FAR 1

• 1. Provide info that's useful to creditors, investors, and lenders
• 2. Provide info regarding entities economic resources & claims to those resouces.
• 3. Changes to economic resources & claims to those resources.
• 4. Provide info of financial performance reflected by accrual accounting
• 5. Provide info of financial performance from past cash flows
• 6. Provide info about changes in economic resources & claims, that's not a result of financial performance.

• for info to be useful it has to be relevant and be faithfully represented.
• 1. Relevance-capable of making a diff in users decision making. 
• a. predictive value- helps decision makers predict/forecast future results.
• b. confirmatory value- confirm/correct prior predictions
• *materiality- info material if it makes a diff if omitted.

• 2. Faithful representation- info depicts what its suppose to be
• a. error free- no errors
• b. neutrality- the info free of error or bias
• c. completeness- info is complete has all parts

to remember Roger is PC, and he is on the FENC.

• the secondary qualitative characteristics that apply are the following:
• 1. Comparability- compare 1 year to the next
• 2. Understandability- makes info understandable
• 3. Timeliness- info is available in a timely manner.
• 3. Verifiability- different sources will get same results.

to remember CUT-V

the overriding constraint is the COST/BENEFIT Constraint. The cost can't outweigh the benefit.

• 1. Assets
• 2. Liabilities
• 3. Equity = assets - liabilities
• 4. Investments by owners
• 5. Distributions by owners
• 6. Comprehensive income-DENT
• 7. Gains
• 8. Losses
• 9. Expenses
• 10. Revenues

• Disclosures under GAAP require these main sections.
• 1. Summary of accounting policies - disclose policies used such as depreciation methods, etc.
• 2. Summary of significant assumptions made-these can be useful lives etc.
• 3. All other relevant info, such as contigent liabilities and contingent gains

• big difference between GAAP is that IFRS & GAAP is that IFRS is judgement based, while GAAP is rules based. IASB has 4 Qualitative characteristics to make the info useful. 
• 1. Relevance
• a. predictive value
• b. confirmatory value
• *materiality

• 2. Reliability
• a. Neutrality
• b. Completeness
• c. Faithful representation
• d. Substance over form
• e. Prudence(Conservatism)

• 3. Understandability
• 4. Comparability

• IASB 5 F/S elements
• 1. Assets
• 2. Liabilities
• 3. Equity
• 4. Income- revs+gains
• 5. Expenses- expenses+losses

cash equivalent is a security that easily converted into cash with maturity within 90days any security beyond 90days becomes an investment. 

bank reconciliation is when a company brings the books and bank statements on the same page and make adjustments to bring them the same. Here are examples,

• Balance on bank statements
• + deposits in transit
• - outstanding checks
• +/- errors by bank
• =corrected balance

• Checkbook balance
• + amounts collected by bank
• - unrecorded bank charges
• +/- errors in recording trans
• = corrected balance

the GAAP Income Statement is a statement that shows the activity of a business over a period of time unlike the balance sheet which is a snapshot of the business. Here is an example

• GAAP I/S
• Operating Income
• Nonoperating Income
• Taxes(deferred/current)
• Income from continuing ops
• Discounting Ops
• Extraordinary G/L
• Net Income
• OCI
• Comprehensive Income

• Operating Income Breakdown
• Sales
• <COGS>
• GP
• SG&A
• Operating Income

• Beg. Inv
• +Net Purchases
• GA4S
• <Ending Inv.> 
• COGS

When a company acquires stock we need to figure out how to account for the acquisition of stock. GAAP allows 3 methods. Here is where cost/equity method show up:

0-20% Cost Method/Marketable securities(used when traded)- Implication has no influence over the investors of the company. 

20-50% Equity Method- Implication is that the investor has significant influence

50+% Consolidation(FAR 8)-Implication has control. 

when you buy stock/shares and you possess 0-20% then you act as if no influence on the company. Example journal entries

• Acquisition
• INVESTMENT X
•     CASH X

• % Of Dividends
• CASH X
•     DIVIDEND INCOME X

no other dividends arise because they don't actually own anything

the equity method is used because the shares owned in another company are between 20-50% and they have significant influence. Example with journal entries:

• Example
• Purchase 4000
• FMV Assets 3000
• CV Assets 2500

• Purchases-FMV Assets=1000 Goodwill
• FMW Assets-CV Assets=500 FMV write-up on assets.

• Acquisition
• INVESTMENT 4000
•     CASH 4000

• % Of Dividends
• CASH 30
•     INVESTMENT 30

• % Of Earnings
• INVESTMENT 50
•     EQUITY IN EARNINGS 50

• A/D/Impairment
• EQUITY IN EARNINGS 20
•     INVESTMENT 20

• *Equity to Cost method- Prospective approach
• *Cost to Equity method- Retrospective approach

Same as GAAP, however, some terminology differences.

First trading securities are held for trading securities. 

• this is securities that fall under the cost method. this means they have no significant influence and don't own enough shares to have any are classified as either;
• 1. Trading Securities-Bought for short term to make a profit(stocks or bonds)

2. A4S Securities-securities that aren't trading or HTM(Bonds or stocks or warrants or options)

3. HTM-doesn't have equity securities, have the ability & intent to hold the security to maturity(bonds only, stocks don't mature)

remember trading securities we are in the 0-20% of ownership and have no significant influence. also they are bought to make a profit in short term. so here is the journal entries;

• To Purchase
• INVESTMENT X
•    CASH X

• Adj to FMV
• INVESTMENT X
•     UNREALIZED GAIN X

*TRADING SECURITIES ARE KEPT AT FMV

remember A4S securities are in the 0-20% of ownership and possess significant influence and are all securities that aren't Trading or HTM. so here goes journal entries;

• To purchase
• INVESTMENT X
•     CASH X 

• Adj to FMV
• UNREALIZED LOSS X
•     INVESTMENT X

*A4S securities are kept at FMV

remember HTM securities are in the 0-20% of ownership and possess no significant influence and are securities that are held to maturity by someone who has intent and ability to do so. so here goes journal entries;

• To purchase
• INVESTMENT X
•     CASH X

*HTM securities are carried at Amortized Cost, which means the Investment account is kept at cost-amortized amounts for impairments etc...

• Impairment testing on all securities are present every year. 
• 1. FV>COST=IMPAIRMENT
• 2. FV-COST=IMPAIRED ASSET AMOUNT
• 3. RECORD/BOOK
• LOSS X
•     IMPAIRMENT X

so here is what we do when we reclassify securities;

• Trading to A4S(Vice Versa)
• -reclassify@FMV
• -Diff is realized G/L

• HTM to A4S(Vice Versa)
• -reclassify@FMV)
• -if HTM to A4S gain goes to OCI on I/S
• -if A4S to HTM gain goes to AOCI on B/S and amortize. 

• *so A4S goes to OCI
• *so Trading goes to Nonoperating in I/S

the N stands for Net Realizable G/L from A4S securities. 

Derivative investments are investments that are derived from something else(in most cases that is derived from stocks). To be a derivative it has to have SUN

• Sold in cash/equivalents
• Underlying price
• No net Investment

• This is items such as;
• -Options contracts(right but no obligation to buy/sell)
• -Future contracts(has right & obligation to buy)
• -Forward contracts(has right & obligation to buy/sell at agreed price)

*All derivatives valued @ FMV

a hedge is a bet against something. Just like you do in vegas. 2 types of hedges are the following:

1. Fair value hedge-a hedge against an asset you own because you think the value will go down. 

2. Cash flow hedge- a hedge against an asset you don't own. 

fair value hedge is a hedge against an asset you own. journal entries example,

• INVENTORY X 
•     CASH X

• if price goes down
• LOSS X
•     INVENTORY X

• gain on our bet of price down
• RECEIVABLE-HEDGE X
•     GAIN-HEDGE X

cash flow hedge is a hedge against an asset you don't actually own. Journal entries are,

• LOSS-HEDGE X
•     PAYABLE-HEDGE X 

Bifurication is when you break apart and embedded derivative into seperate parts. 

Embedded derivative is a financial instrument that has a derivative and is a instrument by itself. Example is Bonds with warrants

• Now to tear apart the derivatives they have to meet 3 criteria;
• 1. Meet SUN definition
• 2. The hybrid instrument not recorded at FV
• 3. The derivative is associated with host instrument.