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Intermediate Accounting/Preparation of

Financial Statements
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Contents
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 1 U.S. GAAP and IFRS


 2 Some of the differences between U.S. GAAP and IFRS
 3 Balance Sheet
 4 Income Statement
 5 Statement of Cash Flows

[edit] U.S. GAAP and IFRS


The transition from US GAAP to w:International Financial Reporting Standards (IFRS) affects
the way one reports and accounts for information on financial statementsis. IFRS is already
impacting business decisions. Switching to IFRS will help eliminate the differences between
companies financial statements which ultimately is a huge thing allowing better camparabilitiy
among companies. IFRS is principle based accounting, which simply means instead of a having a
lot of rules to follow it is more broad with its concepts to guide the accountants. The goal of a
principle based system is to avoid numerous rules. This makes it easier to go about your business
more freely. Comparing your company to another has always been important. To see what you
have to do to stay on top, and to actually know you are, through comparing is an important
motivation. IFRS will help make this more feasible, and hopefully encourage companies and
motivate them along with their competitors now having a better understanding of where they
stand.

[edit] Some of the differences between U.S. GAAP and IFRS


Accounting for contingent losses is very similar between the two however IFRS is "more likely
than not" as well as as "probable". IFRS requires reporting present values of estimated cash
flows when the effect of time value of money is material whereas U.S. GAAP allows this when
the timing of cash flows is fixed or reliably determinable.

Question 1: Under IFRS, if every amount in a range of contingent losses is equally likely the
amount accrued is the?
Under, IFRS, not like U.S. GAAP, convertible debt is divided into its liability and equity
elements.

Question 2: Cost incurred in connection with the issuance of bond's and other debt, such as legal
costs printing costs, and underwriting fees, are referred to as debt issuance costs. Using IFRS:

a. transaction costs are recorded separately as an asset b. we increase the recorded amount of the
debt by the transaction costs c. the increase i nthe effective interest rate is reflected in the interest
expense d. the decrease in the effective interest rate is reflected in the interest expense.

Under IFRS the rate used for leases is usually the rate implicit to discount the minimum lease
payments. However, under U.S. GAAP the lessor uses oen rate, the implicit rate, and the lessees
use another, the incremental borrowing rate unless the other rate is lower.

Question 3:

When recording a capital lease Blue Company is aware that the implicit interest rate used by the
Greay Company, the lessor, to calculate lease payments is 7%. Blue's incremental borrowing rate
is 6%. Blue should record the leased asset and lease liability at the present value of the lease
payments discounted at:

Question 4: A lease is a capital lease if substantially all risks and rewards of ownership are
transferred whether using U.S. GAAP or IFRS. When making this determination less judgement,
more specificity is applied using?

Question 5: When the leaseback in a Sale-leaseback transaction is an operating lease, a company


that prepares it's financial statements using IFRS:

As shown there are still similarities between U.S. GAAP and IFRS but as more and more
companies transform over to IFRS it is important to know the differences in the way they
account for things!

All of the questions can be found in the Study Guide Volume 2 for Chapters 13-21, there
also are more IFRS question for self-study within this book:

Answers:

1. Mid point of the range 2. C 3. 7%, if using IFRS 4. U.S. GAAP 5. Immediately recognizes the
gain on the sale

((A.Cunningham))
See Intermediate Accounting wikibook overview

The three major financial statements are: the Balance Sheet, the Income Statement, and the
Statement of Cash Flows.

[edit] Balance Sheet


The balance sheet presented in the financial statements published by a firm provides summary
information of the assets, liabilities, and shareholder equities of the firm. There is much detail in
subaccounts of the firm's accounting system which is not reported. What is provided is summary
in major account areas, and includes classification of short-term vs. long-term assets and
liabilities.

[edit] Income Statement


The income statement presented in published financial statement is also summary. Income
Statement is the statement of operations or statement of earnings is used to summarize the profit
generating activities that occurred during a particular period of time. The income statement
consist of revenues and expenses.The income statement describes a company's revenue and
expenses along with the resulting net income or loss over a period of time due to earning
activities.

There are two ways in preparing an income statement. Single step income
statement which is an easier approach. Using the simple step method, you total
revenues and total expenses, then subtract the total revenue from the total
expenses to arrive at the net income. The multi-step income statement is more
complex than the single step. The multi-step method takes several steps to
arrive at the net income.

Question 1 Prepare an income statement based on the following information: Service Revenue ,
38000; Supplies Expenses,16000; Salaries Expense,12000; Miscellaneous Expenses, 7000.

Income Staement

Service Revenue 38000 Supplies Expenses (16000) Salaries Expenses (12000) Miscellaneous
Expenses (7000) Net Income 3000

[edit] Statement of Cash Flows


The statement of cash flows provides a reconciliation between beginning vs. end balances of
cash and cash equivalents of a firm, for the period of the income statement. A categorization of
cash flows by Operating vs. Investing vs. Financing cash flows has been adopted and is now part
of required U.S. GAAP reporting.
SFAS #95 230-10-45-1

A statement of cash flows shall report the cash effects during a period of an entity's operations,
its investing transactions, and its financing transactions.

The statement of cash flows lists all cash inflow and cash outflow during a reporting period. It
has three primary categories:

1. Cash flows from operating activities

2. Cash flows from investing activities

3. Cash flows from financing activities

There are also two other categories

4. The reconciliation of the net increase or decrease in cash with the change in the balance of the
cash account.

5. Noncash investing and financing activities.

Cash Flows from Operating Activities:

Includes inflows and outflows of cash that are from activities reported on the income statement.
So, they are elements of the net income. The cash outflows are when operational assets are
acquired. The cash inflows are when the assets are sold. But, resale of the assets are reported as
investing activities except the purchase and sale of inventory are reported as operating activities.
There are two different methods that can be used to report the cash flows of operating activities.
There is the direct method and the indirect method.

Direct Method is when each cash effect is reported directly.

Indirect Method is when the cash effects are reported indirectly by beginning with reported net
income and working backwards to convert the amount to cash basis.

In order to identify the inflows and outflows for operating activities you need to analyze the
components of the income statement.

For example, in order to find out the cash inflow from customer we need to know the sales
revenue, but the sales revenue is also affected by the account receivable account. So, if the sales
revenue is 300 and the Accounts Receivable increases by 20 then the cash received from
customers would be 280.

In order to determine the cash paid to suppliers you need to look at two accounts: inventory and
accounts payable and then determine their effect on the cost of goods sold. For example, if the
cost of goods sold was 220 and inventory increased by 7 and accounts payable decreased by 15
the cash paid to suppliers would be 242. You add 7 because the inventory increased and you add
15 because the accounts payable decreased, which means more money was paid.

The cash paid for interest is determined by the bond interest expense and discount on the bonds
payable. For example, if the interest expense is $10 and the unamortized discount decreases by
$3 then the cash paid for interest is $7.

Cash flows from investing activities:

SFAS #95 230-10-45-11

Cash flows from purchases, sales, and maturities of available-for-sale


securities shall be classified as cash flows from investing activities and
reported gross in the statement of cash flows.

Payments to acquire property, plant, and equipment, investment in securities (except trade
securities), and non-trade receivable are reported as investing activities.

A gain or loss on sale of land is reported as an investing activity. Whether it is a gain or loss is
determined by the difference between the amount of cash received from the sale and the book
value. For example, if the book value was $120,000 and you sold it for $150,000 that would be a
gain of $30,000.

Cash flows from financing activities:

The cash flows from financing activities are the inflows and outflows of cash resulting from
external financing of a business. Activities that considered financing activities are sale of
common and preferred stock, issuance of bonds and other debt securities, buyback of stock,
payment of debt, and payment of cash dividends to shareholders.

Reconciliation with change in cash balance:

The financial statements must report a reconciliation of net income to net cash flows from
operating activities.

Noncash investing and financing activities:

1. Acquiring an asset by incurring a debt payable to seller.

2. Acquiring an asset by entering into a capital lease.

3. Converting debt into common stock or other equity securities.

4. Exchanging noncash assets or liabilities for other noncash assets or liabilities.

Found on p. 1116 of Intermediate Accounting textbook, Spiceland.


Questions

1) State whether the following transactions are considered an operating, financing, or investing
activity, or if they are not reported.

a. Payment of cash dividends

b. Purchase of land

c. Issuance of common stock for land

d. Purchase of inventory

e. Issuance of a bond

2) Which method is being used, the direct or indirect method

Statement of Cash Flows:

Operating Activities:

Cash inflows:

From customers 105

From Investment Revenue 7

Cash outflows:

To Suppliers for goods (50)

To employees (10)

Income taxes (8)

Net cash flows 44

3) Given the sales revenue and the account receivable determine the cash inflow from customers.

a. Sales Revenue: 150

Accounts Receivable Increase: 5

b. Sales Revenue: 450

Accounts Receivable decrease: (30)


4) Given the cost of goods sold, inventory, and accounts payable determine the cash outflow to
supplier.

a. Cost of goods sold: 400

Inventory decrease: (25)

Accounts Payable increase: 30

b. Cost of goods sold: 500

Inventory increase: 20

Accounts payable increase: 10

5) Determine the cash paid for interest given the bond interest expense and unamortized discount

Bond Interest expense: 30

Unamortized Discount: (7)

Answers:

1) a. Financing Activity

b. Investing Activity

c.Not reported

d. Operating Activity

e.Financing Activity

2) Direct Method

3) a. Cash received from customers: $145

b. Cash received from customers: $420

4) a. Cash paid to suppliers: $345

b. Cash paid to suppliers: $510

5) Cash paid for interest: $23

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