4 ^>*? H-t+tf 3 A

The Complete CPA Reference

NICK A. DAUBER, MS, CPA

JAE K. SHIM, PhD

JOEL G. SIEGEL, PhD, CPA

WILEYJohn Wiley & Sons, Inc.

Contents

About the Authors xxi

Acknowledgments xxiii

Introduction xxv

PART I COMMONLY USED GENERALLY ACCEPTEDACCOUNTING PRINCIPLES

CHAPTER 1 Financial Statement Reporting: The Income Statement 3

Income Statement Format 4

Comprehensive Income 4Extraordinary Items 5Nonrecurring Items 6Discontinued Operations 6Revenue Recognition . 8

Realization 9

At the Completion of Production 9Requirements 9

During Production 9Cash Basis 12Recognition of Franchise Fee Revenue by the Franchisor 15

Other Revenue Considerations 18Multiple Deliverables 18Software Revenue Recognition 19Research and Development Costs 20

Advertising Costs 23Restructuring Charges 23

Other Expense Considerations J 23.Earnings per Share 23

Diluted Earnings per Share 26Antidilutive Securities •, 29

Contents

CHAPTER 2 Financial Statement Reporting: The Balance Sheet

Assets

Accounts Receivable

Inventory

Fixed Assets

Depreciation

Capitalized Interest

Nonmonetary Transactions

Impairment or Disposal of Long-Lived Assets

Involuntary Conversion

Asset Retirement Obligations

Disclosure

Intangibles

Financial Assets

Insurance

Liabilities

Bonds Payable

Extinguishment of Debt

Estimated Liabilities

Accounting for Compensated Absences

Accounting for Special Termination Benefitsto Employees

Refinancing of Short-Term Debt to Long-Term Debt

Callable Obligations by the Creditor

Disclosure of Long-Term Purchase Obligations

Exit or Disposal Activities

Fair Value Measurements

Fair Value Option for Financial Assets andFinancial Liabilities

Electing the Fair Value Option

Events

Instrument Application

Balance Sheet

Statement of Cash Flows

Disclosures

Eligible Items at Effective Date

Available-for-Sale and Held-to-Maturity Securities

Stockholders' Equity

Preferred Stock

Stock Retirement '

33

33343641

4244

454648

4949495454

575762

6567

6868

697070

71

73747474

7575

7576

777778

79

Contents vii

Appropriation of Retained Earnings (Reserve) 80Treasury Stock N 80

Cost Method "~ 81Par Value Method 81

Quasi-Reorganization 82Dividends 84Stock Split 86

Stock Options 86Debt Issued with Stock Warrants 87

Fractional Share Warrants 88

Disclosure 89

CHAPTER 3 Financial Statement Reporting: Statement of Cash Flows andOther Disclosures 91

Statement of Cash Flows 91Interim Reporting 103

. Personal Financial Statements . 107

Incorporation of a Business 110Partnerships 110

Bonus Method 111Goodwill Method 112

CHAPTER 4 Accounting and Disclosures 113

Hierarchy of GAAP, 113

FASB Accounting Standards Codification 113Accounting Changes 114

Change in Accounting Principle 115Change in Accounting Estimate 118Change in Reporting Entity 119Correction of an Error 120

Prior-Period Adjustments 121Disclosure of Accounting Policies 122Development-Stage Companies 123Troubled Debt Restructuring 124

Debtor 125Creditor 126

Segmental Reporting 127Imputing Interest on Notes 133Accounting for Futures Contracts 135Oil- and Gas-Producing Companies 138

viii Contents

CHAPTER 5 Key Financial Accounting Areas

Consolidations

NoncontroUing Interests in Consolidated FinancialStatements

Business Combinations

Investments in Securities

Stock Investments

Market Value Adjusted

Equity Method

Leases

Lessee

Lessor

Sales-Leaseback Arrangement

Subleases and Similar Transactions

Leveraged Leases

Pension Plans

Defined Contribution Pension Plan

Defined Benefit Pension Plan

Trustee Reporting for a Defined Benefit Pension Plan

Balance Sheet

Other Postretirement Benefits

Income Tax Accounting

Temporary Differences

Permanent Differences

Financial Statement Presentation

Intraperiod Tax Allocation

Loss Carrybacks and Carryforwards

Deferred Tax Liability versus Deferred Tax Asset

Tax Rates

Indefinite Reversal

Foreign Currency Translation and Transactions

Translation Process

Balance Sheet

Income Statement

Translation Adjustments

Foreign Currency Transactions

Forward Exchange Contracts

Hedging

Derivative Products

Insurance Contracts

139

139

142

143148148148152

156157160

167167168170

171172

182182

183184

184

185

185185185186

187188

189192

193193

193194

197198198200

Contents ix

PART II

U.S. GAAP versus IFRSCash and Cash EquivalentsReceivablesInventoriesInvestments

Equity-Method InvestmentsProperty, Plant, and EquipmentRevaluations Involving Depreciable AssetsIntangible Assets and GoodwillContingent LiabilitiesDefined Benefit PlansIncome Tax DeferralsLease AccountingEquityRevenue Recognition

Sale of Goods

Bill-and-Hold TransactionsMultiple-Element Arrangements

Long-Term Construction ContractsCustomer Loyalty Programs

Discontinued OperationsShare-Based PaymentImpairment

Intangible ImpairmentProperty, Plant, and Equipment Impairment

Earnings per ShareSubsequent Events

ANALYZING FINANCIAL STATEMENTS)I

t

*i

-

CHAPTER 6 Financial Statement Analysis

Introduction

Industry Comparison

Trend Analysis- Horizontal and Vertical Analysis

Balance Sheet AnalysisAssets

CashAccounts ReceivableInventory

Investments

200202202202203203203205206207207208209209210210211211212212213213213214214214215

219

219220221221222222223223224226

Contents

Fixed Assets

Intangibles

Deferred Charges

Unrecorded Assets

Liabilities

Evaluation of Liquidity

Appraising Corporate Solvency

Income Statement Analysis

Cash Flow from Operations

Discretionary Costs

Accounting Policies

Degree of Certainty in Accounting Estimates

Residual Income

Taxable Income

Foreign Operations

Discontinued Operations

Stability of Earnings

Operating Leverage

Profitability Measures

Growth Rate

Market Value Measures

Bankruptcy Prediction

Liquidation Value

227229230231232234236239239240242243244245245245246247248248248249251

PART III MANAGERIAL ACCOUNTING APPLICATIONS

CHAPTER 7 Appraising Segmental Performance

The What and Why of Responsibility AccountingCost CenterProfit CenterInvestment Center

Cost Center Performance and Standard CostsMaterials Variances

Labor VariancesVariable Overhead VariancesFixed Overhead Variances

Mix and Yield VariancesFlexible Budgets and Performance ReportsProfit Centers and Segmented ReportingProfit Variance Analysis

Types of Standards in Profit Variance Analysis

255

255256256256258259261261264267276278281281

Contents xi

Single-Product Firms 282Multiproduct Firms 282Managerial Planning and Decision Making 287

Sales Mix Analysis 288Performance Reports 288

How to Measure the Performance of Investment Centers 288

Rate of Return on Investment 289Residual Income 291Residual Income and Economic Value Added 291

Investment Decisions under ROI and RI 292

More on Economic Value Added 293EVA and Value Creation 295

Corporate Balanced Scorecard 295How to Price Goods and Services Transferred 296Alternative Transfer Pricing Schemes 297Budgeting and Financial Planning 299

Computer-Based Budgeting 302

Case 1 302Case 2 302

Budgeting Software 305Budget Maestro 305Microsoft Business Solutions for Analytics—Forecaster 305Host Budget 306SAP BusinessObjects Budgeting and Consolidation 307

Latest Generation of Budgeting and Planning Software 307

CHAPTER 8 Analysis of Projects, Proposals, and Special Situations 309

Cost-Volume-Profit and Breakeven Analysis 309Contribution Margin 310Target Income Volume and Margin of Safety 313Sales'Mix Analysis 318

Short-Term, Nonroutine Decisions 320Theory of Constraints "̂ 327

Life-Cycle Costs and Target Costing 327

Activity-Based Costing 331Cost of Measurement 334Indirect Measures and the Degree of Correlation 334

Just-in-Time and Total Quality Management 334Taguchi Method of Quality Control 338

Backflush Costing 339Environmental Costs and Ecoefficiency 342

xii Contents

Time Value Fundamentals 346

Capital Budgeting , 350

Payback Period 352

Accounting (Simple) Rate of Return 353

Net Present Value 354

Internal Rate of Return (or Time-Adjusted Rate of Return) 355

Profitability Index (or Excess Present Value Index) 358

Limited Funds for Capital Spending 360

Effects of Income Tax Factors on Capital BudgetingDecisions 361

MACRS Rule 363

CHAPTER 9 Quantitative Applications and Modeling in Accounting 369

Statistical Analysis and Evaluation 369

Mean 369

Standard Deviation 372

Regression Analysis 374

Method of Least Squares 374

Use of a Spreadsheet Program for Regression 376

Trend Analysis 378

Regression Statistics 380

Quantitative Methods for Accounting 386

Decision Making 387

Decision Making under Certainty 387

Decision Making under Uncertainty 388

Decision Matrix 390

Expected Value of Perfect Information 391

Decision Tree 392

Linear Programming and Shadow Prices 394

Shadow Prices (Opportunity Costs) 397

Goal Programming and Multiple Goals 398

Learning Curve 402

Inventory Planning and Control 404

Economic Order Quantity 405

Reorder Point 408

Safety Stock and Reorder Point 410

Program Evaluation and Review Technique 411

Project Budgeting and Control Using Earned Value Analysis 416

Forecasting Project Parameters Using Earned Value

Methodology 420

Schedule Variance (SV) 420

Cost Variance (CV) 420

Contents xui

Schedule Performance Index (SPI)Cost Performance Index (CPI)Estimate at Completion (EAC)

420420421

PART IV AUDITING, COMPILING, AND REVIEWINGFINANCIAL STATEMENTS

CHAPTER 10 Auditing Procedures 425

Risk Assessment Procedures 425The Entity and Its Environment 426

Internal Control 426Substantive Procedures 442Audit Reports 451

Unqualified Opinion 453Qualified Opinion 455Disclaimer of Opinion 459Adverse Opinion 460

CHAPTER 11 Compilation, Review, and Other Reporting Services 463

Compilation of Financial Statements 463Review of Financial Statements 470Accountant's Consideration of Obtaining an Updating

Representation Letter from Management 480Documentation in a Review Engagement 481

Reports on Reviewed Financial Statements 481Departures from the Applicable Financial Reporting

Framework 484Supplementary Information 484

Emphasis of a Matter 485Restricting the Use of an Accountant's Compilation or

Review Report 485Consideration of an Entity's Ability to Continue as a

Going Concern 486Subsequent Events 486Subsequent Discovery of Facts Existing at the Date of

the Report 487Change in Engagement from Audit or Review to Compilation 487Reporting on Prescribed Forms 488Communication between Successor and Predecessor

Accountants 490Compilation of Specified Elements, Accounts, or Items of a

Financial Statement 490

xiv Contents

Compilation of Pro Forma Financial Information 494Communicating to Management and Others in a Compilation

or Review Engagement 498Reports on Prospective Financial Statements 499

Modification and Other Issues 506Range of Values 506Departure from AICPA Presentation Guidelines 506Significant Assumption Does Not Provide Reasonable

Basis 506Scope Limitation 507Emphasis of a Matter 507Division of Responsibility 507

Agreed-Upon Procedures 507Attest Engagements 511

Examination Engagements 512Review Engagements 514Engagements to Apply Agreed-Upon Procedures 517

Examination of an Entity's Internal Control over FinancialReporting That Is Integrated with an Audit of Its FinancialStatements (SSAE 15) 518

Integration with the Financial Statement Audit 534Reporting on Controls at a Service Organization 546Compliance Attestation 555Management's Discussion and Analysis 557Personal Financial Statements Included in Written Personal

Financial Plans 557Reporting on Comparative Statements 559

Same Level of Service 562Higher Level of Service 563

Guideline 563Lower Level of Service 563

Special Reports 564Specific Elements, Accounts, or Items in a Basic Set of

Financial Statements 567

Compliance with Contracts or Regulations Relating toAudited Financial Statements 569

Financial Information Included in Prescribed Forms 571

CHAPTER 12, Auditing Standards 573

SAS 1—Codification of Auditing Standards andProcedures 573

SAS 2—Reports on Audited Financial Statements 574

Contents xv

SAS 3—The Effects of EDP on the Auditor's Study andEvaluation of Internal Control 575

SAS 4—Quality Control Considerations for a Firm ofIndependent Auditors 575

SAS 5—The Meaning of "Present Fairly in Conformity withGenerally Accepted Accounting Principles" in theIndependent Auditor's Report 575

SAS 6—Related Party Transactions 575

SAS 7—Communication be tween Predecessor andSuccessor Auditor 575

SAS 8—Other Information in Documents Containing AuditedFinancial Statements 575

SAS 9—The Effect of an Internal Audit Function on the Scope

of the Independent Auditor's Examination 575

SAS 10—Limited Review of Interim Financial Information 575

SAS 11—Using the Work of a Specialist 575

SAS 12—Inquiry of a Client's Lawyer Concerning Litigation,.Claims, and Assessments , 576

SAS 13—Reports on a Limited Review of Interim Financial

Information 578

SAS 14—Special Reports 578

SAS 15—Reports on Comparative Financial Statements 578

SAS 16—The Independent Auditor's Responsibility for the

Detection of Errors or Irregularities 578

SAS 17—Illegal Acts by Clients 578

SAS 18—Unaudited Replacement Cost Information 578

SAS 19—Client Representations 578

SAS 20—Required Communication of Material Weaknesses in

Internal Accounting Control 579

SAS 21—Segment Information 579

SAS 22—Planning and Supervision 579

SAS 23—Analytical Review Procedures 579

SAS 24—Review of Interim Financial Information 579

SAS 25—The Relationship of Generally Accepted Auditing

Standards to Quality Control Standards 579

SAS 26—Association with Financial Statements 580

SAS 27—Supplementary Information Required by the FinancialAccounting Standards Board 580

SAS 28—Supplementary Information on the Effects ofChanging Prices 580

SAS 29—Reporting on Information Accompanying the BasicFinancial Statements in Auditor-Submitted Documents 580

SAS 30—Reporting on Internal Accounting Control 581

xvi Contents

SAS 31—Evidential Matter 581

SAS 32—Adequacy of Disclosure in Financial Statements 581

SAS 33—Supplementary Oil and Gas Reserve Information 581

SAS 34—The Auditor's Considerations When a Question Arises

about an Entity's Continued Existence 581

SAS 35—Special Reports: Applying Agreed-Upon Proceduresto Specified Elements, Accounts, or Items of a Financial

Statement 581

SAS 36—Review of Interim Financial Information 581

- SAS 37—Filings under Federal Securities Statutes 582

SAS 38—Letters for Underwriters 582

SAS 39—Audit Sampling 582

SAS 40—Supplementary Mineral Reserve Information 583

SAS 41—Working Papers 583

SAS 42—Reporting on Condensed Financial Statements and

Selected Financial Data 583

Condensed Financial Statements 583

Selected Financial Data ' 584

SAS 43—Omnibus Statement on Auditing Standards 585

SAS 44—Special-Purpose Reports on Internal Accounting

Control at Service Organizations 585

SAS 45—Omnibus Statement on Auditing Standards—1983 585

Related Parties 585

SAS 46—Consideration of Omitted Procedures after the

Report Date ., 586

SAS 47—Audit Risk and Materiality in Conducting an Audit 586

SAS 48—The Effects of Computer Processing on the Audit ofFinancial Statements 586

SAS 49—Letters for Underwriters 587

SAS 50—Reports on the Application of Accounting

Principles 587

SAS 51—Reporting on Financial Statements Prepared for Use

in Other Countries 589

SAS 52—Omnibus Statement on Auditing Standards—1987 590

SAS 53—The Auditor's Responsibility to Detect and Report

Errors and Irregularities 590

SAS 54—Illegal Acts by Clients 590

SAS 55—Consideration of Internal Control in a Financial

Statement Audit 591

SAS 56—Analytical Procedures 591

SAS 57—Auditing Accounting Estimates 591

SAS 58—Reports on Audited Financial Statements 592

Contents xvii

SAS 59—The Auditor's Consideration of an Entity's Ability toContinue as a Going Concern 592

SAS 60—Communication of Internal Control Related MattersNoted in an Audit 594

SAS 61—Communication with Audit Committees 594SAS 62—Special Reports 594SAS 63—Compliance Auditing Applicable to Governmental

Entities and Other Recipients of Governmental FinancialAssistance 594

SAS 64—Omnibus Statement on Auditing Standards 594

SAS 65—The Auditor's Consideration of the Internal AuditFunction in an Audit of Financial Statements 594

SAS 66—Communication of Matters about Interim FinancialInformation Filed or to Be Filed with Specified RegulatoryAgencies 595

SAS 67—The Confirmation Process 595

SAS 68—Compliance Auditing Applicable to GovernmentalEntities and Other Recipients of Governmental FinancialAssistance 597

SAS 69—The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles in theIndependent Auditor's Report 597

SAS 70—Service Organizations 597SAS 71—Interim Financial Information 598SAS 72—Letters for Underwriters and Certain Other Requesting

Parties / 598SAS 73—Using the Work of a Specialist 599

SAS 74—Compliance Auditing Considerations in Audits ofGovernmental Entities and Recipients of GovernmentalFinancial Assistance 600

SAS 75—Engagements to Apply Agreed-Upon Procedures toSpecified Elements, Accounts, or Items of a FinancialStatement 600

SAS 76—Amendments to Statement on Auditing StandardsNo. 72, Letters for Underwriters and Certain OtherRequesting Parties 600

SAS 77—Amendments to Statements on Auditing StandardsNo. 22, Planning and Supervision; No. 59, The Auditor'sConsideration of an Entity's Ability to Continue as a GoingConcern; and No. 62, Special Reports 600

•" SAS 78—Consideration of Internal Control in a FinancialStatement Audit: An Amendment to SAS 55 600

SAS 79—Amendment to Statement on Auditing StandardsNo. 58, Reports on Audited Financial Statements 600

xviii Contents

SAS 80—Amendment to Statement on Auditing StandardsNo. 31, Evidential Matter 601

SAS 81—Auditing Investments 601SAS 82—Consideration of Fraud in a Financial Statement Audit 601SAS 83—Establishing an Understanding with the Client 601SAS 84—Communications between Predecessor and Successor

Accountants 602SAS 85—Management Representations 603SAS 86—Amendment to Statement on Auditing Standards

No. 72, Letters for Underwriters and Certain OtherRequesting Parties 607

SAS 87—Restricting the Use of an Auditor's Report 607SAS 88—Service Organizations and Reporting on Consistency 608SAS 89—Audit Adjustments 608SAS 90—Audit Committee Communications 608SAS 91—Federal GAAP Hierarchy 608SAS 92—Auditing Derivative Instruments, Hedging Activities,

and Investments in Securities 609Existence or Occurrence 610Completeness 610Rights and Obligations 611Valuation 611Impairment Losses 612

SAS 93—Omnibus Statement on Auditing Standards—2000 614 .SAS 94—The Effect of Information Technology on the

Auditor's Consideration of Internal Control in a FinancialStatement Audit 6l4

SAS 95—Generally Accepted Auditing Standards 614SAS 96—Audit Documentation 614SAS 97—Amendment to Statement on Auditing Standards

No. 50, Reports on the Application of Accounting Principles 614SAS 98—Omnibus Statement on Auditing Standards—2002 614SAS 99—Consideration of Fraud in a Financial Statement Audit 615SAS 100—Interim Financial Information 623SAS 101—Auditing Fair Value Measurements and Disclosures 623SAS 102—Defining Professional Requirements in Statements

on Auditing Standards 625SAS 103—Audit Documentation 625SAS 104—Amendment to SAS 1, Codification of Auditing

Standards and Procedures ("Due Professional Care in thePerformance of Work") 629

SAS 105—Amendment to SAS 95—Generally AcceptedAuditing Standards 629

Contents xix

SAS 106—Audit Evidence 630SAS 107—Audit Risk and Materiality in Conducting an Audit 632SAS 108—Planning and Supervision 634

SAS 109—Understanding the Entity and Its Environment andAssessing the Risks of Material Misstatement 636

SAS 110—Performing Audit Procedures in Response toAssessed Risks and Evaluating the Audit Evidence Obtained 637

SAS 111—Amendment to Statement on Auditing StandardsNo. 39, Audit Sampling 640

SAS 112—Communication of Internal Control-Related MattersIdentified in an Audit 641

SAS 113—Omnibus 2006 641SAS 114—The Auditor's Communication with Those Charged

with Governance 641SAS 115—Communicating Internal Control Related Matters

Identified in an Audit 642SAS 116—Interim Financial Information 647SAS 117—Compliance Audits -, 648SAS 118—Other Information in Documents Containing

Audited Financial Statements 648SAS 119—Supplementary Information in Relation to the

Financial Statements as a Whole 650SAS 120—Required Supplementary Information 654SAS 121—Revised Applicability of Statement on Auditing

Standards No. 100, Interim Financial Information 655AS 1—References in Auditor's Reports to the Standards of the

Public Company Accounting Oversight Board 656

AS 2—An Audit of Internal Control over Financial ReportingPerformed in Conjunction with an Audit of FinancialStatements 656

AS 3—Audit Documentation 656AS 4—Reporting on Whether a Previously Reported Material

Weakness Continues to Exist 657AS 5—An Audit of Internal Control over Financial Reporting

That Is Integrated with an Audit of Financial Statements 662Definitions 664

AS 6—Evaluating Consistency of Financial Statements 670AS 7—Engagement Quality Review 671

. AS 8—Audit Risk 672•AS 9—Audit Planning 673AS 10—Supervision of the Audit Engagement 674AS 11—Consideration of Materiality in Planning and

Performing an Audit 675

XX Contents

AS 12—Identifying and Assessing Risks of Material

Misstatements

AS 13—The Auditor's Responses to the Risks of Material

Misstatement

AS 14—Evaluating Audit Results

AS 15—Audit Evidence

CHAPTER 13 Sarbanes-Oxley Act of 2002

Auditor Independence

Partner Rotation

Public Company Accounting Oversight Board

677

680681682

685

685686686

PARTY TAXATION

CHAPTER 14 Tax Research

Sources of Tax LawThe Court System

691

691692

PART VI OTHER PROFESSIONAL STANDARDS

CHAPTER 15 Consulting Services

CHAPTER 16 Quality Control

CHAPTER 17 Code of Professional Conduct

Rule 101—IndependenceRule 102—Integrity and ObjectivityRule 201—General StandardsRule 202—Compliance with StandardsRule 203—Accounting PrinciplesRule 301—Confidential Client InformationRule 302—Contingent FeesRule 501—Acts DiscreditableRule 502—Advertising and Other Forms of Solicitations

Rule 503—Commissions and Referral FeesRule 505—Form of Organization and Name

697

699

703

703

705

705

705

706

706

706

707

707

707

707

Index 709