between restricted revenue and conditional pledgesDistinguishing between restricted revenues and the absence of variance power

Financial Accounting Statement 117 governs external reporting for private NFP organizationsRequires Statement of financial position (B/S); statement of activities (I/S); statement of cash flows and statement of functional expenses= required for voluntary health and welfare organizations, and encouraged for other organizations

Statement of Financial Position= B/SAssets, liabilities, and net assetsCurrent= to be spent soonNoncurrent= to be permanently held Net assets:Unrestricted net assets= not permanently restricted or temporarily restricted; internal board designated funds are considered unrestrictedTemporarily 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“PUT”

Statement of Activities= I/S4 required elements:1. Change in total net assets2. Change in unrestricted net assets3. Change in temporarily restricted net assets4. Change in permanently restricted net assets

Permanent Restriction= savings accountUnrestricted= operating checkbookTemporary restricts= savings account

Timing of Reclassification of Restrictions1. Contributions with donor imposed restrictions are recorded as restricted revenue in the period in which they are received. They increase temporarily or permanently restricted net assets2. When a donor restriction is satisfied, a reclassification is reported on the statement of activities. Reclassifications are items that simultaneously increase on net asset class and decrease another. 3. Donor imposed restrictions that are met in the same period they are received may be recorded as a unrestricted support (contribution revenue), provided that the organization discloses and consistently applies this accounting policy.

Expense Classification in the statement of activitiesReported as decreases in unrestricted net assets. Detail functional classification must be presented either on the face of the financials or the notes to the financial statements. Categories:1. Program services: universities (edu and research), hospitals (patient care), union (labor negotiations), day care (child care)2. Support services: fund raising, administration, management and general, membership development3. Combined Costs: Fund raising and education allocate the combined cost between functions

Statement of Cash FlowsEither the direct or indirect method may be usedClassification of sources and uses of cash:Operating activities: when using the direct method, operating activities should be reported by major class of gross receipts (including contributions, program income, and interest income or dividend income from investments)

Contributions of unrestricted revenue later earmarked (board designated) for construction or purchase of long lived assets are classified as operating on the statement of cash flowsFinancing activities: cash flows from financing activities include the cash transactions related to borrowing that are typically found in commercial statements of cash flows but also include cash transactions related to certain restricted contributions.

Proceeds from restricted contributions: cash received with donor imposed restrictions limiting its use to long term purposes such as increases to an endowment, purchases of assets or annuity agreements is displayed as a financing activity. Disbursements of these restricted contributions for either temporary investments or the purpose for which they were intended are classified as investing activity.

Investing activities: include proceeds from the sale of works of art or purchases of art; include investment in equipment; include proceeds form the sale of assets that were received in prior periods and whose sale proceeds were restricted to investment in equipment

Cash and cash equivalents: exclude donor restricted securities that may otherwise meet the cash equivalent definition in commercial accounting.

Statement of Functional ExpensesRequired for voluntary health and welfare organizationsClassification of expenses:1. Program support expenses= directly related to the organization’s program 2. Fund raising expenses= unsolicited merchandise sent out3. Management and General= expenses for the overall direction of the organization4. Multiple cost items= allocate the cost on any reasonable basis

Financial Accounting Statement 116Governs the recognition of most contributions received and contributions made.1. Resource inflows in NFP organizations are generally classified in the financial statements as either revenue or other support. 2. Revenues typically represent exchange transactions in which the NFP organization earns resources in exchange for a service performed (e.g. fees) 3. Other support typically represents operating income that is donated (contributed) or provided in some way that is anticipated as part of the central ongoing activities of the organization

Recipients of a foundation or a community-wide fund raising organization that are specifically intended for another beneficiary organization may represent a liability rather than revenue. Accounting by the beneficiary organization is also affected

Contributions and Recognition: Full accrualCash Contributions: received= revenue, measured at FV at the date of the giftUnconditional Promises: pledge= revenue Dr. Asset at FMV Cr. Contribution support revConditional Promises: earned= revenue

Multi-year pledges: PV pledge: now= revenue, future= temporarily restricted revenue; the difference between the previously recorded PV and the current amount collected is considered contribution revenue, not interest incomeAllowance for Uncollectible Pledges: = NRV (full accrual) Split Interest Agreements: shared with other beneficiaries; measured at FV at the date of acquisition; displayed as temporarily restricted (unless there is a permanent restriction established by the donor)

Donated Services= FMV; recorded as contribution revenue and expense at FV if the services meet the following: 1. they create or enhance a non-financial asset, 2. they require specialized skills that the provider possesses and would otherwise have been purchased by the organizationContributions of services are recognized “some” of the time”: Specialized skills are required and possessed by the donor, Otherwise needed by the organization, Measurable EasilyDr. Expense Cr. Contributions Donated Collection items= contributed works of art or historical treasures. Not required to be recorded by the recipient for NFP if the following conditions are met: 1. part of a collection, 2. collection is cared for, 3. the organization has a policy that requires any proceeds from the sale of donated items to be reinvested in other collection items. Donated Materials= revenue

Recording Promises to Contribute and Other Support TransactionsUnrestricted contributions= to contribute in the future reported as restricted support Dr. Pledge Receivables Cr. Allowance for doubtful accounts Cr. Contributed revenue—temporarily restricted revenueRestricted Contributions= spend it to earn it Dr. Pledge receivables Cr. Allowance for doubtful accounts Cr. Restricted revenue Later: Dr. Reclassification: satisfaction of restriction Cr. Cash/ restricted net assets Dr. Cash/ unrestricted net assets Cr. Reclassification: satisfaction of restriction AND Dr. operating expense Cr. Cash/ unrestricted net assets

Agency Transactions= consist of resources received by the NFP over which the NFP has little or no discretion or variance powerGifts in kind= non cash contributions, measured at FVExchange Transactions= reciprocal transfers in which each party receives and sacrifices something of approximately equal value are termed exchange transactions; the cost of premiums given to potential donors as part of a fund raising appeal is classified as a fund raising expenseAmount transferred- FV of dues= contribution revenue

General principles: Recipient AccountingWithout Variance Power= NFP acts as agent/ no benefit or powerValue at FV; recognized as a liability to the beneficiary Dr. Asset Cr. Refundable advanceGranted Variance Power= NFP acts as agent/ has power

Value at FV; recognized as contribution revenue when received and expensed when distributed to the beneficiary Dr. Asset Cr. Contribution RevenueFinancially Interrelated- Granted Variance Power= NFP acts as agent/ has powerValue at FV; assets are recognized as contribution revenue when received and expensed when distributed to the beneficiary Dr. Asset Cr. Contribution revenue

General Principles: Beneficiary AccountingRecognition Rule: Specified beneficiaries recognize their rights to assets held by others (the recipient) unless the recipient is explicitly granted variance power. Recognized Interest- Financially Interrelated= equity; beneficiaries recognize an interest in the net assets of the recipient when the organizations are financially interrelated. The interest in the net assets of the recipient is adjusted for the beneficiary’s share of the change. Dr. Interest in net assets Cr. Equity transaction (statement of activities) Recognized Beneficial interest- pools of assets= revenue; beneficiaries recognize a beneficial interest in an unconditional right to receive specified cash flows from pools of assets. Measurements and remeasurements serve to present assets at FV using discounting or other techniques. Dr. beneficial interest Cr. Contribution revenue Recognized Receivable and Contribution Revenues= revenues; in cases that do not involve recognition of net assets or beneficial interest, the beneficiary recognizes a receivable and contribution revenue consistent with treatment of all other unconditional promises to give Dr. Receivable Cr. Contribution revenue

Assets transferred to recipient organizations are not contributions and are accounted for as an equity transaction if: resource provider specifies itself as the beneficiary; financially interrelated; does not expect payment of the transferred assets.

Investment in SecuritiesFV: all debt securities and those equity securities that have readily determinable FV are measured at FV in the statement of financial position. Gains and Losses (realized and unrealized):g/l on investments are reported in the statement of activities as increases or decreases in unrestricted net assets unless the use of the investment is restricted.

Derivatives: A NFP organization should recognize the change in FV of all derivatives in the period of the changeDividends, Interest, and Other investment income: Investment income (e.g. dividends and interest) is reported in the period earned as increases in unrestricted net assets unless the use of the investment is restricted, either temporarily or permanently, by explicit donor stipulations or by law. Allocate pooled investment income equitably. Donors Stipulation: the nature of the donor’s stipulation determines how to recognize both gains and losses and investment income. Donor-restricted investment income is reported as an increase in temporarily or permanently restricted net assets, depending on the donor’s stipulation. Gains and losses that are limited to specific uses by donor stipulations may be reported as increases in unrestricted net assets if the stipulations are met in the same reporting period as the gains and income are recognized.

Purchased fixed assets are carried at costFixed assets donated to the NFP are recorded at FMV at the date of the giftDepreciation is recorded in accordance with GAAP for non-governmental NFP organizations

Endowment Fund= used to account for donated assets, the principal of which must be retained intact Permanent Endowment= income is expendable as directed by the donor and recorded based on donor restrictions. Principal is not permitted to be spentTerm Endowment= consist of assets that must be held for a specified term, in accordance with the donor’s stipulations. They are reported as temporarily restricted net assets. Quasi-endowment= used when the internal governing board of an institution (not the donor) has determined that funds are to be retained and invested for specified (other than loan or plant) purposes. They are appropriations of unrestricted net assets.

NFP specific industry applicationsColleges and Universities (Institutions of higher learning)Revenues: Consist of all increase in unrestricted net assets and all restricted resources that were actually expended during the period such as: tuition and fees (reported at gross amount. Scholarships, tuition waivers, and similar reductions are considered either expenditures or a separately displayed allowance reducing revenue); government aid, grants, contracts, gifts, etcAssessed student tuition fees – cancelled classes= gross revenue from tuition and fees (unrestricted net assets)Restricted Revenues and Gains:Reported in the statement of activities. They are reported as changes in temporarily or permanently restricted net assets Expenses: scholarships, maintenance, administration, research, teaching, libraries, etc

Health Care Organizations:Revenues: increases in unrestricted net assets and are reported by their source1. Patient service revenue= should be accounted for on the accrual basis at established standard rates, even if the full amount is not expected to be collected. Although patient service revenue is accounted for on a gross basis, deductions are made from gross revenue for reporting purposes. Central transactions include medical services such as doctors, surgery, recovery room, and room and boardCharity Care: not recorded as a receivable or as revenueDeductions: contractual adjustments for third party payments; policy discounts; administrative adjustments Gross patient service revenue- charitable services= patient service revenue2. Other Operating Revenue: donated supplies and equipment; revenues from educational programs; cafeteria revenue; parking fees; gift shop revenue; etc3. Non-operating revenue and support gains and losses: unrestricted interest; UR gifts; UR grants, etc, donated services

Donated Supplies: contributions of items that are not long lived assets are recognized as revenue in the period received and as assets or a reduction of liabilities or expenses, depending on the form of the benefits received. Dr. Supplies inventory or expense Cr. Unrestricted contributions—other operating revenue

Voluntary Health and Welfare Organizations Income: to a large extent, voluntary health and welfare organizations depend upon contributions and pledges from the general public to support the activities of the organization. Statement of Functional Expenses= mandatory= a detailed schedule of the expenses of the voluntary health and welfare organization, divided into functional areas, such as program services and support servicesFund raising expenses associated with fund raising appeals must be shown separately on the face of the financial statement either as an expense or as a deduction from revenues. Fund raising support may not be displayed as a simple net amount

Summary Comparisons of NFP OrganizationsSources of Revenues:Colleges and Universities:Tuition and feesFederal, state, or local grants, and contracts and appropriationsPrivate gifts, grants, and contractsEndowment incomeSales and service of educational activities Sales and services of other activitiesHealth Care Organizations:Patient service revenue (gross) Less: deductions (charity allowances, other allowances, etc)Net patient service revenuePremium revenueOther revenue g/l: tuition from schools, specific purpose grants, revenue from auxiliary enterprises, etc; unrestricted gifts and grants; unrestricted income from endowment fundsDonated ServicesVoluntary Health and Welfare OrganizationsRevenue:Membership duesInvestment incomeRealized gains on investment activitiesPublic Support:Public contributionsSpecial EventsLegacies and bequestsDonated material and ServicesExpenses:Colleges and UniversitiesInstruction

ResearchPublic serviceAcademic supportStudent servicesInstitutional supportOperation and maintenance of plantScholarships and FellowshipsAuxiliary enterprisesHealth Care Organizations:Nursing servicesOther professional servicesGeneral servicesFiscal servicesAdministrative servicesDepreciationInterest expenseProvision for bad debtsVoluntary Health and Welfare OrganizationsProgram services:ResearchPublic educationProfessional education and trainingCommunity serviceOtherSupport Services:Management and generalFund raising