Intermediate Final

Accounting information should be understandable to user who have a reasonable knowledge of business and economic activities who are willing to study the information carefully

is the overall qualitative characteristic to use in judging the quality of accounting information

Accounting information is relevant if it can make a difference in a decision

• Predictive Value - ability to predict
• feedback value - how well we have predicted
• timeliness - get statements in a timely manner

Accounting information is reliable when it is reasonably free from error and bias and faithfully represents what it is intended to represent

• verifiability - same results by two people with same rules
• representational faithfulness - it is what it is reporting to be
• neutrality - free of bias

conformity from period to period with accounting policie and procedures remaining the same

Purpose is to record revenues and expenses in the correct period, dated the last day of the accounting period

usually one nominal and one real account

of accounting information enables users to identify and explain similarities and differences between two or more sets of economic facts

• The nature of the item
• the relative size rather than the absolute size of an item

The entity assumption assumes that a proprietorship, partnership, or corporation's financial organizations in keeping its own financial records and reports

assumption that the company will continue to operate in the near future unless substantial evidence to the contrary exits. This assumption is also known as going concern

If there is a going concern book value of assets need to equal the fair market value. Recognize the loss when there is a going concern, not when we sell the asset

This assumption states that there must be some basis for measuring exchange of goods or services

Should the monetary unit not be stable we need to adjust financial statements

the process of converting noncash resources and rights into cash or rights to cash

The process of formally recording and reporting an item in the financial statements of a company

Revenues are recognized when they are realized or realizable, or earned and collectability is reasonably assured

states that to determine the income of a company for an accounting period, the company computes the total expenses involved in obtaining the revenues of the period and relates these total expenses to the total revenues recorded in the period

states that when alternative accounting valuations are equally possible, the accountant should select the one that is least likely to over state assets and income in the current period

Don't overstate revenues and assets, Don't understate expenses and liabilities

Always want to try to do it correctly but if we have to error we should choose a way that will put us in the worst position possible

is a financial statement that summarizes the financial position of a company on a particular date

Statement of financial position

a financial statement that summarizes the results of a company's operations for a period of time.

a financial statement that summarizes the cash inflows and outflows of a company for period of time

always have the same number cash flow statements as income statements

• record the daily transactions
• post the journal entries to the accounts in the ledger
• prepare and post adjusting journal entries
• prepare the financial statements
• prepare and post-closing entries for revenue expense and dividend accounts

• 1. if necessary, recompute the balance of each account in the ledger
• 2. prepare the adjusted trial balance to verify that debits equal credits
• 3. prepare an income statement
• 4. prepare a statement of retained earnings
• 5. prepare a balance sheet

Cash is exchanged before the expense is used of the revenue is earned (prepayments)

Deferrals can be treated two ways, when we pay out the cash we can always credit the expense account as opposed to an asset

• 1. close temporary accounts with credit balances to income summary and record the ending inventory - revenues
• 2. close temporary accounts with debit balances o income summary and close the beinging inventory
• 3. close income summary to retained earnings
• 4. close dividends distributed to retained earnings

revenues are earned or expenses are incurred before the cash is exchanged

Have no initial transaction recorded

these should be made for any adjusting entry that creates a new balance sheet account

adjusting entries that increase a real account may be reversed, with the exception of Taxes payable

of an asset is the net amount of discounted future cash inflows less the discounted future cash outflows relating to the asset

is the price that a company would receive to sell an asset(or transfer a liability) in an orderly transaction between market participants on the date of measurement

are cash and other assets that are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer

• Include:
• cash
• cash equivalents - are risk free securities such as money market funds and treasury bills that will mature in 3 months or less from the date acquired by the holder
• Temporary investments in marketable securities - include debt and equity securities that are classified as "trading securities", "available for sale", and "held to maturity" securities
• receivables - accounts receivable and notes receivable with short term maturity dates
• inventories - include goods held for resale in the normal course of business plus in the case of a manufacturing company, raw materials and work in process inventory
• prepaid items - such as insurance, rent, office supplies, and taxes will not be converted in to cash but will be consumed

• Accounts receivable - allowance for doubtful accounts
• amount that we think we can collect

are obligations of a company that it expects to liquidate by using current assets, or creating other current liabilities within one year or the normal operating cycle

current assets - current liabilities

investment items that management expects to hold for more than one year or the operating cycle

PPE that is not being used for operations is reclassified to long term investments

intent to hold for greater than one year

those noncurrent economic assets that a company uses in its operations but have no physical existence

patents, copyrights, franchises, trademarks, computer software costs, good will

If it has finite life, these will be amortized

Always as if it is still useful to the company, if not we write it off

What you pay extra over the fair value of the company

intangible assets that are not reported on the books

those obligations of a company whose liquidations is not expected to require the use of current assets of not expected to create liabilities within one year of the normal operating cycle

is the residual interest of the stockholders in the assets of the corporation

• Components:
• Contributed capital
• Retained earnings
• Accumulated other comprehensive income (AOIC)

• unrealized increases or decreases in the fair value of investments in available for sale securities
• transaction adjustments from converting the financial statements of a company’s foreign operations in us dollars
• certain gains and losses on derivative financial instruments
• certain pension plan gains, losses, and prior service cost adjustments

the minimum amount of stockholders' equity that the corporation may not distribute dividends

par value*issued shares

cannot pay dividends on par value

is one that occurs between a company's balance sheet date and the date of issuance of the annual report

If the subsequent even provides additional evidence about an estimate used on the balance sheet date then we want to restate and disclose in notes

If the subsequent event is a condition that did not exist on the balance sheet date, we leave it as it is and disclose

under this concept, a company records net assets at their historical cost and it does not record changes in the assets and liabilities unless a transaction, event or circumstance has occurred that provides reliable evidence of a change in value

Net income = revenues - expenses +gains - losses

• 1. To help evaluate management’s past performance
• 2. to help predict the company's future income and cash flows
• 3. To help assess the company's "creditworthiness
• 4. to help in comparisons with other companies

1. Association of Cause and Effect - cost of products sold and sales commissions

2. Systematic and Rational Allocation - depreciation and amortization

3. Immediate Recognition - period costs - salaries, utilities, loss contingency (warranty expense)

• 1. Income from continuing operations
• - a. Sales Revenue (net)
• - b. Cost of Goods Sold
• - c. Gross Profit
• - d. Operating Expenses
• - e. Income from operations
• - f. other items
• - g. Income from continuing operations before tax
• - h. Income Tax expense related to continued operations
• - i. income from continuing operations

• 2. Results from discontinued operations
• - a. Income(loss) from operations of discontinued components (net of income taxes)
• - b. gain(loss) from disposals of discontinued components (net of income taxes)

3. Extraordinary items (net of Income taxes)

4. Net Income

5. Earnings per share

involves allocating a corporation's income tax obligation as an expense to various accounting periods because of temporary(timing) differences between its taxable income and pretax financial income

in-between periods, deferred taxes are separated from current taxes

• The following have an effect on tax expense
• 1. Income from continuing operations
• 2. income from discontinued operations
• 3. Gain/loss on sale of discontinued component
• 4. Extraordinary items
• 5. any items of comprehensive income
• 6. Prior period adjustments for retained earnings

involves allocation a corporation's total income tax expense for a period to the carious components of its net income, retained earnings, and other comprehensive income, if any

within the period, separate out some tax numbers

• The following have an effect on tax expense
• 1. Income from continuing operations
• 2. income from discontinued operations
• 3. Gain/loss on sale of discontinued component
• 4. Extraordinary items
• 5. any items of comprehensive income
• 6. Prior period adjustments for retained earnings

may be a subsidiary and operating segment or an asset group

a component of a company involves operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes from the rest of the company

the component has to be exiting the business

Connection with the component have to completely disappear

Gaap requires the following 6 criteria

• 1. Management has committed to a plan to sell the component
• 2. The component is available for immediate sale in its present condition
• 3. Management has begun an active program to locate a buyer
• 4. The sale is probable within one year
• 5. The component is being offered for sale at a price that is reasonable in relation to components fair market value
• 6. It is unlikely that management will make significant changes to the plan

• Records and reports the component at the lower of :
• - it's book value (book value of the assets minus the book value of the liabilities)
• - It's fair value (the amount at which the assets and liabilities as a whole could be sold in a current single transaction)
• less any cost to sell

is an event or transaction that is both unusual in nature and infrequent occurrence

Take off any insurance reimbursements on extraordinary items

If you have something that is unusual but is not extraordinary it is recorded under other income

The underlying event or transaction possesses a high degree of abnormality and is of a type clearly unrelated to or only incidentally related to, the ordinary and typical activities of the company

the unusual nature criterion depends upon the environment in which a company operates. An event may be unusual in nature for one company but not another

the underlying event or transaction is of a type that is not reasonably expected to recur in the foreseeable future

• 1. the write-off of receivables, inventories, equipment leased to others or intangible assets
• 2. gains or losses from exchanges or translation of foreign currencies
• 3. Gains or losses from the disposal of business components
• 4. Other gains or losses from the sale or abandonment of property plant or equipment
• 5. The effects of a strike
• 6. the adjustment of accruals on long-term contracts
• 7. the effects of a terrorist attack

• 1. Income from continuing operations
• 2. Results from discontinued operations
• 3. Extraordinary items
• 4. Net income

• Will either have one, three, or four EPS reported
• 1 and 4 will be the same if there is no 2 or 3

Can be reported under three different alternatives

• - On the face of its income statement
• - In a separate statement of comprehensive income
• - in its statement of changes in stockholders equity

This includes Net income and Accumulated Other Comprehensive income

• contributed capital
• retained earnings
• accumulate other comprehensive income

• Contributed capital:
• common stock(at par)
• additional pd in capital on common stock
• Preferred stock(at par)
• additional pd in capital on Preferred stock
• Total contributed capital
• Retained Earnings
• Accumulated Other Comprehensive Income
• Less treasury stock (at cost)
• TOTAL Stockholders Equity

We had a sale of 100,000 that we aren’t sure we are going to collect, the goods cost 60,000 so we had a gross profit of 40,000

• The payees are going to make payments
• yr1 30,000 - record no revenue, because we are still covering the COGS
• yr2 35,000 - record 5000 in revenue
• yr3 35,000 - record all in revenue

if the job is 20% complete and 20% of the costs have been incurred then we can recognize 20% of revenues

cannot do this if collectability is not reasonably assured

benefits > costs

sold a car and you're not a car dealer

usually results in a gain or loss

If we haven't sold a component by the end of the year we need to do a test to see if the components assets are impaired

if BV >= fair market value - there is no impairment, report nothing beyond the results of the operations

• if BV<= fair market value - the components assets are impaired, and we can estimate the loss
• we need to recognize it net of tax

• reported as:
• impairment loss on held for sale component -net of tax benefit

• journal entry
• d: impairment loss 100,000
• c:assets 100,000

This only accounts for the change in the current year and in future years if the change affects both

• For actual use - if not classify as an investment
• "operational assets" actually used in business
• life > 1 year
• tangible

If not being used for operational purposes will be classified as long-term investment

Historical Cost - "capitalize all costs that are necessary to bring that asset to the location and condition for its intended use"

Would we being doing this if we had not acquired the asset, if no, then it is included in the price of the asset

Any Costs incurred to get the land level will be capitalized

we will expense any unforeseeable circumstances for example a fire, while building a building

Improvements on a lease

Will amortize for the shorter of the life of the lease of the life of the asset

• d: leasehold improvements xxx
• c: cash xxx

when there is going to be a particular cost to restore the asset to the position it needs to be in to be sold or disposed of

We'll know the amount it will take and present value that back to today with an appropriate interest rate

• will add this amount to the asset
• d: asset xxx
• c: ARO xxx

• acquire an asset, don't pay in cash
• ex: trade equipment for stock
• the fair market value of either asset given up or asset received, whichever is easier to determine

use FMV on the date of transaction

Are the parties any better off before or after the exchange?

There was a difference before and after the exchange, we will recognize all losses, recognize all gains

If there is no commercial substance we will recognize the losses but defer the gains

If "cash flows change after exchange", then there is commercial substance, recognize all gains and losses

if no commercial substance defer all gains unless party has a gain and received cash "boot" - recognize the gain that comes from cash, unless cash >= 25% of transaction, recognize all gains

we will capitalize interest during the construction period for assets that are built for our own use or assets that are constructed for sale or lease ( not capitalized on routine manufactured items or inventory)

• 1. expenditures have been made
• 2. activities are in process that are necessary to get the asset ready for its intended use
• 3. interest expense is being incurred

• 1. calculate the average accumulated construction expenditure - if expenditures are evenly incurred use simple average, if expenditures are not evenly incurred use weighted average
• 2. determine the interest rates and multiply by the average accumulated expenditure (#1) first interest rate for from construction specific debt, then use weighted average of all other long term debt
• 2.5 compare what we got in #2 with actual interest incurred. Capitalize the smaller amount

• d: construction in progress
• c: interest expense

Note: keep track of Construction in progress T account, will be easier to find the average accumulated construction expenditure

also if construction doesn't cover a full year will need to prorate based on the months

will capitalize if it extends the life of the asset greater than one year.

• repairs are expensed
• added additions are capitalized

1. Substitution - only works if we have recorded that asset conceptually from the start - substitution for new engine for an old engine, this is conceptually good, but in practice hard

2. reduce accumulated depreciation - debit accum dep, gives you more room to depreciate, usually at the same rate

3. increase asset - debit asset, increase the value of the asset

EASY

• Employer agrees to put some % of the employee’s salary in to investment (401k)
• risk is on the employee

• Employer puts some amount in to plan
• d: pension expense xxx
• c: cash xxx

• the benefit is defined
• formula : % * years of service * highest salary
• will receive this amount per year from the time you retire till you die

include only employees who have vested (usually based on the company’s policy

the actuarial present value of the vested benefits, which are those benefits that the employees have the right to receive if the employee no longer works for the employer

include both the vested and the currently unvested employees at current salary levels

the actuarial present value, at a specified date, of all the benefits attributed by the pension benefit formula to employee service rendered prior to that date

This is what we use

both vested and unvested but at projected future salaries most conservative, gives us the largest obligation

• Not on the Balance sheet
• will disclose in the footnotes the change in the obligation

• Beginning balance
• + Prior Service Cost
• = Adjusted balance
• + service expense
• + interest expense (PBO*Discount Rate)
• +- changes in actuarial assumptions(+ for losses, - for gains)
• = ending balance

• not on the balance sheet
• will disclose in footnotes the change in the assets

• beginning balance
• + actual return
• + contributions
• - benefits paid
• =ending balance

adding another year of employment by the employee

the actuarial present value of benefits attributed by the pension benefit formula to services of employees during the current period

Income statement - pension expense

• Balance Sheet -
• - funded status of plan = plan assets - PBO (+ plan is overfunded - prepd pension, - underfunded - accrued pension liability)
• - OCI - prior service costs unamortized, gains and losses on plan

• + service cost
• + interest cost (PBO* discount rate)
• + amortization of prior service cost
• - expected return on the plan assets
• +- gains and losses (2 calculations)
• = Pension Expense

If the expected return is not equal to the actual return, we well book the difference to OCI- PSC

10% of the greater of the actual projected benefit obligation or the fair value of the plan assets

Done at the beginning of every period, if over the corridor, we will amortize the excess using the average service life

the increase in the projected benefit obligation due to the passage of time

the cost of retroactive benefits granted in a plan amendment or at the initial adoption of the plan

the interest that accrues on both the principal and the past unpaid accrued interest

future value of an ordinary annuity is going to be determined on the date of the last payment.

Last payment has no interest

End of period problem

Payment is made at the beginning of the period

one period after the last cash flow

the last payment has interest

if not given and annuity due table, use ordinary table and look up the value of n + 1 at the % then subtract 1 from the number found on the table.

one period before the first payment

is determined on the date of the first cash flow in the series

• receivables and payables
• bonds
• leases
• pensions
• sinking funds
• asset valuations
• installment contracts

A difference between pretax financial income and taxable income in an accounting period, which will never reverse in a later accounting period

Never create any deferred tax effects

• Examples:
• 1. Nontaxable revenues
• - interest on Municipal bonds ( not taxable)
• - Insurance proceeds on key employee life insurance (not taxable)
• 2. Nondeductible expenses
• - Insurance premiums on key employee life insurance (not deductible)
• - Fines ( Business Expense, not taxable)
• 3. Allowable Deductions
• - Dividend deductions - irs rule, some are not taxable
• - Percentage depletion for gas and oil in excess of cost (tax deductible expense, not GAAP) - the cost of the oil field can deplete for more than cost, makes it look attractive for more companies to look for gas and oil

Temporary difference that will result in deductible amounts in future years when the related asset or liability is recovere or setteled

Temporary difference that will result in taxable amounts in future years when the related asse or liability is recovered or settled

A difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset is recovered or the liability is settled

• All timing differences
• will create a deferred tax asset/liability
• can relate to revenues or expenses
• also net operating losses which create DTA

create a deferred tax liability when first occur

gaap recognition is before tax recognition

• - installment sales (gaap recognizes sale when earned not when cash is received)
• -recognize sales tax when collected
• - percentage of completion (GAAP) vs. Completed contract (tax)
• - investment income from equity method (GAAP) - significant influence like 1/3 ownership

create a deferred tax liability when first occur

tax recognition before GAAP recognition

• - using MACRS for Tax depreciation and straight line for GAAP
• - interest capitalization for GAAP - still interest expense for tax
• - prepaid expense - tax expense when paid

create a deferred tax asset when first occur

tax recognition before GAAP

• - Prepaids received
• - Gains on sale leaseback (sell then lease back)

create a deferred tax asset

GAAP recognition before Tax

• - Unrealized losses on trading securities
• - investment losses from equity method
• - warranty costs (and all other contingent liabilities)
• - bad debt expense
• - pension funding

• 1. Identify the asset or liability that is related to the deferred tax
• - the deferred tax asset/liability is classified by the same classification as the underlying asset/liability - what’s causing it
• 2. If no underlying asset/liability, classify deferred tax by when it reverses/ is used

An excess of tax-deductible expenses over taxable revenues in a year that may be carried back to reduce taxable income in a prior year

can go back for up to 2 years

An excess of tax dedctible expenses over taxable revenues in a year that may be carried forward to reduce taxable income in a future year

can go forward for up to 20 years

The deferred tax consequenses of future taxable amounts. A deferred tax liability is measured using the enacted tax rate for the period of recovery or settlement and provisions of the tax law

The deferred tax consequences of future deductible amounts an operating loss carryforwards. A deferred tas asset is measured using the enacted tax rate for the period recovery or settelment and provisions of the tax law

are we going to be able to use the asset or not

if "more likely than not" the asset is not useable (realized), any amount that will not be realized need to go away

by using a valuation account (B/S - Contra Asset)

lessor retains the title, lessee makes lease payments

does NOT transfer all the risks and benefits of ownership

• Lessee:
• d: lease exp xxx
• c: cash xxx

• Lessor:
• d: cash xxx
• c: lease revenue xxx
• d: dep exp xxx
• c: accum dep xxx

• Transfer the risks and benefits of ownership
• lessee becomes the owner
• acts like a financed purchase
• will have long term liability and asset on balance sheet

• d: asset xxx
• c: liability xxx

1. the title passes to the lessee

2. bargain purchase option - an agreement at the end of the lease to allow the lessee to buy the asset at a discounted rate (bargain)

3. lease term is >= 75% of the expected economic life of the asset (exception: doesn't hold if the lease begins in the last 25% of the assets life)

4. Present Value of the minimum lease payments >= 90% of the assets FMV

• Excludes:
• -executory costs (repair, property tax, maintenance, insurance) - period costs

• includes:
• - guaranteed residual values
• - bargain purchase option
• - penalty for failure to renew lease

generally use lessee's incremental borrowing rate unless the lessee knows interest rate implicit in lease AND IT IS LESS than the lessee incremental rate then use the rate that is in the lease (implicit rate)

Both have to be met

• 1. Collectability of lease payments are reasonably assured
• 2. additional costs related to the lease are reasonably predicable (estimate able)

• two types
• -direct financing lease
• -sales type lease

no profit

FVM of leased asset = cost of asset to lessor

• at lease inception
• d: receivable 50000
• c: asset 46300
• c: unearned interest 3700

• there is a profit
• lessor cost is less than the FMV of asset

• at lease inception
• d: receivable 50000
• d: cogs 30000
• c: inventory 30000
• c: unearned interest 3700
• c: sales revenue 46300

Treat just like Guaranteed residual value for both the lessee and the lessor

Will need to depreciate over the life of the asset because the title passes

1. Operating lease - capitalize costs (asset) AND amortize over life of lease

2. Direct Financing Lease - defer (capitalize) AND recognize over life of lease by reducing interest revenue

3. Sales Type Lease - Expense at the beginning of the lease

• Lesse has obligation at the end of the lease
• lessor reduced the lease payments becayse the residual value us not recorded by the lease
• Calculate the PV of the residual
• Start with carrying value equal to FMV
• add residual payment at the end of the amortization table
• find payment about using FMV minus PV of Residual

• Lesse has no obligation at the end of the lease
• Lessor reduces the lease payments because the residual value is not recovered by the lease
• calculate PV of residual
• start with carrying value equal to FMV minus PV of Residual, and use the same payment amounts calculated for lessee
• calculate payments using FMV minus PV of residual

For lessor: start with carrying value = FMV

• Reconcile cash and cash equivalents
• Change in cash from the beginning of the year to the end of the year
• inflows and outflows of cash

• Operating
• Investing
• Financing

Two alternative presentations - direct and indirect, fasb uses direct and the most common is the indirect

if you use the direct method - you must include a reconciliation of net income to the cash from operating activities (Indirect)

• Net income
• adjust for noncash expenses/revenues, gains/losses
• +- changes in current assets
• +- changes in current liabilities
• = cash flow from operating activities

Changes in investments, changes in PP+E, changes in intangibles

Changes in long term liabilities and equity

• Net Income
• + depreciation Expense
• + losses on Sale
• - gains on sale
• + Amortization Expense
• + Amortization of Bond Discount
• - Amortization of Bond Premium
• + Unrealized loss on Trading securities
• - Unrealized gain on Trading Securities
• + Compensation Expense from issuing stock options
• + net losses from investments accounted for under equity method
• - Net gains from investments accounted for under equity method

• Interest Expense
• + Decrease in Interest Payable
• - Increase in Interest Payable
• + Amortization of Premium on Bonds Payable
• - Amortization of Discount on Bonds Payable
• = Interest Paid

• Income Tax expense
• + Decrease in Taxes payable
• - Increase in Taxes Payable
• + Decrease in DTL
• - Increase in DTL
• + Increase in DTA
• - Decrease in DTA
• = Income taxes Paid