F1 M1: Balance Sheet, Income Statement, and Comprehensive Income

Full Set of Financial Statements

-​ Statement of Financial Position (Balance Sheet)
-​ Statement of Earnings (Income Statement)
-​ Statement of Comprehensive Income
-​ Statement of Cash Flows
-​ Statement of Owners’ Equity
Income from Continuing Operations = Operating Income + Nonoperating Income
-​ Operating Income: Revenues and expenses
-​ Nonoperating Income: Gains and losses
Income from Discontinued Operations
-​ Are reported separately from continuing operations on the income statement, net of tax
-​ Include a component of an entity, a group of components of an entity, or a business or nonprofit
activity
-​ Items are included in discontinued operations when they occur
o​ Has been disposed of, or is classified as held-for-sale
o​ Represents a strategic shift that has or will have a major effect on an entity’s operations
and financial results
-​ Items that are included in the results of discontinued operations
o​ Results of operations for the component
o​ Gain or loss on disposal of the component
o​ Impairment loss (and subsequent increases in fair value) of the component
-​ Once an entity is classified in discontinued operations, assets within the component are no longer
depreciated/amortized
Foreign Currency Transactions
-​ Direct Method: Quoting the domestic price of one unit of foreign currency
o​ X units of domestic currency for 1 unit of foreign currency
-​ Indirect Method: Quoting the foreign price of one unit of domestic currency
o​ X units of foreign currency for 1 unit of domestic currency
Comprehensive Income = Net Income + Other Comprehensive Income (OCI)
-​ Net Income (closed to retained earnings)
o​ Continuing operations
o​ Discontinued operations
-​ OCI (closed to accumulated other comprehensive income)
o​ Pension adjustments
o​ Unrealized gain/loss on available-for-sale debt securities
o​ Foreign currency translation (consolidated financial statements)
o​ Instrument specific credit risk
F1 M2: EPS and Public Company Reporting Topics
SEC Reporting Requirements (Issuers)
-​ Form 10k (annual report)
o​ 60 days for large accelerated filers ($700M Market Value)
o​ 75 days for accelerated filers ($75-700M Market Value + $100M Revenue)
o​ 90 days for all other filers (<$100M Revenue)
-​ Form 10Q (quarterly report)
o​ 40 days for larger accelerated filers and accelerated filers
o​ 45 days for all other filers
-​ Form 8k (disclosure of a material event)
o​ 4 days after the event occurred
Earnings per Share
-​ All public entities are required to present EPS on the face of the income statement
-​ Simple Capital Structure
o​ Only common stock outstanding (no potentially dilutive securities)
o​ Must present basic EPS
-​ Complex Capital Structure
o​ Securities other than common stock outstanding (potentially dilutive)
o​ Must present both basic EPS and diluted EPS
Basic EPS = Income Available to Common Shareholders / Weighted Average Common Shares Outstanding
-​ Income Available to Common Shareholders = Net Income – Dividends on Preferred Stock
o​ Preferred Dividends
▪​ Cumulative = shares x par x rate
▪​ Noncumulative = declared
-​ WACSO = ​ Beginning Shares Outstanding
+ Shares Sold
- Shares Reacquired
+ Stock Dividends/Splits
- Reverse Stock Splits
Diluted EPS = Income Available to Common Shareholders + Interest on Dilutive Securities / WACSO
Dilutive vs Antidilutive
-​ Dilutive: Price to exercise is below market price, “in the money” means assume exercised
-​ Antidilutive: Price to exercise is above market price, “out of the money" means assume not
exercised
Treasury Stock Method (options/warrants)
-​ Assume that dilutive securities are exercised and proceeds that are received are used to purchase
common shares
-​ Additional Shares added to WACSO = shares – ( (shares x exercise price) / average market price)
If Converted Method (bonds/preferred stock)
-​ Assume securities were converted to common stock at the beginning of the period
-​ Bonds: Add interest expense (net of tax) to the numerator, add shares associated with the bond to
the denominator
-​ Preferred Stock: Do not subtract preferred dividends from the numerator, add shares associated
with the preferred stock to the denominator
-​ Only include items in diluted EPS if they are dilutive
o​ Check diluted EPS against basic EPS, diluted should be lower

F1 M3: Stockholders' Equity: Part 1

Capital Stock
-​ Must be retained by an entity for the protection of creditors
-​ Can be authorized, issued, or outstanding
-​ Book Value per Common Share = Common Stockholder’s Equity / Common Shares Outstanding
Preferred Stock
-​ Cumulative: dividends that are not paid accumulate and must be paid before dividends to
common shareholders
-​ Non-Cumulative: dividends not paid do not accumulate
-​ Participating: share dividends with common shareholders in excess of a specific amount
o​ Fully: participate in excess dividends without a limit
o​ Partially: participate in excess dividends to a limited extent
-​ Non-Participating: limited to dividends provided by preference
-​ Convertible: may be exchanged for common stock at the option of the shareholder at a specified
conversion rate
-​ Callable: may be called (repurchased) at a specified price at the option of the issuer
-​ Mandatorily Redeemable: must be bought back by the issuer on a specified date, and is classified
as a liability by the issuer
Additional Paid in Capital
-​ Contributed capital in excess of par/stated value
Retained Earnings = Net Income – Dividends Declared +/- Prior Period Adjustments
-​ Accumulated earnings/losses during the life of an entity that have not been paid out as dividends
Appropriated Retained Earnings
-​ Retained earnings may be appropriated for a specific purpose, not available for dividends
-​ When appropriation is to be made
dr. Retained Earnings (unappropriated)​ ​ $
​ cr. Retained Earnings appropriated for X​ ​ $
Treasury Stock
-​ A corporation’s own stock that has been issued to shareholders and subsequently reacquired
-​ Portion of Retained Earnings equal to the cost of treasury stock may be restricted and not used for
dividends
-​ Accounted for using the Cost Method (95% of the time) or the Par Method (5% of the time)
Cost Method (accounting for treasury stock)
-​ Treasury stock is recorded at the cost to reacquire, there is no gain/loss until reissued
dr. Cash​ ​ ​ ​ ​ ​ $​ ​ (shares x sell price)
​ cr. Common Stock​ ​ ​ ​ ​ $​ (shares x par)
​ cr. APIC – CS​ ​ ​ ​ ​ ​ $
dr. Treasury Stock​ ​ ​ ​ ​ $​ ​ (shares x repurchase)
​ cr. Cash​ ​ ​ ​ ​ ​ $
dr. Cash​ ​ ​ ​ ​ ​ $​ ​ (shares x reissue)
​ cr. Treasury Stock​ ​ ​ ​ ​ $​ (shares x repurchase)
​ cr. APIC – TS​ ​ ​ ​ ​ ​ $
dr. Cash​ ​ ​ ​ ​ ​ $​ ​ (shares x reissue)
dr. APIC – TS​ ​ ​ ​ ​ ​ $​ ​ (shares x par)
dr. Retained Earnings​ ​ ​ ​ ​ $​ ​ (plug if no APIC – TS)
cr. Treasury Stock​ ​ ​ ​ ​ $​ (shares x repurchase)

F1 M4: Stockholders' Equity: Part 2

Stock Subscriptions
-​ Contractual agreement to sell a specified number of shares at an agreed upon price on credit
dr. Subscriptions Receivable​ ​ ​ ​ $​ ​ (shares x price)
​ cr. Common Stock Subscribed​​ ​ ​ $​ (shares x par)
​ cr. APIC​ ​ ​ ​ ​ ​ $​
dr. Cash​ ​ ​ ​ ​ ​ $​ ​ (amount collected)
​ cr. Subscriptions Receivable ​ ​ ​ ​ $
dr. Common Stock Subscribed​ ​ ​ $​ ​ (shares x par)
​ cr. Common Stock​ ​ ​ ​ ​ $​
Distributions to Shareholders
-​ Date of Declaration: board of directors formally approves a dividend, and a liability is created
reducing retained earnings
-​ Date of Record: board of directors specifies as of the date the names of the shareholders to
receive the dividend
-​ Date of Payment: date the dividend is disbursed
Dividends
-​ Cash Dividends: can be declared on common or preferred stock, are paid from retained earnings
only on authorized, issued, and outstanding shares
-​ Property (In-Kind) Dividends: distribution of noncash assets, on the date of declaration the
property should be restated to fair value
-​ Scrip Dividends: form of notes payable where a corporation commits to pay a dividend at a later
date
-​ Liquidating Dividends: occur when dividends to shareholders exceed retained earnings, the
dividend in excess of retained earnings reduces APIC then common/preferred stock
-​ Dividends are not distributed on treasury stock because treasury stock is not considered
outstanding
Stock Dividends
-​ Distribution of additional shares of a company’s own stock to its shareholders, are paid out of
retained earnings
-​ Treatment depends on the size (%) of dividend in proportion to total shares of outstanding before
the dividend​
Small Stock Dividend (<20-25%)
-​ Fair value of the stock dividend at the date of declaration is transferred from retained earnings to
common stock and APIC
dr. Retained Earnings​ ​ ​ ​ ​ $​ ​ (shares x fair value)
​ cr. Common Stock​ ​ ​ ​ ​ $​ (shares x par)
​ cr. APIC​ ​ ​ ​ ​ ​ $
Large Stock Dividend (>20-25%)
-​ Par/stated value of the stock dividend at the date of declaration is transferred from retained
earnings to common stock
dr. Retained Earnings​ ​ ​ ​ ​ $​ ​ (shares x par)
​ cr. Common Stock Distributable​ ​ ​ $
dr. Common Stock Distributable​ ​ ​ $
​ dc. Common Stock​ ​ ​ ​ ​ $
Stock Splits
-​ Occur when a corporation issues additional shares of its own stock to current shareholders and
reduces the par value per share proportionally
-​ No change in total book value of shares outstanding
-​ Does not affect retained earnings or total equity
F2 M1: Revenue Recognition Introduction
Revenue Recognition
-​ Occurs when an entity satisfies a performance obligation
1.​ Identify the contract
2.​ Separate performance obligations
3.​ Transaction price
4.​ Allocate transaction price to different performance obligations
5.​ Recognize revenue when obligations are satisfied
Contracts
-​ An agreement between two or more parties that creates enforceable rights and obligations
-​ Requirements
o​ All parties must approve and commit to perform
o​ Rights of each party are identified
o​ Payment terms are identified
o​ Contract has commercial substance
o​ Probable collection of consideration
-​ When two or more contracts are entered into with the same customer at or near the same time,
the contracts should be combined and accounted for as a single contract if they are negotiated as
a package with a single commercial objective, consideration for one contract is tied to the
performance of another obligation, or the goods/services promised represent a single obligation
-​ Contract modification represents a change in the price or scope of a contract
o​ Contracts should be treated as new if the modification increases the scope due to addition
of obligations and the contract price increases to reflect the additions
Performance Obligations
-​ Separately Identifiable: not integrated with other obligations, does not customize or modify other
obligations, does not depend on or relate to other obligations
-​ Not Separately Identifiable: obligations are interrelated, entity provides service of integrating with
other obligations in the contract (bundle)
Recognizing Revenue
-​ Satisfied Over Time: performance creates or enhances an asset, customer simultaneously receives
and consumes the benefits, the performance does not create an asset with an alternative use
o​ Output Method: based on value to customer of goods transferred
o​ Input Method: based on entity’s efforts to satisfy the obligation
-​ Satisfied at a Point in Time: customer has accepted the asset, entity has a right to payment,
physical possession has been transferred, customer has legal title, customer has reward and risk
F2 M2: Accounting Changes and Error Corrections
Changes in Accounting Estimate (Prospective)
-​ Occurs when it is determined that an estimate previously used by an entity is incorrect
o​ Is not a correction of an error
-​ Use the new information in current/future years, no changes are made to previous reports
o​ Change in asset useful life, settlement of litigation, change to LIFO, depreciation method
-​ If estimate effects are beyond one year, disclose in the notes to the financial statements
Changes in Accounting Principle (Retrospective)
-​ A change in accounting from one principle to another acceptable principle
-​ May only be made if required by GAAP or if change results in more fairly presented accounting
information
o​ Cannot change principles without justification
-​ To account for a change retrospectively, beginning retained earnings must be adjusted to reflect
the cumulative effect, net of tax
-​ Use the new accounting principle in all periods that are presented
o​ Exceptions: change to LIFO, change in depreciation method, impracticable to estimate
o​ A change in depreciation method is a change in accounting principle that is inseparable
from a change in estimate and is accounted for as a change in estimate
Change in Accounting Entity (Retrospective)
-​ Occurs when the entity being reported on has changed composition
-​ Restate comparative financial statements presented to reflect the information of the new entity
Error Correction (Prior Period Restatement)
-​ Correction of errors in recognition, measurement, presentation, or disclosure resulting from
mathematical mistakes, misapplication of GAAP, or oversight of facts
o​ Not an accounting change
-​ Change from non-GAAP to GAAP
-​ If comparative financial statements are presented
o​ Correct the error if presented in prior period financial statements
o​ Adjust opening retained earnings of the earliest period if the error is not presented in
comparative financial statements
-​ If comparative financial statements are not presented
o​ Report the error as an adjustment to opening retained earnings
F2 M3: Adjusting Journal Entries
Adjusting Journal Entries
-​ In order to properly match revenues with expenses in the periods in which they occur, it is
sometimes necessary to defer or accrue
-​ Deferral of revenues and expenses will occur when cash is received or expended but is not
recognizable on the income statement yet
-​ Accrual of revenues and expenses will occur when revenues or expenses are recognizable on the
income statement, but cash has not been expended or received
-​ In some instances, an entity may record cash receipts/disbursements to revenue/expense when
they should have been recorded to an asset/liability
o​ This is an error, and an adjusting entry would be needed
Adjusting Journal Entry Rules
-​ Must be recorded by the end of the fiscal year
-​ Never involve the cash account
-​ Always hit one income statement account and on balance sheet account

M2 M4: Notes to the Financial Statements

Summary of Significant Accounting Policies
-​ A description of all the significant policies included in the financial statements, as the first or
second note
-​ Significant accounting principles and methods
o​ Does not include composition and dollar amounts of accounts, details relating to principle
changes, or computations
Notes to the Financial Statements
-​ All information relevant to decision makers that is not presented in either the body of the financial
statements or in the summary of significant accounting policies
o​ Fulfill the purpose of providing disclosures required by generally accepted accounting
principles
Disclosure of Risks and Uncertainty
-​ GAAP requires the disclosure of risks and uncertainty existing at the date of the financial
statements
o​ Disclosure of an entity’s major products or services and principal markets
o​ Managements use of estimates and assumptions
o​ Concentration of vulnerability arises when entity is exposed to risk of loss that could be
mitigated through diversification
▪​ Disclosed if exist at financial statement date, vulnerable to near term severe
impact, and reasonably possible to occur
▪​ Concentration of business with one customer/supplier, revenue from one
product/service, availability of resources, market region
M2 M5: Subsequent Events
Subsequent Events
-​ An event that happens after the balance sheet date but before the financial statements are issued
-​ Recognized Subsequent Event: provide additional information about conditions that existed at the
balance sheet date, must be recognized in the financial statements
-​ Non-Recognized Subsequent Event: provide additional information about conditions that did not
exist at the balance sheet date, not recognized in the financial statements
Subsequent Event Evaluation Period and Disclosure
-​ Public entities must evaluate subsequent events through the date that the financial statements
are issued, but do not have to disclose this date
-​ Private entities must evaluate subsequent events through the date that the financial statements
are available to be issued, and must disclose this date

F2 M6: Fair Value Measurements

Fair Value (“Exit Price”)
-​ The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal market under current conditions
o​ A market-based measure, an instrument-by-instrument basis
-​ Principal Market: the market with the greatest volume or level of activity for an asset/liability
-​ Most Advantageous Market: the market with the best price for the asset/liability after transaction
cost
o​ Transaction costs are only considered in determining most advantageous market, but are
not included in fair value
Highest and Best Use
-​ Measurement basis for non-financial assets
-​ Take into account the ability to generate economic benefits by using the asset in its highest and
best use or by selling it
Fair Value Techniques
-​ Market Approach: uses prices and other relevant information from market transactions involving
identical or comparable assets/liabilities
o​ Level 1 Input: quoted prices in active markets for identical items
o​ Level 2 Input: quoted prices in active/non active markets for nonidentical/identical items
o​ Level 3 Input: unobservable and assumption based
-​ Income Approach: converts future amounts to a single discounted amount
-​ Cost Approach: current replacement cost
Fair Value Disclosures
-​ Provide financial statement users with information about assets/liabilities measure at fair value
o​ Techniques and inputs
o​ Uncertainties
o​ Changes in fair value
F2 M7: Special Purpose Frameworks
Special Purpose Frameworks (OCBOA)
-​ Cash basis, modified cash basis, tax basis, regulatory basis
-​ Financial statement titles should differentiate OCBOA basis
-​ Equivalent of balance sheet and income statement must be presented
-​ Explain changes in equity
-​ No statement of cash flows
-​ Disclosures are similar to GAAP
Cash Basis
-​ Revenues are recognized when cash is received, and expenses are recognized when cash is paid
o​ Statement of Cash and Equity: only asset is cash, no liabilities
o​ Statement of Cash Receipts and Disbursements: proceeds and payments
Modified Cash Basis
-​ Includes elements of both accrual accounting and cash basis accounting
o​ Statement of assets and liabilities
o​ Statement of revenues and expenses and retained earnings
Converting Cash Basis to Accrual Basis
-​ In certain situations, entities may be required to convert cash basis financial statements to accrual
basis financial statements
-​ Revenue​ ​
Cash Basis Revenue
+ Ending AR
- Beginning AR
+ Beginning Unearned Revenue
- Ending Unearned Revenue
Accrual Basis Revenue
-​ COGS​ ​ ​
Cash Paid for Purchases
+ Ending AP
- Beginning AP
- Ending Inventory
+ Beginning Inventory
Accrual Basis COGS
-​ Operating Expenses
​ ​ ​ Cash Paid for Operating Expenses​
​ ​ ​ + Ending Accrued Liabilities
​ ​ ​ - Beginning Accrued Liabilities
​ ​ ​ - Ending Prepaid Expenses
​ ​ ​ + Beginning Prepaid Expenses
​ ​ ​ Accrual Basis Operating Expenses
F3 M1: Cash and Cash Equivalents
Cash and Cash Equivalents
-​ Cash Equivalents: short-term, highly liquid investments that are readily convertible to cash and so
near maturity when acquired by the entity (90 days) that they present insignificant risk of changes
in value
-​ Cash, checking accounts, savings accounts, money market accounts, checks drawn on a bank
account but not disbursed before balance sheet date
o​ Does not include marketable debt/equity securities, bond sinking funds, or post-dated
checks (checks dated after balance sheet date)
o​ Balances in various accounts within the same bank can be netted, but balance totals for
different banks must be accounted for separately when one has a negative position
▪​ The bank with a negative position is reported as a current liability
Restricted or Unrestricted Cash
-​ Restricted cash is classified as either short term or long term, based on the purpose of the
restriction

Bank Reconciliations
-​ Differences between the cash balance reported by the bank and the cash balance per the
depositors’ records are explained through a bank reconciliation
Balance Per Bank​ ​ $
+ Deposits in Transit​ ​ $
- Outstanding Checks​ ​ $
Adjusted Bank Balance ​ $

​ ​ Balance Per Books​ ​ $

​ ​ + Bank Collections​ ​ $
​ ​ + Interest Expense​ ​ $
​ ​ - NSF Checks​ ​ ​ $
​ ​ - Service Charges​ ​ $
​ ​ Adjusted Book Balance ​ $
-​ Errors made by either the bank or the depositor can cause differences and must be accounted for
o​ Should only be accounted for by the side that made the error
F3 M2: Trade Receivables
Accounts Receivable
-​ Oral promises to pay debts and are generally classified as current assets
o​ Trade Receivables: accounts receivables from customers
o​ Non-trade Receivables: accounts receivables from non-customers
-​ Accounts receivable should be valued at original transaction amount, but may be adjusted for
sales discounts
o​ Discounts are generally a percentage of the sales price (ex: 2/10, n/30)
▪​ The net method immediately records the sale at the discounted amount, while the
gross method does not record the discount until it is taken
Uncollectible Accounts Receivable
-​ Accounts receivable should be recorded at net realizable value, which means that the amount
initially recorded should be reduced by any uncollectible receivables
-​ Direct Write Off Method (not GAAP): account is written off and bad debt is recognized when the
account becomes uncollectible
dr. Bad Debt Expense​ ​ ​ ​ $
​ cr. Accounts Receivable​ ​ ​ $
-​ Allowance Method (GAAP): under the current expected credit loss (CECL) model, once the selling
entity determines that collection for services provided is probable, an estimate of expected losses
over the life of the receivable should be recorded
o​ A percentage of each period’s ending accounts receivable is estimated to be uncollectible
dr. Bad Debt Expense ​​ ​ ​ $
​ cr. Allowance for Doubtful Accounts​ ​ $
dr. Allowance for Doubtful Accounts​ ​ $
​ cr. Accounts Receivable​ ​ ​ $
-​ If there is subsequent collection of accounts receivable that has been written off, the accounts
receivable and allowance for doubtful accounts must be restored before recording the cash
received, and subsequently reducing the accounts receivable
Pledging Accounts Receivable
-​ Process where a company uses existing accounts receivable as collateral for a loan and retains title
to the accounts receivable while “pledging” to use the proceeds to pay the loan
-​ Only requires note disclosure, no adjustment to accounts receivable
Factoring Accounts Receivable
-​ Process where a company converts accounts receivable to cash by assigning them to a factor
-​ Factoring without recourse is essentially a sale of the accounts receivable and the factor assumes
the risk of a loss on collection
dr. Cash​ ​ ​ ​ ​ $
dr. Due from Factor​ ​ ​ ​ $​ ​ (factor’s margin)
dr. Loss on Sale of Accounts Receivable​ $​ ​ (discount for factor)
​ cr. Accounts Receivable​ ​ ​ $​ (total receivable)
 -​ Factoring with recourse is when the factor has the option to re-sell any uncollectible receivables
back to the seller
Notes Receivable
-​ Written promises to pay a debt in a promissory note
-​ Unearned interest and finance charges are deducted from face value of the note
Discounting Notes Receivable
-​ Process where the holder endorses the note to a third party and receives a sum of cash
o​ The amount received is determined by applying a discount rate to the maturity value of
the note
-​ Discounting with recourse means the holder remains liable
-​ Discounting without recourse is a true sale
o​ Maturity Value = Face Value + Interest
o​ Bank Discount = Maturity Value x Discount Rate
o​ Paid by Bank = Maturity Valie – Discount
o​ Interest Income = Amount Paid – Face Value

F3 M3: Inventory
Inventory
-​ Must be periodically counted, valued, and recorded
-​ Any good or material the company has legal title to should be included in inventory
Goods in Transit
-​ Title passes from the seller to the buyer as specified by the contract, but if there are no agreed
upon conditions, title passes with completion of the seller’s obligations
-​ FOB Shipping Point: title passes to the buyer when the seller delivers the goods to the common
carrier
-​ FOB Destination: title passes to the buyer when the buyer receives the goods from the common
carrier
Consigned Goods
-​ The consignor (owner) delivers goods to an agent (consignee) to hold and sell on the consignor’s
behalf
-​ Inventory is included in the consignor's inventory even though possession is with the consignee
-​ Title passes directly from the consignor to the buyer when sold
Public Warehouses
-​ Inventory held in a public warehouse is included in the inventory of the owner
Sale with Mandatory Buyback
-​ Seller is required to repurchase goods as part of a financing arrangement and must include the
inventory in inventory even though title has passed to the buyer
Installment Sales
-​ If the seller retains title as the goods are sold as security for a loan, inventory is included in the
inventory of the seller
-​ If uncollectible debt can be estimated, include in the buyer inventory
Valuation of Inventory
-​ Inventory must be stated at cost, which is the price paid to acquire an asset
o​ Departures arise when the utility of goods is no longer as great as their cost
o​ The write-down of inventory is reflected in cost of goods sold
▪​ Reversal of inventory write-downs is prohibited
Lower of Cost or Market (LIFO/retail)
-​ Used when inventory is costed using LIFO or the retail inventory method
o​ Market value is the median of replacement cost, ceiling, and floor
o​ Replacement Cost = cost as of the valuation date
o​ Market Ceiling = selling price – cost to complete
o​ Market Floor = market ceiling – profit margin
Lower of Cost or NRV (FIFO)
-​ Used for all inventory that is not costed using LIFO or the retail inventory method
o​ NRV is an item’s net selling price less the costs to complete and dispose of the inventory
Periodic Inventory System
-​ Inventory is determined by a physical count, usually at year end
-​ Not a running total, ending inventory is counted and priced
Beginning Inventory
+ Purchases
Cost of Goods Available for Sale
- Ending Inventory
Cost of Goods Sold
Perpetual Inventory System
-​ Inventory records are updated for each purchase and sale as they occur
-​ A running total is kept
Specific Identification
-​ Cost of each item in inventory is uniquely identified
-​ Usually used for physically large or high value items
FIFO
-​ First costs inventoried are the first costs transferred to COGS, meaning ending inventory includes
the most recently incurred costs
o​ Ending balance approximates replacement cost
Weighted Average Method
-​ At the end of the period, the average cost of each item in inventory would be the weighted
average of the cost of all items in inventory
o​ Weighted Average = Total Cost of Inventory Available / Total Units of Inventory
Moving Average Method
-​ Computes the weighted average cost after each purchase
-​ Must be a perpetual system
o​ Weighted Average = Total Cost of Inventory After Each Purchase / Total Units of Inventory
After Each Purchase
LIFO
-​ Last costs inventoried are the first costs transferred to COGS, meaning ending inventory includes
the oldest costs
Firm Purchase Commitments
-​ A legally enforceable agreement to purchase a specified amount of goods at some time in the
future
o​ All material firm purchase commitments must be disclosed
-​ If the contracted price exceeds the market price and it is expected that losses will occur when the
purchase is actually made, the loss should be recognized at the time of the decline in price

F3 M4: PPE: Cost Basis

Property, Plant, and Equipment
-​ Fixed assets that are acquired for use in operations and are not for sale
-​ Possess physical substance, are long term, and subject to depreciation
Valuation of Fixed Assets
-​ Historical cost is the basis for valuation of fixed assets, which is the price of obtaining and bringing
the asset to condition for use
Donated Fixed Assets
-​ Are recorded at fair value
dr. Fixed Asset​​ ​ ​ ​ $
​ cr. Gain on Nonreciprocal Transfer​ ​ $
Property
-​ When land is purchased for the purpose of constructing a building, all costs incurred up to
excavation are considered land costs
o​ Price, broker commissions, title/recording fees, legal fees, draining swamps, clearing trees,
back taxes, mortgage, tearing down old buildings less proceeds from any sale of scrap
-​ Land improvements are depreciable
o​ Fences, sidewalks, landscaping, lighting, water systems
Plant
-​ Plant costs begin at excavation for a new building
o​ Price, repairs, alterations/improvements, architect fees, digging a hole for foundation
Equipment
-​ Includes office equipment, machinery, furniture, fixtures, factory equipment
o​ Invoice less discounts, freight in, installation charges, taxes
Equipment Capitalization

F3 M5: PP&E: Depreciation, Disposal, and Impairment

Depreciation
-​ Physical: relates to an asset’s deterioration and wear over time
-​ Functional: arises from obsolescence or inadequacy
-​ Component: the separate depreciation of each part of an item of PPE that is significant to the total
cost of the fixed asset
-​ Composite: the process of averaging the economic lives of a number of items and depreciating the
entire class of assets over a single useful life
Straight Line Depreciation
-​ Equivalent depreciation recorded every period, unless placed in service/useful life ends mid-year
-​ SLD = (Cost – Salvage Value) / Estimated Useful Life
Sum of the Years Digits
-​ Accelerated method of depreciation
-​ SYD Depreciation = Cost – Salvage Value x (Remaining Life / Sum of Years Digits)
Units of Production
-​ Service production declines with use
-​ Units of Production Depreciation = # Units Produced x ( (Cost – Salvage Value) / Estimated Units)
Double Declining Balance
-​ Asset is subject to rapid obsolescence
-​ DDB Depreciation = Cost – Accumulated Depreciation x (2 / Useful Life)
Sale of an Asset During its Useful Life
​ ​ dr. Cash​ ​ ​ ​ ​ $​ ​ ​ (amount received)
​ ​ dr. Accumulated Depreciation​ ​ $
​ ​ dr. Loss​​ ​ ​ ​ ​ $​ ​ ​ (if applicable)
​ ​ ​ cr. Asset​ ​ ​ ​ ​ $​ ​ (cost)
​ ​ ​ cr. Gain​ ​ ​ ​ ​ $​ ​ (if applicable)
Write off of a Fully Depreciated Asset
​ ​ dr. Accumulated Depreciation​ ​ $​ ​ ​ (cost)
​ ​ ​ cr. Asset​ ​ ​ ​ ​ $
Total and Permanent Impairment of an Asset
​ ​ dr. Accumulated Depreciation​ ​ $
​ ​ dr. Impairment Loss​ ​ ​ ​ $
​ ​ ​ cr. Asset​ ​ ​ ​ ​ $​ ​ (cost)
Depletion
-​ The allocation of the cost of using natural resources
-​ Cost depletion is computed by dividing the current estimated recoverable units into unrecovered
cost to arrive at the depletion rate
o​ Depletion Base = Total Cost (cost + developmental + restoration) – Residual Value
o​ Unit Depletion Rate = Depletion Base / Estimated Recoverable Units
o​ Yearly Depletion = Depletion Rate x Units Extracted
o​ Yearly Depletion COGS = Depletion Rate x Units Sold
Impairment of Property, Plant, and Equipment
-​ The carrying amounts of fixed assets held for use need to be reviewed when events or changes in
circumstances indicate that the carry amount may not be recoverable
Test for Recoverability
-​ Future cash flows expected to result from the use of the asset need to be estimated
o​ If the undiscounted future net cash flows are less than the carry amount, impairment loss
must be recognized
Calculation of Impairment
-​ To determine if asset is impaired: Undiscounted Future Net Cash Flows – Net Carry Value
-​ To calculate impairment: Discounted Future Net Cash Flows – Carry Value
-​ Assets held for use
o​ Write down the asset, depreciate the new cost, no restoration is permitted
-​ Assets held for disposal
o​ Write down the asset, no depreciation taken, restoration is permitted
F3 M6: Intangibles With Finite Lives
Intangible Assets
-​ Long-lived legal rights and competitive advantages that are developed or acquired by a business
-​ Used in operations and provide benefits for several periods
o​ Patents, copyrights, franchises, trademarks, goodwill
o​ For defending a patent, the accounting for the legal fees will depend entirely on whether
the defense is successful or not. If the defense is successful, the costs associated with legal
fees will be capitalized and treated as an asset on the company's balance sheet. If the
defense is unsuccessful, the legal fees will be treated as an expense recorded on the
income statement
-​ Purchased: acquired from other entities, should be recorded at cost and capitalized, including
legal and registration fees
-​ Developed: should be expensed as incurred because GAAP prohibits the capitalization of research
and development costs
Amortization of Intangible Assets
-​ The value of intangible assets eventually disappears, so intangible assets must be amortized over
the period of estimated benefits
o​ Goodwill and indefinite life intangible assets are not amortized
-​ Straight line amortization should be applied unless another method is deemed more appropriate
Impairment of Intangibles
-​ Finite life intangible assets are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable
-​ The carry amount of the asset is compared with the undiscounted future cash flows
-​ If carry amount exceeds the undiscounted cash flows, the asset is impaired, and impairment loss is
recorded
o​ Held for Use: Fair Value – Carry Value = Impairment Loss
o​ Held for Disposal: Fair Value – Carry Value = Impairment Loss + Disposal Cost = Total Loss
Cloud Computing
-​ Paying a vendor a fee in exchange to use software over the internet
-​ Preliminary Project: determine system requirements, expense costs as incurred
-​ Application Development: work to customize configurations
o​ Capitalize: implementation, licensing, development fees
o​ Expense: training, maintenance, support
-​ Post Implementation: software is placed in service, expense costs as they are incurred
Franchisee Accounting
-​ Initial fees: present value of the amount paid is recorded as an intangible asset on the balance
sheet and amortized over the expected period of benefit
-​ Continuing fees: received for ongoing services provided by the franchisor based on a percentage
of franchise revenues, reported as an expense by the franchisee in the period incurred
Start Up Costs
-​ Are expensed as they are incurred
o​ Organizing the entity, opening a facility, implementing a new process/service

F4 M1: Payables and Accrued Liabilities

Trade Accounts Payable
-​ Amounts owed for goods, materials, and supplies that are not evidenced by a promissory note
Trade Notes Payable
-​ Formal, written promises to pay on a certain date that arise from the purchase of goods, supplies,
or services
-​ Include a stated interest rate
o​ If a payable has a stated interest rate and a payment date that does not coincide with year
end, it will result in an interest payable balance at year end
Accrued Vacation
-​ Vacation accruals are recorded in the year earned if:
o​ Services have been rendered by employees
o​ Obligation is related to rights that accumulate
o​ Payment of compensation is probable
o​ Amount can be reasonably estimated
Exit and Disposal Costs
-​ Liability must be recognized for costs associated with exit or disposals
o​ Involuntary termination benefits, contract termination, relocation
-​ Liability is recognized when an obligating event has occurred, which results in the obligation to
transfer assets in the future, and the entity has no discretion to avoid the future transfer
-​ Liability is measured at fair value in discontinued operations
Disclosure of Exit and Disposal Costs
-​ Disclosures are made in the period of initiation and until the activity is complete
-​ Must disclose a description of major exit and disposal costs
Asset Retirement Obligations
-​ Legal obligation associated with retirement of a tangible long-lived asset
-​ Recorded as a liability for future payment required to clean up, close down, or restore the
condition of an asset
o​ Amount paid in the future x present value factor
-​ When an asset retirement obligation exists and qualifies for recognition, the entity records the
obligation at fair value
o​ Asset: Asset retirement obligation
o​ Liability: Asset retirement cost
Accretion and Depreciation
-​ In periods after initial measurement, an asset retirement obligation is adjusted for accretion
expense due over time
-​ Depreciation Expense = Asset Retirement Cost / Useful Life
dr. Depreciation Expense​ ​ ​ $
​ cr. Accumulated Depreciation​​ ​ $
-​ Accretion Expense: increases an asset retirement obligation liability due to the passage of time
using the appropriate rate
dr. Accretion Expense​​ ​ ​ $​ ​ (beginning ARO x rate)
​ cr. Asset Retirement Obligation​ ​ $

F4 M2: Contingencies and Commitments

Contingencies
-​ An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or
loss ultimately determined in the future
Loss Contingencies
-​ Involves possible future loss proven by subsequent events
o​ Receivable collection, litigation, obligations
-​ Recognition in financial statements depends on the likelihood that a future event will occur
o​ Probably, reasonably possible, remote
-​ Probable
o​ If reasonable estimable, contingency is accrued for by a charge to income​and disclosed
▪​ If estimation is a range and no one amount is better than another, accrue for the
lowest amount in the range and disclose the range in the notes
o​ If not reasonably estimable, contingency is disclosed in the notes
-​ Reasonably Possible
o​ Disclosure shall be made including the nature and estimate of loss, or statement that there
is no estimate
-​ Remote
o​ No disclosure is necessary, with guarantees of debt being exceptions
Gain Contingencies
-​ Not recognized in the financial statements until realized
-​ Disclose in the notes to the financial statements if the possibility is not remote
Premiums and Warranties
-​ Loss contingencies that are accrued by an entity as the expected amounts are probable and can be
reasonably stated
-​ Premiums: offers to customers for the purpose of simulating sales, charged to sales in the periods
that benefit from the offer
-​ Warranties: a seller’s promise to “correct” any product defects, result in a liability if the cost can
be reasonably estimated
F4 M3: Long-Term Liabilities
Annuities
-​ Transactions that result in identical periodic payments or receipts at regular intervals
-​ Ordinary annuity: payments are made at the end of each period
-​ Annuity due: payments are made at the beginning of each period
Present Value of $1
-​ The amount that must be invested now at a specific interest rate so that $1 can be paid or
received in the future
Future Value of $1 (Compound Interest)
-​ The amount that would accumulate at a future point in time if $1 were invested now

F4 M4: Bonds: Part 1

Bonds Payable
-​ Bond Indenture: document that describes the contract between the issuer and the holder
-​ Face (Par) Value: the total dollar amount of the bond and the basis on which period interest is
paid
o​ Bonds are issued at par when the stated rate of interest is equal to the market interest rate
-​ Stated (Nominal/Coupon) Interest Rate: the stated interest rate is the interest to be paid to the
investors in cash
-​ Market (Effective/Yield) Interest Rate: the rate of interest actually earned by the bondholder and
is the rate of return for comparable contracts on the date the bonds are issued
-​ Discount: if the market rate is higher than the stated rate, the bonds are issued at a discount
-​ Premium: if the market rate is lower than the stated rate, the bonds are issued at a premium
Types of Bonds
-​ Bonds are a source of long-term funding for companies needing large amounts of capital, and they
represent a contractual promise by the issuing corporation to pay investors a specific sum of
money at a designated maturity date plus periodic, fixed interest payments based on a percentage
of the face amount of the bond
-​ Debentures: unsecured bonds
-​ Mortgage Bonds: bonds that are secured by real property
-​ Collateral Trust Bonds: secured bonds
-​ Convertible Bonds: convertible into common stock of the debtor at the option of the bondholder
o​ Nondetachable Warrants: convertible bond itself must be converted into capital stock
o​ Detachable Warrants: bond is not surrendered upon conversion, only the warrants plus
cash representing the exercise price of the warrants
-​ Participating Bonds: bonds that not only have a stated rate of interest but participate in income if
certain earnings levels are obtained
-​ Term Bonds: bonds that have a single fixed maturity date
-​ Serial Bonds: prenumbered bonds that the issuer may call and redeem a portion by serial number
-​ Income Bonds: bonds that only pay interest if certain income objectives are met
 -​ Zero Coupon Bonds: bonds sold with no stated interest but rather at a discount and redeemed at
the face value without periodic interest payments
-​ Commodity-Backed Bonds: bonds that are redeemable either in cash or a stated volume of a
commodity, whichever is greater
Bond Terms
-​ Bonds payable should be recorded as a long term liability at face value and adjusted to the
present value of their future cash outflows by either subtracting unamortized discounts or adding
unamortized premiums
-​ Recorded at the true present value at the date of issuance based on the market rate at that date
o​ Bonds are usually issued in denominations of $1,000
o​ Price is always quoted in 100s
o​ Indenture is a contract for purchase of a bond
o​ Coupon rate = stated interest rate on the bond
o​ Bond interest = coupon rate x face
▪​ Interest is generally paid semiannually
o​ Principal payoff is always the full face amount
Bond Selling Price
-​ When a bond is issued, the price is computed as the sum of the present value of the future
principal payment plus the present value of the future periodic interest payments
-​ Issued at Par: the stated rate on the bond is equal to the market rate at the date of issuance
o​ Borrower
​ dr. Cash​ ​ ​ ​ ​ $​ ​
​ ​ cr. Bonds Payable​ ​ ​ ​ $
-​ Issued at a Discount: the stated rate on the bond is less than the market rate
o​ Borrower
dr. Cash​ ​ ​ ​ ​ $
dr. Discount on Bonds Payable​ ​ $
​ cr. Bonds Payable​ ​ ​ ​ $
-​ Issued at a Premium: the stated rate on the bond is greater than the market rate
o​ Borrower
dr. Cash​ ​ ​ ​ ​ $
​ cr. Premium on Bonds Payable​ ​ $
​ cr. Bonds Payable​ ​ ​ ​ $
F4 M5: Bonds: Part 2

F5 M7: Lessee Accounting

F5 M1: Financial Instruments

Financial Instruments
-​ Include either financial assets or financial liabilities
-​ Entities may choose to measure at fair value eligible financial instruments that are not typically
measured at fair value
o​ Unrealized gains and losses are reported in earnings
Debt Securities
-​ Any security representing a creditor relationship with an entity
o​ Bonds, preferred stock, government securities, convertible debt
-​ Classified as either trading, available-for-sale, or held-to-maturity
-​ Trading Securities: debt securities that are bought and held principally for the purpose of selling
them in the near term
o​ Reflect active and frequent buying and selling with the objective of generating profits on
short-term differences in price
o​ Reported as current assets
-​ Available-for-Sale Securities: those securities that do not meet the definition of the other two
categories
o​ Reported as either current or non-current assets, depending on intent of the holder
-​ Held-to-Maturity Securities: holder has the intent and ability to hold the securities to maturity, not
just for an indefinite period of time
o​ Reported as either current or non-current assets based on their time to maturity
Valuation of Debt Securities
-​ Debt securities classified as trading and available-for-sale must be reported at fair value
o​ Changes in fair value result in unrealized holding gains and losses, which are recorded in
net income for trading securities, but in other comprehensive income for available-for-sale
securities
-​ Debt securities classified as held-to-maturity are reported at amortized cost
o​ No unrealized gains or losses are recognized
Reclassification of Debt Securities
-​ Transfers between categories for debt securities should only occur when justified
-​ All transfers from one category to another are accounted for at fair value, with unrealized holding
gains or losses as follows:
o​ From trading: unrealized holding gains/losses are already recognized and are not reversed
 o​ To trading: unrealized holding gains/losses at the date of transfer are recognized in
earnings immediately
o​ HTM to AFS: unrealized holding gains/losses are recorded in other comprehensive income
o​ AFS to HTM: unrealized holding gains/losses are already recognized in other
comprehensive income
Income from Debt Securities
-​ Interest income from debt securities classified as trading or available-for-sale is recorded on the
income statement, but is not included in the valuation of the securities
Impairment of Debt Securities
-​ Under the CECL model, AFS and HTM debt securities should be reported at the net amount to be
collected using an allowance for expected credit losses
Impairment of Held-to-Maturity Securities
-​ If it is determined that all amounts due will not be collected on a debt investment recorded at
amortized cost, the investment should be reported at the present value of the principal and
interest that is expected to be collected
o​ The credit loss is the difference between the present value and amortized cost
Impairment of Available-for-Sale Securities
-​ Impairment on AFS securities is accounted for differently than HTM securities, as the holder of the
security has the option to sell the security if the loss on the sale will be less than the expected
credit loss
o​ Loss reported in net income on an AFS security is limited to the amount by which fair value
is below amortized cost, with any additional loss going to other comprehensive income
Sale of Debt Securities
-​ Sale of debt securities from any category results in a realized gain or loss and is recognized in net
income for the period
o​ Trading Securities: the realized gain or loss is the difference between the adjusted cost and
the selling price
o​ Available-for-Sale Securities: the realized gain or loss is the difference between the selling
price and the original cost of the security
Equity Securities
-​ An equity security is a security that represents an ownership interest in an enterprise or the right
to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices
o​ Common stock, preferred stock, stock warrants, stock rights
-​ Equity securities are generally carried at fair value
Valuation of Equity Securities
-​ Equity securities are generally reported at fair value with unrealized holding gains and losses
included in earnings as they occur
Income from Investments in Equity Securities
 -​ Dividend income from an equity security investment is recognized in net income, unless the
dividend is a liquidating dividend
dr. Cash​ ​ ​ ​ ​ ​ $
​ cr. Dividend Income​ ​ ​ ​ ​ $
Impairment of Equity Securities
-​ Equity investments that do not have readily determinable fair values are measured at cost minus
impairment, and must consider several factors (investee ability to continue as a going concern,
significant changes in industry, declines in earnings, etc.) when determining if an investment is
impaired
o​ Intent to sell a security does not matter in recording unrealized gains/losses
Sale of Equity Securities
-​ The sale of an equity security does not give rise to a gain or loss if all changes in the fair value of
the equity have been reported in earnings as unrealized gains and losses as they occurred
dr. Cash​ ​ ​ ​ ​ ​ $
​ cr. Equity Security​ ​ `​ ​ ​ $
-​ If an entity has not recorded an equity security’s change in fair value up to the point of a sale, a
gain or loss is recorded at the time of the sale equal to the difference between adjusted cost and
the selling price
dr. Cash​ ​ ​ ​ ​ ​ $
dr. Loss on Equity Security​ ​ ​ ​ $​ ​ (as needed)
​ cr. Equity Security​ ​ ​ ​ ​ $​
​ cr. Gain on Equity Security ​ ​ ​ ​ $​ (as needed)

F5 M2: Equity Method

When to Use the Equity Method
-​ The equity method is used to account for investments if significant influence can be exercised by
the investor over the investee
-​ A company that owns 20% to 50% of voting stock of another “investee” company is presumed to
be able to exercise significant influence over the operating and financial policies of that investee
and, therefore, must use the equity method when presenting the investment in that investee
When the Equity Method is not Appropriate
-​ Bankruptcy of the subsidiary, the investment in the subsidiary is temporary, another group with
interest in the subsidiary operates the company
Equity Method Accounting
-​ Under the equity method, the investment is originally recorded at the price paid to acquire the
investment. The investment is subsequently adjusted as the net assets of the investee change
through the earning of income and payment of dividends
-​ The investment account increases by the investor’s share of the investee’s net income, and
decreases with the distribution of dividends
 o​ Continuing losses by the investee can also result in a decrease in the investment to zero
dr. Investment in Investee​ ​ ​ ​ $​ ​ (cost)
​ cr. Cash​ ​ ​ ​ ​ ​ $
dr. Investment in Investee​ ​ ​ ​ $​ ​ (share of earnings)
​ cr. Equity in Earnings/Income​​ ​ ​ $
dr. Cash​ ​ ​ ​ ​ ​ $​ ​ (share of dividends)
​ cr. Investment in Investee​ ​ ​ ​ $

Investments in Investee Common Stock and Preferred Stock

-​ If an investor company owns both common and preferred stock of an investee company, the
significant influence test is generally met by the amount of common stock owned and the
calculation of income from the investee to be reported on the income statement includes
preferred stock dividends and the share of earnings to common shareholders less preferred stock
dividends
Differences in Purchase Price and Book Value of the Investee’s Net Assets
-​ When there is a difference in the price paid for the investment and the book value of the
investee’s net assets, additional adjustments must be made
o​ The excess of the purchase price of an investment over the fair value of the equity
acquired is allocated to goodwill
o​ The excess of the fair value of the equity acquired over the book value of the equity
acquired is allocated as a premium
Equity Method Impairment
-​ An impairment loss on an equity method investment is recognized when the fair value of the
investment falls below the carry value of the investment, and the investor believes that the
decline in value is other than temporary
o​ If the investment is impaired a loss is recorded on the income statement and the carry
value of the investment is reduced to the lower fair value on the balance sheet
dr. Impairment Loss​ ​ ​ ​ ​ $
​ cr. Investment​​ ​ ​ ​ ​ $
Transition to the Equity Method
-​ When significant influence is acquired, it is necessary to record a change from the fair value
method to the equity method by adding the cost of acquiring the additional interest in the
investee to the carry value of the already owned investment, and by adopting the equity method
as of the date the investment qualifies

F5 M3: Consolidated Financial Statements

Basic Consolidation Concepts
 -​ Under the voting interest model, consolidated financial statements are prepared when a
parent-subsidiary relationship has been formed
-​ An investor is considered to have parent status when control over an investee is established or
more than 50% of the voting stock of the investee has been acquired
-​ Under GAAP, all majority owned subsidiaries must be consolidated except when significant doubt
exists regarding the parent’s ability to control the subsidiary
Controlling Interest and Noncontrolling Interest
-​ Business combinations that do not establish 100% ownership of a subsidiary by a parent company
result in a portion of the subsidiary’s equity (net assets) being attributable to noncontrolling
shareholders
o​ An investor owning more than 50% if a subsidiary has controlling interest
o​ Noncontrolling interest is the portion of equity of a subsidiary not attributable to the
parent, and is reported at fair value in the equity section of the consolidated balance sheet
Acquisition Method
-​ Used to account for business combinations in which the investor established control over the
investee
o​ 100% of the assets acquired are recorded at fair value, with any unallocated amount
creating goodwill
o​ When the companies are consolidated, the subsidiary’s entire equity is eliminated
o​ Fair Value = Acquisition Price = Investment in Subsidiary
Consolidation Adjustments
-​ Common Stock, APIC, and Retained Earnings are Eliminated
o​ The pre-acquisition equity of the subsidiary is not carried forward in an acquisition
o​ Consolidated equity at the time of acquisition will be equal to the parent’s equity balance
o​ The subsidiary’s equity is eliminated by debiting each of the subsidiary’s equity accounts
-​ Investment in Subsidiary is Eliminated
o​ The parent eliminates its investment in subsidiary account from its balance sheet
-​ Noncontrolling Interest is Created
o​ The fair value of any portion of the subsidiary that is not acquired by the parent must be
reported as noncontrolling interest in the equity section of the consolidated financial
statements
-​ Balance Sheet of Subsidiary is adjusted to Fair Value
o​ All of the subsidiary’s balance sheet accounts are to be adjusted to fair value on the
acquisition date
o​ Adjustment is made regardless of how much is paid to acquire the subsidiary
▪​ Adjustment is made for 100% of fair value even if the parent does not acquire
100% of the subsidiary
-​ Intangible Assets of Subsidiary are recorded at Fair Value
o​ The parent must record the fair value of all identifiable intangible assets of the subsidiary,
even if no amount was incurred to acquire the items in the acquisition
-​ Goodwill (or Gain) is Required
o​ If there is an excess of the fair value of the subsidiary over the fair value of the subsidiary’s
net assets, then the excess is debited to create goodwill
 ▪​ If the acquisition cost is less than the subsidiary's fair value, a gain is recorded
Intercompany Transactions
-​ When consolidating, 100% of intercompany transactions must be eliminated, even when the
parent owns less than 100% of the subsidiary
o​ Because the transactions lack the criteria of being arms length
o​ Includes AR/AP, Bonds Payable/Investment, Dividends Payable/Receivable

Intercompany Inventory/Merchandise Transactions

​ ​ dr. Intercompany Sales​ ​ ​ ​ $​ ​
​ ​ dr. Retained Earnings​ ​ ​ ​ ​ $
​ ​ ​ cr. Intercompany COGS​ ​ ​ ​ $
​ ​ ​ cr. COGS​ ​ ​ ​ ​ ​ $​ (sale to third party)
​ ​ ​ cr. Ending Inventory​ ​ ​ ​ ​ $​ (inventory on hand)

F5 M5: Statement of Cash Flows

Statement of Cash Flows
-​ A required part of a full set of financial statements for all business enterprises
-​ Provides information about the sources of cash and cash equivalents and the uses of cash and
cash equivalents
-​ Operating Cash Flows: Cash receipts and disbursements from transactions reported on the income
statement and current assets and liabilities
-​ Investing Cash Flows: Cash receipts and disbursements from non-current assets
-​ Financing Cash Flows: Cash receipts and disbursements from debt
Cash and Cash Equivalents
-​ The statement of cash flows reconciles the cash and cash equivalents amount presented on the
beginning balance sheet to the cash and cash equivalents amount presented on the ending
balance sheet
-​ The cash concept is used because investors, creditors, and other interested parties need
information about the entity’s available cash and cash needs
Presenting the Statement of Cash Flows
-​ The statement of cash flows is presented using the indirect method
Operating Activities
-​ Operating activities involve producing goods and delivering services to customers
-​ Net income is adjusted to arrive at net cash flows from operating activities
Investing Activities
-​ Include cash flows from the purchase or sale of non-current assets
Financing Activities
-​ Include cash flows from non-current liabilities and equity activities
-​ Equity activities: obtaining resources from owners, such as issuing stock, providing owners with a
return on their investment, such as paying dividends or repurchasing stock
-​ Non-current liability activities: obtaining resources from creditors, such as issuing bonds,
payments of principal on amounts borrowed

F5 M6: Income Taxes: Part 1

F5 M7: Income Taxes: Part 2

F6 M1: Not-for-Profit Financial Reporting: Part 1

Not for Profit Accounting
-​ Revenue comes from contributions
-​ Do not operate for the sake of generating a profit, though nothing to preclude the generation of
profit
-​ Ownership interests are unlike business enterprises
Common Not for Profit Industries
-​ Healthcare
-​ Education
-​ Voluntary Health and Welfare
-​ Private (not government) Organizations
Users of Not for Profit Information
-​ Donors, creditors, members
-​ Assess services provided, ability to continue, methods of operating responsibly
Not for Profit Financial Statement Information
-​ Assets, liabilities, and net assets
-​ Inflows and outflows of economic resources
-​ How cash is obtained and spent
-​ Service efforts
-​ GAAP requires the use of full accrual basis accounting
o​ Primary reporting purpose is to disclose the sources of resources and how they were
expended
Required Not for Profit Financial Statements
-​ Statement of financial position
-​ Statement of activities
-​ Statement of cash flows
Reporting Expenses for Not for Profits
-​ Functional Classification: classifying where resources are used
o​ Program Services: relate to the purpose and mission of the not for profit
o​ Support Services: relate to supporting the program services
-​ Natural Classification: classifying by type or category
Statement of Financial Position (Balance Sheet)
-​ Divided into assets, liabilities, and net assets
-​ Assets/liabilities are classified as either current or noncurrent
Net Assets without Donor Restrictions
-​ Available to finance the general operations of the not for profit
-​ Expended at the discretion of the board
o​ Internal board designated funds are not reported as restricted

Net Assets with Donor Restrictions

-​ Subject to specific, externally imposed limitations made by a donor
-​ Information regarding the amount and nature of the restrictions should be reported with
classification or in the notes to the financial statements
Statement of Activities (Income Statement)
-​ Reports revenues/expenses, gains/losses, and reclassifications between classes of net assets
-​ Required elements:
o​ Change in net assets, net assets with/without donor restrictions
-​ Revenues are classified as net assets with donor restrictions if the use of the asset received is
limited by donor-imposed restrictions
o​ Recognized in the period in which they are received
 -​ Expenses are reported as decreases in net assets without donor restrictions

F6 M2: Not-for-Profit Financial Reporting: Part 2

Not for Profit Statement of Cash Flows
-​ Required for all not for profit organizations
-​ Identical to commercial standards, the primary purpose is to provide relevant information about
the cash receipts and cash payments of the not for profit during the period
Operating Activities
-​ Day-to-day operations of the core business
Investing Activities
-​ Long-term investments and capital expenditures
Financing Activities
-​ Raising and repaying capital

F6 M3: Not-for-Profit Revenue Recognition

Not for Profit Revenue Recognition
-​ An exchange transaction occurs when a not for profit earns resources in exchange for a service
performed
o​ Revenue is recognized when realized or realizable and earned
o​ Increase in net assets without donor restrictions
-​ Contributions are unconditional transfers of cash or assets to a new owner in a manner which is
voluntary and nonreciprocal
o​ Cash, services, and other assets
o​ Recognized as revenue or gain and reported as increase in net assets either with or
without restrictions in the period received
o​ Revenue if it is part of the ongoing major activity of the not for profit
o​ Gain if it is incidental to the purpose of the not for profit
o​ Conditional contributions are not recognized
Cash Contributions
 -​ Measured at fair value at the date of the gift, either net asset with or without donor restrictions
Pledges
-​ Unconditional Promise: a contribution that is recorded at fair value when the promise is made
-​ Conditional Promises: require the occurrence of a future and uncertain event, and revenue is not
recognized until the event occurs
o​ Specified levels of service, specific outputs or outcomes, outside events
Multi Year Pledges
-​ Recorded at net present value at the date of the pledge
-​ Collections are considered donor restricted revenue
Allowance for Uncollectible Pledges
-​ An allowance for uncollectible pledges should be recorded in accordance with commercial
accounting principles for accounts receivable in order to present the pledge at its net realizable
value, but there is no bad debt expense recognized at any point
Donated Services
-​ Generally, are not recorded due to difficulty in placing a monetary value on the services
-​ Recorded as a contribution and expense at fair value if either they create or enhance a
nonfinancial asset or if they provide specialized skills that otherwise would have been purchased
by the organization
o​ Donated services are recognized SOME of the time (specialized skills, otherwise needed,
measurable, easily at fair value)
dr. Expense​ ​ ​ ​ ​ $​ ​ (fair value)
​ cr. Contribution without donor restrictions​ $
Donated Collection Items
-​ Contributed works of art or historical treasures
-​ Are not required to be recorded if all of the following:
o​ They are part of a collection that is held for viewing, exhibition, or education
o​ They are part of a collection that is cared for, preserved, and protected by the not for profit
o​ The not for profit has a policy requiring proceeds from the sale of donated items to be
reinvested in other collections items or the care of existing collections
-​ If not all are met, record as an asset and revenue
Donated Materials
-​ If a significant amount is donated, record at fair value on the date of receipt
dr. Asset​ ​ ​ ​ ​ $​ ​ (fair value)
​ cr. Contribution​ ​ ​ ​ $
-​ If the materials pass through to a beneficiary, the materials should not be recorded unless they
are substantial in amount
Gifts in Kind
-​ Noncash contributions such as investments, which are recorded at fair value
Fundraising
 -​ Not for profit offers premiums to donors as a part of a fundraising campaign, cost of premiums is a
fundraising expense
-​ Difference between contribution and the fair value of the premium is accounted for as
contribution revenue
Total Contribution
- Fair value of premium
Contribution Revenue

F6 M4: Not-for-Profit Transfers of Assets and Other Accounting Issues

Financially Interrelated Organizations
-​ Organizations related by both of the following characteristics:
o​ One organization has the ability to influence the operating and financial decisions of the
other
o​ One organization has an ongoing economic interest in the net assets of the other
Recipient Accounting
-​ A not-for-profit is a recipient entity when it accepts assets from a resource provider and agrees to
use the assets on behalf of, or transfer the assets to, a specified beneficiary
o​ Accounting by the recipient depends on if the recipient has variance power and whether
the recipient and beneficiary are financially interrelated
Not Financially Interrelated: Without Variance Power
-​ Recipient accounts for accepted assets as a liability at fair value

M6 M5: Governmental Accounting Overview

Objectives of Governmental Reporting