F1: Conceptual Framework and Financial Reporting

F1: Module 1 Standards and Conceptual Framework

SEC: Has legal authority to establish GAAP; however, it has generally allowed accounting profession to self-regulate

● Committee on Accounting Procedures (CAP): 1934 – 1959

● Accounting Principles Board (APB): 1959 – 1973
● Financial Accounting Standards Board (FASB): 1973 – present
● U.S. GAAP: FASB Accounting Standards Codification (ASC): 2009 became single source of authoritative nongov’t US GAAP
● Accounting Standards Updates (ASUs) are NOT authoritative lit.; provide background info., update the
codification, and describe the basis for changes in codification
■ Accounting Standards Update is issued only after majority vote by board members of FASB

Private Company Council (PCC): created by Financial Accounting Foundation (FAF) to improve standard setting for privately held
companies in the U.S.; goal is to establish alternatives to GAAP to make private co. FS more relevant, less complex, and cost-beneficial

FASB: created conceptual framework called Statements of Financial Accounting Concepts (SFAC) that serves as basis for all FASB
pronouncements; NOT GAAP but provides a basis for financial accounting concepts for business and non-business enterprises

● SFAC No. 8, Ch. 1: Objective of General Purpose Financial Reporting: to provide relevant info that will help the primary
users of the financial report (EXTERNAL users: stockholders/investors, creditors, customers, lenders, etc.) make decisions
● Meet “informational needs”: FCFs (free/future cash flows), earnings, growth potential, required return (risk)
■ Includes: claims against the entity, resources of the entity, & how effectively and efficiently
the entity’s governing board has discharged its responsibility to use the entity’s resources
● SFAC No. 8, Ch. 3: Qualitative Characteristics of Useful Financial Info: relevant and reliable (faithful)
● Relevance: if capable of making a difference in decisions made by users
■ Passing Confirms Money
● Predictive value: predict future outcomes (earnings per share)
● Confirmatory value: provides feedback about evaluations previously made by users
● Materiality: if an omission or misstatement of info could affect the decisions made by users
● Faithful Representation: reliable
■ Colin Not Fitzgerald
■ Complete: includes all info necessary for user to understand (Primary FS & Notes)
■ Neutral: free from bias
■ Free from error: no MATERIAL errors
● Enhancing Qualitative Characteristics (enhances RELEVANCE & FAITHFUL REP)
■ VCUT
■ Verifiability: independent observers can reach consensus that a particular depiction is faithfully represented
■ Comparability: ensure FS are comparable & consistent (trend analysis)
■ Understandability: clearly presented and concise
■ Timeliness: available to users in time to influence decisions
● Cost Constraint
■ Benefit of reporting the information > Cost to get it reported
● SFAC No. 4: Objectives of Financial Reporting by NONbusiness orgs (Gov’t and not-for-profit)
● Characteristics of NONbusiness organizations
■ Resources come from contributions & grants
■ Operating purposes are “other than” to provide goods/services for profit
■ Lack ownership (NO stockholders)
● Users: resource providers, constituents, governing & oversight bodies, & managers
● Objectives
■ Resource allocation decisions
■ Assessing services and the ability to provide services
■ Assessing mgmt. stewardship and performance
● SFAC No. 5: Recognition and Measurement in FS
● Full set of FS
■ Statement of financial position (balance sheet)
● Financial risk
■ Statement of earnings (income statement)
● Performance
● Operating risk
■ Statement of comprehensive income: PUFIE
■ Statement of cash flows
■ Statement of changes in owners’ equity
● Why E ^ or v
● Recognition Criteria: JE to get info in FS
■ Definitions
■ Measurability: amount
■ Relevance: capable of making a difference
■ Reliability: faithful
● Measurement Attributes for A & L: in a variety of ways
■ Historical cost: PP&E
● Amount paid by a company to acquire an asset
■ Current cost: Inv.
■ Net realizable value: AR
● Selling price less any disposal costs
● If operations are ending very soon, this is used
■ Current market value: Marketable securities (Trade securities & AFS)
■ Replacement cost
● The amount of cash or its equivalent that would be paid to acquire or replace an asset currently
■ Present value of future cash flows: bonds, notes
● Fundamental assumptions and principles
■ Entity assumption: separate company or division
■ Going concern assumption: entity will continue to operate in foreseeable future
■ Monetary unit assumption: measure
■ Periodicity assumption: economic activity can be divided into meaningful time periods (quarters, years)
■ Measurement principle: allows assets and liabilities to be measured in various bases
■ Accrual accounting (record without exchange of cash)
● Revenues recorded when earned
● Expenses recorded in period when incurred
● Revenue recognition principle
● General rule: recorded when earned & realized (received cash)
or realizable (created AR; expect to receive)
● Expense recognition principle
● Recorded when incurred to generate revenue (matched against that revenue);
systematic & rational to period in which the asset provides benefit
■ Full disclosure principle: notes, completeness
● SFAC No. 6: Elements of FS: REGL ALE ID
● Revenues: selling your inventory or services (part of normal operations)
● Expenses: operating (part of normal operations); COGS, SG&A, Depr., etc.
● Gains: SP/NRV > BV NRV=SP-Costs to sell
● Losses: SP/NRV < BV
●
● Assets: probable future economic benefits
● Liabilities: probable future sacrifices of economic benefits
● Equity (A-L=E): residual interest in assets that remains after deducting liabilities
●
● Investments by owners: increases equity; not revenue - not on IS
● Distributions to owners: decreases equity; not expense - not on IS
● Comprehensive Income (CI): Sum of NI per IS + OCI “PUFIE”
 ● SFAC No. 7: Using Cash Flow Info and “Present Value” in Accounting Measurements: framework for accountants
to employ when using future cash flows as a measurement basis for A & L
● 5 elements of present value measurement (Asset - note rec.; Liability - bonds)
■ Estimate of future cash flow
■ Timing variations of future cash flows
■ Time value of money (risk-free rate)
■ Uncertainty - credit risk
■ Other (liquidity issues)
● Present value computations
■ Traditional approach
● One discount rate used to take the present value of a future cash flow (PV of bonds:
scheduled known payments)
■ Expected cash flow approach
● More complex (PV of warranties)
● Expected cash flow: range of possible cash flows and assigns probability

Notes from MCQs

● Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not be followed for
(internal) managerial accounting purposes.
● Interim financial reporting should be viewed as reporting for an integral part of an annual period.
● Accruals are concerned w/ expected future cash receipts and payments (cash later), while deferrals are
concerned with past cash receipts and payments (cash now).
● Replacement cost is defined as the amount of cash or its equivalent that would be paid to acquire or replace an
asset currently. Replacement cost is an acquisition cost.
● Predictive value is the primary reason why discontinued operations are reported separately from continuing
operations in the income statement.
 F1: Module 2 Income Statement and Balance Sheet
Income Statement: Performance for a period of time; REGL- Revenues, expenses, gains, & losses

● Uses: to determine profitability, value, and creditworthiness

● Terminology
● Cost: amount (measured in money)
■ Expense immediately: “period” cost
■ Capitalize: asset
● Unexpired costs (asset): benefit in future periods; matching principle (match against revenues)
● Gross concept (Revenues & Expenses): normal/operating
■ Revenue: Sales
■ Expenses: COGS, SG&A
● Net Concept (Gains & Losses only, not SP or NRV): sale non-inventory, write-downs, write-offs
■ Gains: proceeds less NBV
■ Losses: on sale of investment or abandonment
■ Whether unusual or infrequent & unusual and infrequent: does NOT matter - non-operating

Income from Continuing Operations: sum of operating R/E and nonoperating G/L

● Multiple-step income statement: separates operating from nonoperating (WILL BE TESTED)

○ Net sales
■ Sales less discounts and returns
○ - Cost of sales
■ Purchase price, freight-in
○ = Gross margin
○ - Selling expenses
■ Salaries, commissions, freight-out, advertising
○ - General and administrative expenses
■ Officers’ salaries, insurance, accounting, legal, property tax
○ - Depreciation expense
○ = Income (loss) from operations
○ + Other revenues and gains
■ Interest revenue, gain on sale, other revenue
○ - Other expenses and losses
■ Interest expense, loss on sale
○ = Income before unusual items and income tax
○ - Loss on sale of AFS securities
○ = Income before income tax
○ - Income tax expense
○ = Income from continuing operations
○ +/- Discontinued operations (net of tax)
■ Only when the business itself gets rid of it
○ = Net income
● Single-step income statement: expenses/losses are grouped together & revenues/gains are grouped together
○ Revenues and other items
○ - Expenses and other items
○ = Income from continuing operations
○ +/- Discontinued operations (net of tax)
○ = Net income
Balance Sheet: Financial risk / “capital structure”; A-L+E

● Distinguishes current and non-current assets & liabilities; based on liquidity

● Current A ^ Current A – Current L = Working Capital

Current L v Working Capital ^ = Risk v

● Retained earnings & Accumulated OCI: internally generated

Notes from MCQs

● Sold a fixed asset: use net concept, showing the total gain as part of continuing operations, not net of income taxes
● 1 year or operating cycle, whichever is longer
● Cash to be paid into a bond sinking fund should be classified as a non-current asset
● No separate disclosure is required in income statement if the event is a common occurrence
● Remember to include interest expense even if it’s not explicitly stated in calculating net income
● DIscount (premium) on bonds payable decreases (increases) amount of considered liability
● Prior period adjustments (i.e., corrections of amortization expense) have no impact on net income
● Unrealized gains on AFS securities are reported in other comprehensive income, have no impact on net income
 F1: Module 3 Revenue Recognition: Part 1
5 Step Approach: I am a STAR when I recognize revenue

● Identify the contract with the customer

● Rule of conservatism: Revenue when job is done (earned)
● Contract modification
■ Change in the price or scope (or both) of a contract approved by both parties
● Either treated as a new contract or as a modification of the existing contract
● Identify separate performance obligations in the contract
● Performance obligation = a promise to transfer a good or a service to a customer
● Single vs. separately identifiable performance obligations
■ Single performance obligation
● No revenue as each as done
● Must wait until very last item is complete
■ Separately identifiable performance obligations
● Recognize revenue on each one
● Characteristics
○ Entity does not integrate the good/service with other goods/services in the contract
○ Good/service does not customize or modify another good/service in the contract
○ Good/service does not depend on or relate to other goods/services
promised in the contract
● NOT separately identifiable
○ Goods/services that are highly interrelated/interdependent
○ Significant service of integrating the good/service with other
goods/services promised in the contract as bundle
○ EX: Design & build
● Determine the transaction price
● Transaction price = amount of consideration an entity can expect to be entitled to receive
● Variable consideration
■ Examples:
● Bonus
● Penalty
● Discount
● Time value
○ If < 1 year, no discount/time value of $

○
■ Choose either
● Probability weighted average
○ Lots of options
● Most likely
○ Few options
● Non-cash consideration: measured at FV at contract inception
● Consideration payable to a customer: reduction in the transaction price
 ● Allocate the transaction price to the separate performance obligations
● Allocation
■ Proportional basis (FMV)
● Stand-alone selling price
■ If available, total transaction price should be allocated in proportion to the stand-alone selling prices
● Discounts
■ Exists when sum of stand-alone prices > total consideration for the contract
■ Allocated proportionally
● Recognize revenue when or as the entity satisfies each performance obligation
● Transfer of control
■ Over time
● Examples:
○ Annual services
○ Subscription
○ Not basic inventory
● Measures of progress
○ Output methods:
■ Units produced/delivered
■ Time elapsed
■ Milestones achieved
○ Input methods:
■ Costs incurred relative to total expected costs
■ Resources consumed
■ Labor-hours expended
■ Time elapsed
■ Point in time
● Requires the following: (“RAPPeL”)
○ Rewards
■ Customer has significant rewards and risks
○ Accepted
■ Customer accepted the asset
○ Payment
■ Entity has right to payment
○ Physical
■ Entity transferred physical possession
○ e
○ Legal
■ Customer has legal title
● Presentation
● Contract asset
■ Entity’s right to consideration in exchange for goods/services that the entity has transferred
to the customer
● Performance prior to payment
● Contract liability
■ Entity has an obligation to transfer goods/services to a customer
● Paid prior to performance

Notes from MCQs

● If all services are performed, it’s OK to recognize revenue
● Remember to split up revenue and unearned revenue based on stand-alone prices if available
● If there is a repurchase agreement call option, no revenue can be recognized until that option expires
 F1: Module 4 Revenue Recognition: Part 2

Incremental costs of obtaining a contract

● Incremental costs = costs that would not have been incurred if the contract had not been obtained
● Recognize as asset (capitalize and amortize) if costs are incurred because the contract was completed
○ Examples:
■ Legal fees to draw up contract
■ Commissions to sales employees
■ NOT travel costs
● Recognize as expense if costs incurred regardless of whether the contract went through or not
○ Travel expense to deliver “proposal”
○ Design costs
○ Printing costs
○ Anything that was incurred after the contract was obtained

Costs to fulfill a contract

● RM, DL, FOH
○ Capitalized & expensed upon recognition of revenue
● SG&A, wasted labor/materials, & costs tied to satisfy performance obligations
○ Expensed as incurred

Principal vs. Agent: gross revenue vs. net revenue

● Principal
● Revenue recognized is equal to gross consideration expected to be received
■ Just like normal
● Agent:
● Revenue recognized is equal to the fee or commission for performing the agent function
■ JE for Agent:
● DR: Cash $10,000
○ CR: Due to other customer $9,000
○ CR: Revenue $1,000
● How to tell if agent:
○ Another party is primarily responsible for fulfilling the contract
○ Entity does not have inventory risk
○ Entity does not have discretion in establishing prices
Repurchase agreements
● General Definition
○ Entity sells an asset and also either promises to or has the option to repurchase the asset
● Accounting if financing arrangement
○ Recognize the asset
○ Recognize a financial liability for any consideration received from the customer
○ Recognize interest expense for the difference between the amount of consideration received from the
customer and the amount of consideration to be paid by the customer

○
● Forward
● Definition
■ Entity’s obligation to repurchase the asset
● Accounting
■ If repurchase < original selling price
● Lease
■ If repurchase is = or > original selling price
● Financing arrangement
● Call option
● General definition
■ Entity’s right to repurchase the asset
● Accounting
■ If repurchase < original selling price
● Lease
■ If repurchase = or > original selling price
● Financing arrangement
● Put option
● Definition
■ Entity’s obligation to repurchase the asset at the customer’s request
● Accounting
■ If repurchase < original selling price
● If customer has significant economic incentive to exercise the right
○ Lease
● If customer does NOT have significant economic incentive to exercise the right
○ Sale w/ a right of return
■ If repurchase = or > original selling price
● If repurchase price is > the expected MV of the asset
○ Financing arrangement
● If repurchase price is < or = the expected MV of the asset & the customer does NOT
have significant economic incentive to exercise the right
○ Sale w/ a right of return
Bill-and-hold arrangements
● Definition
○ Contracts in which entity bills customer for product that is not yet delivered to the customer
● Revenue recognition
● Revenue CANNOT be recognized until customer obtains control of the product
■ Substantive reason for arrangement and requested by customer
■ Separately identified
■ Currently ready for transfer
■ Entity cannot use it for any other purpose

Consignment
● Definition
○ When dealer/distributor has not obtained control of the product
● Revenue recognition
● Revenue is recognized when dealer/distributor sells product to customer
■ Entity controls the product
■ Dealer does NOT have an unconditional obligation to pay
■ Entity can require the return

Warranties
● General rule
○ If it can be purchased separately, it is considered a distinct service
■ Entity will account for it as a performance obligation and allocate a portion of the overall
transaction price to that obligation
○ If it cannot be purchased separately, there is no separate performance obligation
● Factors to consider
○ If the law requires the warranty, it is NOT a performance obligation
○ The longer the coverage period, the higher the likelihood that it is a performance obligation
○ If entity must perform specific tasks, it is likely NOT a performance obligation

Refund Liabilities and Right to Return

● Definition
○ Recognize a refund liability if receive or will receive consideration from a customer and anticipate
having to refund a portion or all of that consideration
● Recognition if right of return
● Revenue for transferred products equals the amount of consideration the entity expects to be entitled to receive
(revenue will NOT be recognized for products the entity anticipates having to return)
● A refund liability
● An asset related to the subsequent recovery of products when the refund liability is settled

●
Long-Term Construction Contracts
● Percentage-of-completion method
○ Definition
■ Revenue is recognized over time when profitability is easily estimated AND progress can be reliably measured
● Balance sheet presentation
■ Current asset
● Accounts
○ Accounts Receivable
○ Construction in progress or contracts in excess of progress billings (inventory account)
● Calculation
○ CIP (costs incurred + estimated gross profit earned to date) > Progress billings =
Current asset (costs of uncompleted contracts in excess of progress billings)
■ Current liability account
● Accounts
○ Progress billings or billings in excess of cost (contra-inventory
account) (Excess billings, retainer, deposits)
● Calculation
○ CIP( costs incurred + estimated gross profit earned to date) < Progress billings =
Current liability (progress billings on uncompleted contracts in excess of costs)

● Accounting for Percentage-of-Completion (3 steps)

■ Step 1: % of job earned
■ Actual Cost incurred___ = work done____ = % of job earned

Total expected cost total expected work

■ Step 2: Gross profit earned to date

● % of job earned x gross profit (sales price - estimated cost of contract) = gross profit earned to date
■ Step 3: Current year gross profit
● Gross profit earned to date - previously recognized gross profit = current year gross profit
■ Estimated loss on total contract
● Recognized immediately in the year discovered
● In addition, all previous profit is reversed
○ Therefore, total loss would be equal to costs in excess of contract + previously recognized
gross profit
■ If additional losses are incurred in subsequent years, loss recognized is equal
to total loss less amount of loss recognized in prior years
■ Journal entries
■ To record costs incurred
● DR: Construction in Progress
○ CR: Cash (Payable)
■ To record billings on contract
● DR: Contracts Receivable
○ CR: Progress Billings
■ To record payments received
● DR: Cash
○ CR: Contracts Receivable
■ To record revenue/cost during construction period
● DR: Construction Expense (total expenses x % earned)
● DR: Construction in Progress (gross profit for year)
○ CR: Revenue (selling price x % earned, less revenue already recognized in prior years)
■ To record final completion of contract
● DR: Progress Billings
○ CR: Construction in Progress
 ● Completed Contract Method
● Definition
■ Only permitted when:
● Difficult to estimate
● Many contracts
● Short duration
● Balance sheet presentation
■ Current asset
● Accounts
○ Accounts Receivable
○ Construction in progress or contracts in excess of progress billings (inventory account)
● Calculation
○ CIP (costs incurred) > Progress billings = Current asset (costs of uncompleted contracts in
excess of progress billings)
■ Current liability account
● Accounts
○ Progress billings or billings in excess of cost (contra-inventory account)
(Excess billings, retainer, deposits)
● Calculation
○ CIP (costs incurred) < Progress billings = Current liability (progress billings on uncompleted
contracts in excess of costs)
● Accounting for Completed Contract Method
■ No gross profit is recognized until contract is completed
■ Gross profit (loss) = contract price – total costs
● Loss incurred
■ Losses should be recognized in full in the year they are discovered
■ If additional losses are incurred in subsequent years, loss recognized is equal to
total loss less amount of loss recognized in prior years
● Journal entries
■ To record costs incurred
■ DR: Construction in Progress
● CR: Cash (Payable)
■ To record billings on contract
■ DR: Contracts Receivable
● CR: Progress Billings
■ To record payments received
■ DR: Cash
● CR: Contracts Receivable
■ To record revenue/cost during construction period
■ NO ENTRY (only recognize at end of contract)
■ To record final completion of project
■ DR: Progress Billings
● CR: Revenue (selling price)
■ DR: Construction Expense (costs)
● CR: Construction in Progress

Notes from MCQs

● Under % of completion, annual gross profit = [total cost incurred/total expected cost] x [total expected gross profit] less
total gross profit already recognized. In the final year of the contract, actual rather than expected amounts are used.
● Formula to calculate % of completion is [Total cost to date/total estimated cost of contract]
 F1: Module 5 Income Statement: Discontinued Operations

Discontinued operations
● Reported separately from continuing operations in the IS, net of tax
● Bottom of IS after income from continuing operations
● Can consist of an impairment loss, G/L from actual operations, and a G/L on disposal

Component of an entity
● Definition
● Part of an entity (the lowest level) for which operations and cash flows can be clearly distinguished,
both operationally and for financial reporting purposes, from the rest of the entity
● Examples
● Operating segment
● Reportable segment
● Reporting unit
● Subsidiary
● An asset group
● A component of a business classified as “held for sale” in the period in which ALL criteria are met:
■ Management commits to a plan to sell the component
■ Available for immediate sale in present condition
■ An active program to locate a buyer has been initiated
■ Sale of component is probable and is expected to be completed within one year
■ Actively marketed
■ Actions required to complete the sale make it unlikely that significant changes to the plan
will be made or that the plan will be withdrawn
● When a component is classified as held for sale, and impairment analysis of the component
must be conducted

Accounting Rules for Discontinued Operations

● Types of entities to be considered
● If it has been disposed of or is classified as held for sale
● Conditions that must be present for “discontinued operations” rules to apply
● A disposal of a component or group of components is reported in discontinued operations IF the disposal represents a
“strategic shift” that has or will have a major effect on an entity’s operations and financial results
■ Disposal of a major geographical area
■ Disposal of a major equity method investment
■ Disposal of a major line of business
● Discontinued operations calculations
● NO FUTURE ESTIMATES
● Results of operations of the component (income or losses)
■ For that period only (all income/loss, even from before the announcement, is included in discontinued ops)
● (Revenues - expenses), net of tax
● Gain or loss on disposal of the component
■ In year of sale only
● (Selling price - carrying value), net of tax
● Impairment loss (and subsequent increased in VF) of the component
■ Upon “held for sale”
● Initial and subsequent impairment losses
○ (Selling price - costs to sell) = NRV
■ If NRV < BV = impaired = have to write down
● (Carrying value - NRV), net of tax = impairment loss amount
○ If loss is determined to be more in the subsequent year than estimated
■ Additional loss, net of tax = additional impairment loss amount
● Subsequent increases in fair value
○ Can reverse prior impairment loss and record a gain if there is an increase in NRV,
but cannot go up more than prior impairment loss
■ Depreciation and amortization
○ Stops once management/board decides to dispose
● Anticipated “future” gains or losses
○ G/L not previously recognized that results from sale of component is recognized at date of sale and not before
● Measurement and valuation
○ Component classified as “held for sale” is measured at the lower of:
■ Carrying amount (BV), or
■ NRV (selling price - costs to sell
● Presentation and disclosure
○ Results of discontinued operations are reported NET OF TAX as separate component of income below
income from continuing operations
○ Gain or loss on disposal can be reported either on the face of the IS or in the notes
 F1: Module 6 Accounting Changes and Error Corrections

Changes in Accounting Estimate

● Characteristics
○ Occurs when it is determined that the estimate previously used by the company is incorrect
○ Not a correction of error - do NOT restate
■ Affects current & future income from continuing operations
● Examples
○ Change in lives of fixed assets
○ Adjustments of year-end accrual of officers’ salaries and/or bonuses
○ Write-downs of obsolete inventory
○ Material, nonrecurring IRS adjustments (adjustment of tax accrual)
○ Settlement of litigation
○ Revisions of estimated regarding discontinued operations
● Accounting treatment
○ Prospectively
■ Implement in the current period and continue in future periods (affects “income from continuing operations”)
■ Do NOT affect previous periods (No effect on prior years RE)
■ If change affects several future periods, it will affect income from continuing operations, net income,
and related per share information
● Should be disclosed in notes to FS (unusual & material change = disclose in notes)

Changes in Accounting Principle

● Characteristics
● Rule of preferability
● Accounting principle may be changed ONLY IF required by GAAP (newly issued codification update), or
● Alternative principle is preferable and more fairly represents the info (no income smoothing)
● Effects of a change
● Direct effects
■ Adjustments that would be necessary to restate FS of prior periods
● Indirect effects
■ Differences in non-discretionary items based on earning that would have occurred if
new principle had been used in prior periods
● Cumulative effects
■ Adjust beginning RE, net of tax, [adjustment x (1 - tax rate)]
● In non-comparative FS
○ Change beginning RE in period of change
● In comparative FS
○ Change beginning RE in 1st period presented; “restated” (retrospectively)
● Examples
■ GAAP to GAAP
■ Non-GAAP to GAAP is an error (see below)
● Accounting treatment
■ General rule: retrospectively
■ EXCEPTIONS to general rule of retrospective application
■ Changes in accounting principle that are inseparable from a change in estimate
● Definition
○ Still changes in accounting principle (NOT estimate) but handled prospectively,
why? – impractical to estimate
■ If considered “impractical” to accurately calculate this cumulative effect
adjustment, then change is handled prospectively (like change in estimate)
● Examples
○ Change to LIFO
○ Change in depreciation method
Changes in Accounting Entity
● Characteristics
○ Occurs when entity being reported on changes composition (consolidated or combined FS that are
presented in place of statements of the individual companies)
● Accounting Treatment
○ Retrospectively
● Restatement to reflect info for the new entity (if comparative FS are presented)
● IF change in entity occurs in the current year, all previous FS presented in comparative FS
along w/ current year should be restated to reflect the info for new reporting entity
● Full disclosure of cause and nature of change
● Including changes in income from continuing operations, NI, & RE

Error Correction (prior period adjustment) (retrospective application)

● Characteristics
○ NOT accounting changes
■ Mathematical mistakes
■ Mistakes in application of GAAP
■ Changes from a “non-GAAP” method to GAAP (cash basis to accrual) as specific correction of an error
● Accounting Treatment
● Comparative FS presented
■ If the year of the error is presented
● Correct the info in that year
■ If the year of the error is not presented
● Correct the beginning RE (NET OF TAX) of the earliest year presented
● Effect on Statement of RE - “net of tax”
■ Reconcile the beginning balance of RE w/ ending balance
● Usually presented immediately following the IS or as a component of Statement of SE

Notes from MCQs

● If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered a
change in accounting estimate and is accounted for prospectively as a component of income from continuing operations
● If inventory is understated (overstated), then COGS is overstated (understated)
● For balance sheet items, the cumulative effect is determined as of the beginning of the year of change if
comparative FS are not presented
● Change to LIFO is a change in accounting principle, but is handled prospectively. It’s one of those exceptions
 F1: Module 7 Statement of Comprehensive Income
Comprehensive income:
● Definition
○ Non-owner transactions
■ Includes all changes in equity during a period except those resulting from:
● Investments by owners
○ Stock transactions
● Distributions to owners
○ Dividends
● Calculation:
○ Net Income (per income statement)

+ Other Comprehensive Income “PUFIE”

= Comprehensive income

● Net Income: Note there is no extraordinary - Go to retained earnings

● Income from continuing operations
● Income from discontinued operations
● Other comprehensive income: “PUFIE” - goes to equity (accumulated OCI)
● Pension adjustment
● Unrealized gains and losses on available-for-sale debt securities
● Foreign currency translation method items
■ Translation method - CTA & OCI*
■ Remeasurement method - G/L on IS (NOT OCI)
● Instrument-specific credit risk
● Effective portion of cash flow hedges
■ Matching principle
● Reclassification adjustments
● Avoids double accounting - from AOCI to IS
● Accumulated Other Comprehensive Income (AOCI)
● Equity account (just like RE) on the balance sheet
● What goes in will come out
■ Like a temporary resting place for items before they hit the IS

PASS KEY
● At the end of each accounting period:
○ All components of comprehensive income are closed to the BS
○ NI is closed to RE
○ OCI is closed to AOCI

Financial Statement Reporting

● Comprehensive income should be displayed in FS presented w/ same prominence as the other FS that constitute a full set of FS
● Comprehensive income should NOT be reported on a per share basis
● Comprehensive income may be presented in either:
● Single-statement approach
■ Displays OCI items individually and in total below the NI amount
● Two-statement approach
■ Displays comprehensive income as a separate statement that immediately follows IS
Other reporting issues
● OCI
● May report either:
■ Net of tax, OR
■ Before related tax effects with one amount shown for the aggregate income tax expense
● Income tax expense or benefit
● May disclose either:
■ On the face of the IS, OR
■ In the notes to FS
● Interim period reporting
● Total for comprehensive income should be reported in condensed FS to shareholders
● Required disclosures
● All formats must disclose:
■ Tax effects of each component
■ Changes in the accumulated balances
● Face of the FS, OR
● Notes to the FS
■ Total AOCI
● BS as an item of equity
● Reclassification adjustments (unrealized gains on AFS securities realized during the year)
■ Changes in AOCI balances
● Must separately disclose reclassification adjustments AND current-period OCI

Notes from MCQs

● One of the elements of a FS is comprehensive income
○ Comprehensive income EXCLUDES changes in equity resulting from which of the following?
■ Dividends paid to stockholders - only included in equity, NOT Net Income or OCI
● Beginning SE
● - Dividends paid
● + New shares issued
● - Shares repurchased
● + Comprehensive income
● = Ending SE
 F1: Module 8 Adjusting Journal Entries

Matching Revenues and Related Expenses

● Accrual basis - in accordance w/ GAAP
○ Unearned (deferred) revenues
■ Cash is received before revenue is earned
○ Prepaid (deferred) expenses
■ Cash is paid before expense is incurred
○ Accrued revenues (receivables)
■ Cash is received after revenue is earned
○ Accrued expenses (accrued liabilities)
■ Cash is paid after expense is incurred

Adjusting JEs - Unearned Revenue & Prepaid Expenses

● JE to record Unearned Revenue

● DR: Cash XXX
■ CR: Unearned Revenue XXX
● AJE to record unearned revenue that has been earned
● DR: Unearned Revenue XXX
■ CR: Revenue XXX
● JE to record Prepaid Expense
● DR: Prepaid Expense XXX
■ CR: Cash XXX
● AJE to record expense that has been incurred (over time)
● DR: Expense XXX
■ CR: Prepaid Expense XXX

Adjusting JEs - Accrued Revenue & Accrued Expenses

● JE to record Accrued Revenue

● DR: AR XXX
■ CR: Revenue XXX
● JE to record Accrued Expenses
● DR: Expense XXX
■ CR: Accrued Liabilities XXX

Adjusting JEs - Error Corrections: if error found in same year it is made

● Rules for Recording AJEs

● Must be recorded by end of entity’s fiscal year & before preparation of FS
● Never involve the cash account
● All AJEs will hit one IS account & one BS account

Notes from MCQs

● “Advances” affect cash flow but do not affect accrual basis expense
 F2: Financial Reporting and Disclosures

F2: Module 1 Notes to Financial Statements

Summary of significant accounting policies
● 1st or 2nd footnote
● Disclosures
● Measurement bases
● Specific accounting principles and methods, criteria, and policies
■ Basis of consolidation
■ Depreciation methods
■ Amortization of intangibles
■ Inventory pricing
■ Use of estimates
■ Fiscal year definition
■ Special revenue recognition issues
■ Criteria for which investments are cash equivalents

Remaining notes to FS
● All other information that is relevant to decision makers
○ Material information
○ Changes in stockholders’ equity
○ Required marketable securities disclosure
○ FV estimates
○ Contingency losses
○ Contingency gains
○ Contractual obligations
○ Pension plan description
○ Segment reporting
○ Subsequent events (including discontinued segment & outside ordinary course of business)
○ Changes in accounting principle or implication of new accounting standards update
○ Related party disclosures
Disclosure of Risks and Uncertainties (U.S. GAAP)
● Nature of Operations
● Description of entity’s major products/services and its principal markets, including the locations of those markets
● Use of estimates in preparation of FS
● Certain significant estimates
● Inventory or equipment subject to rapid technological obsolescence
● Deferred tax asset valuation allowances
● Capitalized computer software costs
● Loan valuation allowance
● Litigation-related obligations
● Amounts reported for LT obligations, such as pension/post-retirement benefits
● Amounts reported in LT contracts
● Current vulnerability due to certain concentrations
● When an entity is exposed to risk of loss that could be mitigated through diversification
■ Disclose if all of the following criteria are met:
● Exists at FS date
● Makes the entity vulnerable to the risk of a near-term severe impact (a significant
financially disruptive effect on the normal functioning of entity)
● Is at least reasonably possible that the events that could cause the severe impact
will occur in the near term
● Examples
■ Concentrations in the volume of business transacted with a particular customer, supplier,
lender, grantor, or contributor
■ Concentrations in revenue from particular products, services, or fund-raising events
■ Concentrations in the available supply of resources, such as materials, labor, or services
■ Concentrations in market or geographic area

Notes from MCQs/SIMs

● Trade accounts receivable must be presented separately from non-trade receivables, which includes
dividends receivable and interest receivable
● Investments in bonds that are held to maturity should be reported at amortized cost, not fair value.
● The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
○ This disclosure is intended to inform the users of the financial statements of inherent uncertainties in
measuring amounts presented in the financial information and alerts users that uncertainties are present in
the financial statements of all reporting entities
○ These disclosure requirements are governed by generally accepted accounting principles (GAAP)
● Under the guidance of ASC 606, revenue resulting from sales with customers with contracts is properly
recognized when the customer obtains control of promised goods and services
● Fair value guidance
○ The guidance established by GAAP has established a three-tier fair value hierarchy which includes:
■ Quoted prices (level 1)
■ Observable inputs (level 2)
■ Unobservable inputs (level 3)
○ Management's estimates and CFO approval are not requirements under the guidance
○ There is also no threshold for applying the fair value hierarchy, such as applying them to assets and
liabilities that exceed 20% of annual revenues
 F2: Module 2 Subsequent Events

Subsequent Event
● Definition
● Occurs after BS date but before FS are issued or available to be issued
● Recognized subsequent event
● Definition
■ Existed at the BS date
● Accounting treatment
■ Record JE and disclose in notes
● Examples
■ Settlement of litigation
■ Loss on an uncollectible receivable
● Nonrecognized subsequent event:
● Definition
■ Did not exist at the BS date
● Accounting treatment
■ Disclose in notes (ONLY)
● Examples
■ Issued bond or stock
■ Business combination
■ Settlement of litigation (if litigation arose after BS date)
■ Loss of plant or inventory due to fire or natural disaster
■ Changes in FV of assets, liabilities, or foreign exchange rates
■ Entering into significant commitments or contingent liabilities
■ Loss on receivables resulting from conditions occurring after BS date

Subsequent event evaluation period:

● Public Co. (entity that files with SEC)
○ Must evaluate through the date that FS are issued
■ Format complies with GAAP
■ Widely distributed to users
● Private (all other entities)
○ Must evaluate through the date that FS are available to be issued
■ Format complies with GAAP
■ All approvals for issuance have been obtained

Reissuance of FS
● Should NOT recognize events that occurred between the original FS issuance date and the reissuance date,
UNLESS an adjustment is required by GAAP

Revised
FS
● To correct an error or to reflect retrospective application of GAAP
● Considered reissued FS
● Non-SEC filers
○ Disclose in revised FS the dates through which subsequent events were evaluated in both its
issued/available to be issued FS and its revised FS
● SEC filers
○ No disclosure of date required
 F2: Module 3 Fair Value Measurements

US GAAP has “standardized” the definition of fair value, established a framework for measuring FV, and outlined required
FV disclosures for all areas that require or permit FV measurement, EXCEPT:

● Share-based compensation
● Measurement based on or using vendor-specific objective evidence of FV
● FV measurements used for lease classification or measurement

FV Defined (Exit price): price that would be received to sell assets or paid to transfer liabilities in an orderly transaction between
market participants in the principal (or most advantageous) market at the measurement date under current market conditions

● Market-based measure
● Principal market or the most advantageous market in the absence of a principal market
● Exit price (to sell assets or transfer liabilities)
● Should reflect all of the assumptions that market participants would use in pricing the asset or liability
● *Does NOT include transaction costs, BUT may include transportation costs if location is an important attribute of asset or liability
● EXCEPTION: transaction cost is used to calculate most advantageous market, but then disregarded in FV measurement
● Nonfinancial asset assumes highest and best use of the asset (PP&E)
● In practice, choose the highest price available

FV Terminology
● Orderly transaction
● Cannot be a forced transaction
● Market participants
● Independent, NOT related parties
● Principal market
● GR: market with the greatest volume or level of activity for the asset or liability
● Most advantageous market
● Only use if NO principal market
● The market w/ the best price for the asset (maximizes selling price of the asset) or liability (minimizes
payment to transfer the liability), AFTER considering TRANSACTION COSTS*
■ Only used to determine most advantageous market, NOT included in final FV measurement

●
● Highest and Best Use
● Use for nonfinancial assets: PP&E
● Liabilities and financial assets: bonds & stocks
■ Highest and best use concept is NOT relevant when measuring FV of assets
FV Measurement Framework: GAAP has established a framework for measuring FV
● Valuation Techniques: “MIC” – should maximize the use of observable inputs
● Market approach
■ Uses prices and other relevant info from market transactions
● “Exchange”
● Income approach
■ Converts future amounts, including CFs or earnings, to a single discounted amount - PVFCP (DCF) sum (PVFC)
● Cost approach
■ Uses current replacement cost
● Hierarchy of the inputs
● Prioritizes the inputs that can be used in the valuation techniques
■ Level 1 Inputs highest priority/most reliable
● Quoted prices in “active” markets for “identical” asset/liability that the reporting entity
has access to on measurement date
● Quoted prices obtained from exchange markets, dealer markets, broker markets, and
principal-to-principal markets
■ Level 2 Inputs
● Directly or indirectly observable
● Quoted prices from similar asset/liability in active markets
● Quoted prices for identical/similar asset/liability in markets that are nonactive
■ Level 3 Inputs lowest priority
● Discounted cash flows - unobservable
● Reflect the reporting entity’s assumptions (FCV & discount rate) and should be
based on the best available info
● Use ONLY when no observable level 1 or 2 inputs are available

FV Disclosures
● Valuation techniques and inputs, including judgements and assumptions (level 3)
● Uncertainty in FV measurements as of reporting date
● How changes in FV measurements affect the entity’s performance and cash flows
● SPECIFICALLY, an entity must provide the following disclosures
■ Quantitative info about significant unobservable inputs – Forecasted FCFs/ discount rate
■ Discussion of the sensitivity of Level 3 measurements to changes in unobservable inputs disclosed
■ Info about nonfinancial assets and liabilities for which measurements differ from highest and best use
■ Hierarchy for items that are not measured on the BS but are disclosed in the notes to FS

Exceptions to FV Measurement
● Exist when:
○ It is not practicable to measure FV
○ FV cannot be reasonably determined
○ FV cannot be measured with sufficient reliability

Notes from MCQs

● When valuing certain financial instruments, a company that has elected the FV measurement option must apply
the accounting measurement based on instrument-by-instrument basis.
 F2: Module 4 Segment Reporting
Objective of segment reporting
● To provide info on business activities and the economic environment of a company to help users of FS:
○ Better understand the entity performance
○ Better assess its prospects for future net cash flows
○ Make more informed judgements about the entity as a whole

Disclosure Requirements
● Required to disclose:
○ Segment P&L
○ Segment assets
○ Certain related items
○ NOT segment cash flow
○ NOT segment liabilities if regularly provided to “chief operating decision maker”
● Require Disclosures for ALL public entities:
● Operating segments (annual and interim)
● Products and services
● Geographic areas
● Major customers

Intercompany Transactions are NOT Eliminated for Reporting

Scope (Public Companies ONLY)

Operating Segment
● Component of an entity with ALL of the following characteristics:
● Engages in business activities
● Operating results are regularly reviewed by entity’s CFO
● Discrete financial info is available (traceable cash flows)
■ Definition of a segment depends on how management uses info (mgmt. approach method)
● NOT every component is an operating segment
● Corporate headquarters is NOT an operating segment
● Pension plan is NOT an operating segment

Reportable Segments: meet criteria for separate reporting

● Operating segments that exhibit similar LT financial performance may be aggregated into a single operating segment
only if the segments have the same basic characteristics in each of the following areas:
● Nature of products and services
● Nature of production processes
● Type/class of customer for their products and services
● Methods used to distribute their products or provide their services
● If applicable, the nature of the regulatory environment (banking, insurance, public utilities, etc.)

Quantitative Thresholds for Reportable Segments

● Considered significant and require disclosure if it meets one or more of the following:
● If one segment is > 90%, NO segment reporting needed
● 10% “Size” test
■ Combined revenues (whether intersegment or affiliated customers)
■ Operating profit (of all segments not having an operating loss)
■ Identifiable assets
● 75% “Reporting Sufficiency” Test
■ 75% of sales to unaffiliated (external) customers
● For this test, if the external sales of initial reportable segments do not reach 75% of external sales,
must include more segments (highest to lowest external sales) until that 75% threshold is met
● “All other segments” category: not 10% OR already showing over 75%
Comparative Reporting
● Operating segment deemed to be reportable in the immediately preceding period but does NOT meet the criteria for reportability
in the current period may continue to be reported separately if management judges the segment to have continuing significance

Segment Profit (or Loss) Defined

● Revenues
● - Directly traceable costs (For that segment, both internal & external)
● - Reasonably allocated costs (By management [CODM-chief operating decision maker])
● Equals: Operating Profit (or Loss) EBIT (earnings before interest and tax)

● Items normally EXCLUDED from segment profit (or loss)

■ General corporate revenue
■ General corporate expenses
■ Interest expense (except for financial institutions)
■ Income taxes
■ Equity in earnings and losses of unconsolidated subsidiary
■ Gain/loss from discontinued operations
■ Noncontrolling interest

Reportable segment disclosures

● Identifying factors
● Factors used to identify the entity’s reportable segments should be disclosed
■ Products and services
■ Geographic areas
■ Regulatory environments
■ *also disclose whether any operation segments have been aggregated
● Products and services
● Types from which reportable segment derives its revenues
● Profit or loss
● Must be individually disclosed if used in calculation of segment profit/loss
■ Revenues from external customers
■ Revenues from transactions with other internal operating segments
■ Interest revenue
■ Interest expense
■ Depreciation, depletion, and amortization
■ Unusual items, including unusual events and transactions
■ Equity in net income of investees accounted for by equity method
■ Income tax expense or benefit
■ Significant noncash items other that depreciation, depletion, and amortization expense
● Total Assets
● Amount of investment in equity method investees
● Total expenditures for:
■ Additions to long-lived assets other than financial instruments
■ Long-term customer relationships of financial institution
■ Mortgage and other servicing rights
■ Deferred policy acquisition costs
■ Deferred tax assets
 ● Measurement criteria
● Basis of accounting for any internal transactions
● Nature of any differences between measurements of reportable segments’ profits or losses and the
entity’s consolidated income
● Nature of any differences between measurements of reportable segments’ assets and the entity’s consolidated assets
● Nature of any changes from prior periods in measurement methods used to determine reported segment P/L
● Nature and effect of any asymmetrical allocations to segments
● Reconciliations
● Total of reportable segments’ revenues to entity’s consolidated revenues
● Total of reportable segments’ measure of P/L to entity’s consolidated income before taxes, discontinued operations, and
the cumulative effects of changes in accounting principles
● Total of reportable segments’ assets to the entity’s consolidated assets
● Total of reportable segments’ amount for every other significant item of information disclosed to the
corresponding consolidated amount

Entity-wide disclosures
● Required for ALL public entities
● Products and services
■ Revenues from external customers for each product/service or each group of similar products & services
must be disclosed unless impracticable to do so (and that fact must be disclosed)
● Geographic areas
■ Revenues
● Attributable to entity’s domicile country
● Attributed to all foreign countries if the amount is material
● Attributed to individual foreign countries if the amount is material
● Basis for attributing revenues from external customers to individual countries
● Long-lived assets
■ Located in the entity’s domicile country
■ Located in all foreign countries in total in which the entity holds assets
■ Located in individual foreign countries if the amt is material

Major Customers
● An entity that generates 10% or more of its total revenue from sales to a single-customer must disclose:
○ That fact
○ The total amount of revenues from each such customer
○ The identity of the segment or segments reporting the revenues
○ NOT: the identities of the major customers

Notes from MCQs

● In disclosure questions, if you are not sure, disclose the most rather than the least
 F2: Module 5 SEC Reporting Requirements

Securities offering registration statements

● When a company issues new securities, it is required to submit a registration statement to SEC that includes:
○ Disclosures about securities being offered for sale
○ Relationship of the new securities to the company’s other securities
○ Info similar to that filed in the annual filing
○ Audited FS
○ Description of business risk factors

** Know the forms!

Form 10-K
● ANNUAL report
● Contains:
○ Financial disclosures
■ Summary of financial data
■ MD&A
■ Audited FS
● Filing deadlines:
○ Large accelerated companies: 60 days (outstanding common equity held by nonaffiliates of $700m +)
○ Accelerated companies: 75 days (outstanding common equity held by nonaffiliates of $75m - $699m)
○ All others: 90 days (annual revenue < $100m)

Form 10-Q
● Quarterly report
● Contains:
○ Unaudited FS prepared using US GAAP
○ Interim period MD&A
○ Certain disclosures
● Filing deadlines:
○ Large accelerated: 40 days
○ Accelerated: 40 days
○ All others: 45 days

Form 11-K
● Annual report of company’s employee benefit plan(s)

Form 20-F
● Non-US (10-K) annual report
● Contains:
○ Financial disclosures
■ Summary of financial data
■ MD&A
■ Audited FS (using GAAP)

Form 40-F
● Canadian (10-K) annual report
● Contains:
○ Financial disclosures
■ Summary of financial data
■ MD&A
■ Audited FS (using GAAP)
Form 6-K
● Semi-annual report by foreign private issuers (similar to form 10-Q)
● Contains:
○ Unaudited FS
○ Interim period MD&A
○ Certain disclosures

Form 8-K
● Report on major events
○ Corporate asset acquisitions/disposals
○ Changes in securities and trading markets
○ Changes to accountants or FS
○ Changes in corporate governance or management

Forms 3, 4, and 5
● 10% owners - directors, officers, or beneficial owners of > 10%

Regulation S-X
● Requirements for Interim FS
● Review requirement
■ Interim FS filed with the SEC must be reviewed by an independent public accountant and
a review report must be filed with the FS
● Statements and periods presented
■ Balance sheets
■ Income statements
■ Statement of cash flows
● Adjustments for fair presentation
■ The entire amount of any gain on sale should be reported during the period incurred
■ Expenses that benefit more than one interim period are allocated among the periods benefited
● Condensed FS
■ OK to have
● Disclosure
■ Sufficient
● Omitted disclosures
○ May OMIT summary of significant accounting policies & the details of accounts
that have not changed significantly
● Required disclosures
○ Material contingencies
○ Subsequent events
● Requirements for Annual FS
● Audit requirement
● Periods presented
■ 2 BS
■ 3 IS, CF, statements of changes in owner’s equity
 ● Disclosure requirements
■ Dividends per share and in total for each class of shares
■ Principles of consolidation or combination
■ Assets subject to lien
■ Defaults with respect to any issue of securities/credit agreements if existed at the BS date & not cured
■ Preferred share disclosures
■ Restrictions that limit the payment of dividends
■ Significant changes in bonds, mortgages, or similar debt
■ Summarized financial info of subsidiaries not consolidated & 50% or less owned entities
■ Income tax expense
■ Warrants or rights outstanding
■ Related party transactions that affect FS
■ Repurchase and reverse repurchase agreements
■ Accounting policies for derivative instruments

SEC XBRL Reporting Requirements

● XBRL (eXtensible Business Reporting Language)
● Definition
■ Royalty-free, open specification for software that uses XML (eXtensible Markup Language)
data tags to describe financial info for business and financial reporting
● Terms
■ Tag
● A machine-readable code that gives standard definition for each line item
○ Include descriptive labels, definitions, references to GAAP, and other elements that
provide contextual info that allow data to be recognized and processed by software
■ Taxonomy
● Defines the specific tags used for individual items of business and financial data
■ XBRL GAAP Financial reporting taxonomy
● Maintained and updated by FASB & Financial Accounting Foundation (FAF) to reflect
changes in GAAP and SEC FS disclosure requirements
■ Global ledger taxonomy
■ Industry specific taxonomy
■ Company specific tags
■ Instance document
● XBRL formatted document that contains tagged data

SEC Interactive Data Rule

● Requires public companies and foreign issuers to prepare financials and related schedules in an exhibit using
XBRL - schedules and financials all have to be linked
● Data tagging details
● A filer’s primary FS are required to be tagged (linked) in detail
■ Level 1
● Each complete footnote and schedule is tagged as a single block of text
■ Level 2
● Each significant accounting policy within the significant accounting policies footnote
is tagged as a single block of text
■ Level 3
● Each table within each footnote or schedule is tagged as a separate block of text
■ Level 4
● Within each footnote or schedule, each amount (monetary value, percentage, and number)
is required to be separately tagged
● 30-day grace period
● Within 30 days after the earlier of due date or filing date, must be tagged using all levels of detail
● Posting to corporate website
● Must be posted to filer’s corporate website no later than end of calendar day on which the filer filed or
was required to file (whichever comes first)
 F2: Module 6 Special Purpose Frameworks

Special Purpose Frameworks

● Other comprehensive bases of accounting (OCBOA)
○ Definition
■ Non-GAAP presentations that have widespread understanding and support
○ Examples
■ Cash basis
■ Tax basis
■ Price-level
■ Regulatory basis

General Presentation Guidelines

● FS titles should differentiate the OCBOA FS from accrual basis FS (DON’T use GAAP terms)
● Statement of cash flows is NOT required

Cash Basis FS
● Accounting treatment
● Revenue is recognized when cash is received and expenses are recognized when cash is paid
● FS
● Statement of cash and equity (BS)
■ Cash is the only asset
■ No liabilities recorded
■ Equity is equal to cash
● Statement of cash receipts and disbursements (IS)
■ Revenues received
■ Debt and equity proceeds
■ Proceeds from asset sales
■ Expenses paid
■ Debt repayments
■ Dividend payments
■ Payments for purchase of assets

Modified Cash Basis FS

● Definition
● Hybrid method that includes elements of cash basis and accrual basis
■ Modifications should not be so extensive that modified cash basis becomes accrual basis FS
● Common modifications
● Capitalizing and depreciating fixed assets
● Capitalizing inventory
● Accrual of income taxes
● Recording liabilities
● Reporting investments at FV and recognized unrealized G/L
● Presentation
● A statement of assets and liabilities (BS)
● A statement of revenues collected and expenses paid (IS)
Income Tax Basis FS
● Usefulness
● Well-suited for entities that have complex operations
● Accounting issues
● Special accounting treatment must be given to nontaxable revenues and expenses not reported on tax return
■ Nontaxable revenues and expenses may be reported as:
● Separate line items in the revenue & expenses sections of statement of revenues & expenses
● Additions and deductions to net income; or
● A disclosure in a note
● Presentation
● A statement of assets and liabilities and equity (BS)
● A statement of income (IS)

Converting Cash Basis FS to the Accrual Basis

Cash Basis Accrual Basis

Revenue Recognition Cash Received Realized or realizable and earned (A/R)
Expense Recognition Cash Paid Incurred/owed/benefit received (A/P)

● Balance sheet conversion (to be recognized if not already recognized under modified cash basis)
● Accounts receivable
● Inventory
● Prepaid expenses
● Investments at FV
● Fixed assets, net of accumulated depr.
● Accounts payable
● Accrued liabilities
● Unearned revenue
● Interest payable
● Income taxes payable
● Short-term and long-term debt
● Income statement conversion
● Converting cash basis revenue to accrual basis revenue
● Converting cash paid for purchase to accrual basis COGS
● Converting cash paid for operating expenses to accrual basis operating expenses
● Additional adjustments may be required to:
■ Recognize noncash expenses (depreciation and amortization)
■ Capitalize purchases of fixed asset (fixed asset purchases are cash disbursements under cash basis)
■ Reduce fixed asset balance for assets sold during the period and recognized G/L on sale
■ Record debt proceeds rcvd during the period as liabilities
■ Record debt repayments as reductions in liabilities

● How to convert cash basis revenue to accrual basis revenue

Formula Explanation
Cash Basis Revenue From cash basis IS
+ Ending AR Revenue earned during period but not yet collected from customers
- Beginning AR Cash collected during the current period that was earned in prior period
- Ending Unearned Revenue Cash collected during current period NOT earned until future periods
+ Beginning Unearned Revenue Cash collected in prior periods that was earned in current period
= Accrual basis revenue
 ● How to convert cash paid for purchases to COGS

Formula
Cash paid for purchases
+ Ending A/P
- Beginning A/P
- Ending Inventory
+ Beginning Inventory
= Cost of Goods Sold
Explanation
From cash basis IS
Expenses incurred during the period but not yet paid
Expenses incurred during prior period and paid in current period
Purchases made during current period not yet sold
Purchases made in prior periods that were sold during current period

● How to convert cash paid for operating expenses to accrual basis operating expenses

Formula
Cash paid for operating expenses
+ Ending Accrued Liabilities
- Beginning Accrued Liabilities
- Ending Prepaid Exp
+ Beginning Prepaid Exp
= Accrual basis operating exp
Explanation
From cash basis IS
Expenses incurred during the period but not yet paid
Expenses incurred during prior period and paid in current period
Payments made during the current period that will benefit future period
Payments made in prior periods that benefited the current period

Notes from MCQs

● Income tax-basis FS recognize events when taxable income or deductible expenses are recognized on the entity’s tax return.
Non-taxable income and non-deductible expenses are shown on FS and included in determination of income.
● Cash basis to accrual
○ Add increases in current assets
○ Subtract decreases in current assets
○ Add decreases in current liabilities
○ Subtract increases in current liabilities
● In FS prepared using the income tax basis, the nondeductible portion of expenses should be included in the
expense category in the determination of income
● Make T-accounts if not seeing it right away
 F2: Module 7 Ratio Analysis

Ratio analysis
● What used for
● “Quickly” identify red flags through historical trends and the industry standards
● Financial indicators that distill relevant information about a business entity
● Compared w/ ratios of a different period (of same company) OR compared w/ competitor ratios and industry ratios
■ Identify trends that may be important to investors, lenders, and other “primary users”
● Key ratios: liquidity, activity, profitability, and coverage ratios
● ^ Numerator = resulting ratio ^

Denominator

● Numerator = resulting ratio v

^ Denominator

Liquidity Ratios
● Definition
● Short-term risk of distress
● General rule: higher the ratio, lower the risk
● Numerator and denominator derive from BS
● Examples
● Current ratio
■ Current assets / Current liabilities
● Quick ratio
■ (Current assets - Inventory) / Current liabilities
● More liquid and more conservative than current ratio
● Cash ratio
■ (Cash + Marketable securities) / Current liabilities
● Most liquid, smallest numerator

Activity Ratios
● Definition
● Effectiveness
● Examples
● AR Turnover
■ Sales (net) / Average net AR
● Success of the firm in collecting outstanding receivables
● Days Sales in AR
■ Ending net AR / [ Net sales / 365]
● Number of days required to collect AR
○ General rule: the lower the better
● Inventory turnover
■ COGS / Average inventory
● Number of times going through inventory per year
○ General rule: the higher the better
● Days in Inventory
■ Ending inventory / [COGS / 365]
● # days to sell too high - slow moving
● # days to sell too low - selling too fast - giving it away
○ General rule: a little less than industry standard is best
 ● Accounts Payable Turnover
■ COGS / Average AP
● Take full advantage of interest free grace period, but don’t be late
○ No problem paying on time, but don’t pay too fast unless 2% discount
● Days of payables outstanding
■ Ending AP / [COGS / 365]
● # days to pay
○ Too high - problems paying
○ Too low - poor cash management
● Cash conversion cycle (net operating cycle)
■ Days sales in AR + Days in inventory – Days of payables outstanding
● How long to generate cash from core business
● General rule: < or = standard
● Asset turnover
■ Net sales / Average total assets
● Ability of asset to generate revenue
● General rule: = or > standard
● High ratio indicates effective asset use to generate sales

Profitability Ratios
● General rule: = or > standard
● Definition:
● Measures success or failure of enterprise for a given period
● Examples
● Profit margin
■ Net income / Net sales
● Turn revenue into profit, but first cover costs
● Heavily dependent on industry competition
○ As competition ^ PM v
● Return on Assets (ROA)
■ Net income / Average total assets
● Turn asset into profit for owners
● The higher the better
● “DuPont” Return on assets
■ Profit margin x Asset turnover
● Explains why ROA is what it is
○ Do assets generate revenue?
○ Does revenue generate profit?
● Return on total equity
■ Net income / Average total equity
● Return on equity = or > “required rate”
● The Higher the better - is it sustainable?
● Return on sales
■ EBIT/ Net sales
● Sales - COGS - SG&A - Depreciation = Operating income
● Return on sales = or > standard
● Operating margin excludes impact of DFL (degree of financial leverage)
● Gross (Profit) Margin
■ (Net sales - COGS) / Net sales
● Operating Cash Flow Coverage Ratio
■ Cash flow from operations / Current liabilities
● Cash generated from core business
● The higher the coverage, the less risk of distress
Coverage Ratios
● Definition
● Long-risk
● Solvency
● Capital structure
● Examples
● Debt-to-equity
■ Total liabilities / Total equity
● Dependent on risk that management is willing & able to assume
● Degree of financial leverage (DFL) = 1 + debt-to-equity
● The lower the ratio, the better the company’s position; but less risk assumed, lower ROE
● Total Debt Ratio
■ Total liabilities / Total assets
● As debt increases, risk assumed increases, but A = L ^ + E v
● Equity multiplier
■ Total assets / Total equity
■ Used in DuPont model
■ ROA x DFL = ROE
■ Equity multiplier amplifies both risk assumed & potential return
● Times interest earned
■ EBIT / Interest expense
● Interest “coverage” ratio
■ The bigger the variance between numerator and denominator, the less the risk

Investor Ratios
● Definition
● Two ways to make money on common equity
■ Current income (dividend)
■ Change in price (growth)
● Examples
● Earnings per share
■ (Net income - Preferred dividends) / Weighted-average common shares outstanding
● Price earnings ratio
● Price per share / Basic earnings per share
■ “Relative valuation”
■ Preferred equity v: cheap - relatively undervalued
■ Preferred equity ^: expensive - growth
● Dividend payout
● Cash dividends paid / Net income
■ If payout v – more growth opportunities to fund
■ If payout ^ - less growth opportunities
■ Retention Rate = 1 – Dividend payout

Limitations of Ratios
● Easy to compute, but dependent on reliability (methods/estimates)
● Need benchmarks (standard) to compare them to
● Horizontal analysis
○ Measures dollar and % change over a period of time (Trend analysis)
● Vertical analysis
○ Assists in period-to-period analysis, but also allows for comparability among other entities as the statement
is in a common size format (Compare companies of different sizes “cross-sectional”)

Notes from MCQs

● Times interest earned measures the ability of a company to cover interest charges. The greater the ability, the
less the risk of bankruptcy. An increase in times interest earned would generally be considered beneficial.
 F2: Module 8 Partnerships
Admission of a Partner
● By purchase or sale of existing partnership interest = outside partnership transaction
● No JE
● Formation
● Assets
■ Valued at FV (less any associated liabilities)
● Liabilities
■ Recorded at present value
● Partner’s capital account
■ Difference between FV of asset contributed less present value of liabilities assumed
● Creation of a new partnership interest with investment of additional capital
● Exact method
○ Equal to BV
■ Steps
● Determine the exact amount a new partner will have to pay to get his capital
account in the exact proportional interest to the new net assets of the partnership
○ Finger math
■ Get 1/4 = 4 - 1 = divide by 3
■ Get 1/5 = 5 - 1 = divide by 4
■ Get 1/20 = 20 - 1 = divide by 19
● There is no goodwill or bonus
● Old partners’ capital account “dollars” stay the same
● Bonus method
○ Recognize intercapital transfer
■ Steps
● Determine total capital and the interest to the new partner
● If interest < amount contributed, then bonus goes to old partner(s)
○ To existing partners: when new partner pays more than NBV

○
● If interest > amount contributed, then bonus goes to new partner
○ To new partner: when new partner pays less than NBV

○
■ B = Bonus = balance in total capital accounts controls the capital account allocation
 ● Goodwill method
■ Recognized intangible asset
■ G = Goodwill = Going in investment (dollars) controls capital account allocation and
goodwill allocation that goes to the old partners
● Steps
○ Compute new “net assets before goodwill” after admitting new (or paying old) partner
○ Memo: Compute new “capitalized” net assets (= total net worth) and
compare “Capitalized Net Assets” with “Net Assets before Goodwill;” and
○ The “Difference” is “Goodwill” to be allocated to the old partners
according to their old partnership profit ratios

○
● PASS KEY SUMMARY
■ Exact Method
■ The incoming partner’s capital account is their actual contribution (you must calculate)
■ No adjustment to the existing partner’s capital accounts is required
■ Bonus Method
■ Balance in total capital accounts controls the computation
■ The incoming partner’s capital account is their percentage of the
partnership total NBV (after their contribution)
■ Adjust the existing partner’s capital accounts to balance
■ Goodwill Method
■ Going in investment (dollars) controls the computation
■ The incoming partner’s capital account is their actual contribution
■ Goodwill (implied) is determined based upon the incoming partner’s contribution, and it is
shared by the existing partners

Profit and Loss Distribution

● Distributed in accordance with agreement
● In absence of agreement, all partners share equally irrespective of their capital accounts
● All interest, salaries, and bonuses are deducted from total profit to arrive at the amount of profit and loss distributed
Withdrawal of a Partner
● Bonus method
● Process
■ Difference between withdrawing partner’s capital account and the amount that person is paid
■ Bonus is allocated among remaining partners’ capital accounts in accordance with profit and loss ratios
● Journal Entries
■ JE to revalue assets to reflect FV
● Asset Adjustment XXX Adjust assets up to FV
○ A, Capital (%) XXX Based on profit/loss ratios
○ B, Capital (%) XXX Based on profit/loss ratios
○ X, Capital (%) XXX Based on profit/loss ratios

■ JE to pay off withdrawing partner

● A, Capital (%) XXX Make up difference
● B, Capital (%) XXX Make up difference
● X, Capital (100%) XXX Paid him more than his capital account
○ Cash XXX Amount paid to withdrawing partner

● Goodwill method
● Process
■ Implied goodwill is allocated to all of the partners in accordance with profit and loss ratios
● Journal Entries
■ JE to revalue assets to reflect FV
● Asset adjustment XXX Adjust assets up to FV
○ A, Capital (%) XXX Based on profit/loss ratios
○ B, Capital (%) XXX Based on profit/loss ratios
○ X, Capital (%) XXX Based on profit/loss ratios

■ JE to record goodwill to make withdrawing partner’s capital account equal payoff

● Goodwill XXX Implied
○ A, Capital (%) XXX Based on profit/loss ratios (remaining)
○ B, Capital (%) XXX Based on profit/loss ratios (remaining)
○ X, Capital (%) XXX Get him to exact amount of buyout

■ JE to pay off withdrawing partner

■ X, Capital (100%) XXX Account should equal cash paid to him
○ Cash XXX Cash paid to him
 ● SIM Example of Bonus Method vs. Goodwill Method Journal Entries

Liquidation of a Partnership
● Order of Preference Regarding Distribution of Assets
● Creditors (including partners): paid first
● Partner’s Capital: paid last
■ Right of offset between partner’s loans to and from partnership
● Losses considered in liquidation
● Convert non-cash assets
● Gain or loss on realization
● Capital deficiency
● Right of offset: use their loan account
● Remaining partners charged: if negative partner runs out of $
● Partnership liquidation schedule:

●
● PASS KEY
● Generally, the “poor” partners do not have any money to repay their shortage; so (generally),
the “richest” partners are paid first
● Many MCQs ask for ending partners’ balances after liquidation of a partner or the partnership’ some
questions merely ask for amount of “cash” to be paid upon liquidation
■ If all “other” assets and all liabilities are liquidated, the answer will be the same: Cash = Partners’ balances
 F3: Assets and Related Topics

F3: Module 1 Cash and Cash Equivalents

Cash and Cash Equivalents

● Cash includes
○ Currency
○ Demand deposits
● Cash equivalents
○ Short-term, highly liquid investments that are both readily convertible to cash and so near their
maturity when acquired by the entity (90 days or less from date of purchase) that they present
insignificant risk of changes in value
■ KEY IS ORIGINAL MATURITY < or = 90 DAYS
● Examples of cash and cash equivalents:
● Coin and currency on hand
● Petty cash
● Checking accounts
● Savings accounts
● Money market funds
● Deposits held as compensating balance (not legally restricted)
● Negotiable paper
■ Traveler’s checks, bank drafts, and cashier checks
■ Treasury bills and commercial paper
■ Certificates of deposit (original maturities of 90 days or less)
● Things that are NOT cash or cash equivalents:
● Time certificate of deposit (if original maturity > 90 days)
● Legally restricted deposits held as compensating balance against borrowing arrangements with a lending institution
● Restricted or unrestricted cash
● Restricted cash
■ Cash that has been set aside for specific use or purpose (ex: purchase of PP&E)
● Unrestricted cash
■ Cash that can be used for all current operations
● Disclosures
■ Nature, amount, and timing of cash restrictions should be disclosed
● Current or non-current

Bank Reconciliations: two forms

● Components of a simple reconciliation
● Goal
■ Calculate the “true balance” of cash
● Shore up differences between cash balance reported by bank and cash balance per books
● Calculations
■ Balance per books
● - Service charges
● + Bank collections
● - NSF checks
● + Interest income
● +/- Errors
■ Balance per bank
● + Deposits in transit
● - Outstanding checks
● +/- Errors

Reconciliation of Cash Receipts and Disbursements

● Four-column reconciliation, or proof of cash, that serves as a proof of the proper recording of cash transactions
Notes from MCQs
● Marketable equity and debt securities are both classified as investments, not cash/cash equivalents
● Cash in a bond sinking fund is restricted cash and would not be included in cash and cash equivalents
● Negative bank balance (overdraft)
○ General rule
■ Should be reported on the BS as a current liability
● DR: Bank Account (to get back to 0)
○ CR: Current Finance Obligation (Amount of overdraft)
○ If there is a right of offset agreement, net the accounts at each bank before determining if there is a liability
● If the entity voids a check, even after year-end, that will be an addition to the book balance because it is no longer an outflow
 F3: Module 2 Trade Receivables

Types of Receivables
● AR
○ Oral promises to pay debt
● Trade receivables
○ AR from purchasers of the company’s goods and services
● Non-trade receivables
○ AR from persons other than customers, such as advances to employees, tax refunds, etc.
● NRV of AR
○ Balance of AR account adjusted for:
■ Allowances of receivables that may be uncollectible
■ Sales discounts
■ Sales returns and allowances

Accounts Receivable
● What makes AR go up or down?
● Up
■ Credit sales
● Down
■ Cash collected
■ Write-offs
■ Convert AR to Notes Receivable
● Valuation of AR with Discounts
● Sales or cash discounts
■ Gross method
● Records sale without regard to available discount
○ If payment is received during the discount period, a sales discount (contra-revenue)
account is debited to reflect sales discount
● Journal Entries
○ JE on date of sale
■ DR: AR Full amount
● CR: Sales Revenue Full amount
○ JE if payment is received within discount period
■ DR: Cash Amount received
■ DR: Sales Discounts Plug
● CR: AR Wipe-off
○ JE if payment is not received within discount period
■ DR: Cash Amount received
● CR: AR Wipe-off
■ Net method
● Records sale & AR net of available discount
○ If payment is received after the discount period, sales discount not taken account (revenue)
must be credited
● Journal Entries
○ JE on date of sale
■ DR: AR Net amount
● CR: Sales Revenue Net amount
○ JE if payment is received within discount period
■ DR: Cash Amount received
● CR: AR Wipe-off
○ JE if payment is not received within discount period
■ DR: Cash Amount received
● CR: Sales Discounts Not Taken Plug
● CR: AR Wipe-off
● Trade discounts (quantity discounts)
○ Quoted in percentages
○ Sales revenue and AR are recorded net of trade discounts
○ Applied sequentially

■
● Estimating (accruing) uncollectible AR
○ Should be presented on BS at NRV
■ Gross AR - Allowance for Doubtful Accounts = NRV
● Direct write-off method (Tax NOT GAAP)
○ No JE until written off
○ For tax purposes: expenses not estimated because if you overstate expenses, you pay less tax
○ AR is always overstated for tax purposes
● Allowance method (GAAP - matching principle)
○ Contra-asset account
■ Debit allowance account to write off receivable
■ Allowance account has a normal credit balance
○ Methods
■ Current expected credit losses model (CECL)
○ Balance should be based on current conditions, past experience, and future expectations
● Percentage of AR method
● Amount calculated is the ending balance that should be in the Allowance for Doubtful Accounts
■ Step 1: Calculate the necessary ending balance in Allowance for Doubtful Accounts
■ Step 2: Back into current year Bad Debt Expense
● Aging of Receivables method
● Emphasized asset valuation “NRV”
■ Balance in each category x Estimated % uncollectible = Estimated uncollectible amount
● Bad Debt Expense
● Amount charged to earnings for the bad debt expense of the period includes:
● Provision made each period throughout the year
● Adjustment made at year-end to increase/decrease the balance in the allowance for uncollectible accounts
● What makes Allowance for Doubtful Accounts go up or down?
● Up
■ Bad Debt Expense accrual each year
■ Recoveries
● Down
■ Write-offs
● Journal Entries
● Write-off specific AR
● Allowance method
● DR: Allowance for Uncollectible Accounts XXX
■ CR: AR XXX
● Direct write off method (for tax purposes)
● DR: Bad debt expense XXX
■ CR: AR XXX

● Subsequent collection of AR written off

● Allowance method
■ DR: AR XXX
● CR: Allowance for Uncollectible Accounts XXX
■ DR: Cash XXX
● CR: AR XXX
● Direct write off method (for tax purposes)
■ DR: Cash XXX
○ CR: Uncollectible Account Recovered XXX

● Pledging (assignment)
● Definition
■ Using AR as collateral for a loan
● Accounting
■ Footnote disclosure only
■ No JE
● Factoring of AR
● Types
■ Without recourse
● Definition
○ True sale thus AR v
■ Sale is final and the assignee assumes risk of any losses on collections
● Journal Entries
○ DR: Cash XXX
○ DR: Due from factor XXX (factor’s margin)
○ DR: Loss on sale of receivable XXX
■ CR: AR XXX
● Due from factor
○ Asset account
○ Protects the factor against sales returns, sales discounts, allowances, and customer disputes
■ If the returns, discounts, and allowances are less than retained amount,
the balance will be returned to the seller
● With recourse
■ Can be sale or pledge
● Treat as sale if:
● Seller’s obligation for uncollectible accounts can reasonably be estimated
● Transferor surrenders control
● Transferor cannot be required to repurchase the receivables, but may be
required to replace the receivables
■ If any above conditions are not met
● Treat as loan
○ Footnote disclosure only
 ● Securitization
○ AR are transferred to a different entity, such as trust or subsidiary
○ The entity then sells securities that are collateralized by the AR
○ Investors receive cash as AR are paid

Notes Receivable
● Definition
● Written promises to pay a debt
● Face value = principal
● Maturity value = principal + interest
● Valuation and presentation
● For FS purposes, unearned interest and finance charges are deducted from face amount of related promissory note
■ This is necessary to state receivable at present value
● Face amount - Unearned interest = Present value
● Accrue (earned) interest over time, not when $ received
● Discounting notes receivable (i.e., get cash now)
● Entity gives the note (with or without recourse) to a 3rd party and receives a sum of cash in return
■ Steps to determine amount of cash received
● Original note: Principle x Rate x Time = Interest
● Principle + Interest = Maturity value
● Maturity value x Bank rate % x Time remaining on note = Bank charge
● Maturity value - Bank charge = Cash received by entity
■ With recourse
● Journal Entry
○ DR: Cash XXX
■ CR: Notes Receivable Discounted XXX contra-asset account
● OR remove the Notes Receivable from the BS and add a contingent liability in the notes to the FS
■ Without recourse (risk of loss is on the buyer)
● Journal Entry
■ DR: Cash XXX
■ DR: Loss XXX
● CR: Notes Receivable XXX

Notes from MCQs

● For the year ended December 31, Beal Co. estimated its allowance for uncollectible accounts using the year-end
aging of AR. The following data are available:
○ Allowance for uncollectible accounts 1/1 $42,000
○ Provision for uncollectible accounts (2% of $2m) 40,000
○ Uncollectible accounts written off 11/30 46,000
○ Estimated uncollectible accounts per aging 12/31 52,000
■ After the year-end adjustment, the uncollectible accounts expense should be:
● Beg balance: $42,000
● Add: Provision for year 40,000
● Less: Uncollectible AR written off (46,000)
● Ending balance (before adj) 36,000
● Estimated uncollectible AR 52,000
● Difference $16,000
○ Provision $40,000 + Adj of $16,000 = $56,000
● Allowance for Sales Returns (subtracted from gross sales to get net sales) functions very similarly to
Allowance for Doubtful Accounts
● Security deposits are not accounts receivable
 F3: Module 3 Inventory
Inventory of goods
● Must be periodically counted, valued, and recorded
● Types of inventory
○ Retail inventory
○ Raw materials inventory
○ Work-in-process inventory (WIP)
○ Finished goods inventory

Goods and materials to be included in inventory

● Any good in which company has “legal title” to
● Goods in transit: are “we” the buyer or the seller of the goods?
■ If no conditions are explicitly agreed on:
● Title passes from seller to buyer at time and place where seller’s performance
regarding delivery of goods is complete
■ FOB “free on board”
● FOB shipping point “freight in”
○ Title passes to buyer when seller delivers goods to common carrier
○ Goods shipped should be included in buyer’s inventory upon shipment (in truck)
○ All selling costs are included in buyer’s inventory
● FOB destination “freight out”
○ Title passes to buyer when buyer receives goods from common carrier
○ Goods shipped should be included in seller’s inventory until delivered to buyer
○ All selling costs are paid by the seller and are NOT included in the buyer’s inventory
● Shipment of nonconforming goods
■ Should be included in the seller’s inventory, regardless of who has physical possession
● Consigned goods
■ Consignor is the true owner while the consignee is merely a sales agent
● Inventory belongs to consignor even though the consignee possesses the goods
○ Revenue will be recognized when goods are sold to third party

Valuation of inventory
● General Rule - at cost
● Cost includes freight in (any cost incurred, that isn’t a period cost, to get inventory to a place where it can be sold),
less purchase discounts
● Departures from the cost basis - EXCEPTIONS
● Precious metals and farm products
■ Valued at NRV (selling price - costs of disposal)
● Lower-of-cost-or-market and Lower-of-cost-or-NRV
■ When utility of goods is no longer as great as their cost (loss on sale is expected)
● Recognize loss in current period
○ Write-down of inventory is usually reflected in COGS
○ If the loss is material, identify separately in IS
● Reversal of inventory write-downs: NO
■ Lower-of-cost-or-NRV
● FIFO and weighted-average
■ Lower-of-cost-or-market
● LIFO/Retail
○ Market value
■ MIDDLE VALUE of following three items:
● Replacement cost: current cost to purchase item as of valuation date
● Market ceiling: NRV (selling price - costs to sell)
● Market floor: NRV - normal profit margin
■ Then, compare the MIDDLE VALUE to cost and value at the lower
● Disclosure requirements:
■ Substantial and unusual losses, disclose in FS
Periodic vs. Perpetual
● Periodic
● 1 JE at time of sale
● Determined by physical count annually
● Actual COGS is determined after physical inventory by “squeezing” the difference between beginning inventory
+ purchases - ending inventory
● Formula
■ Beginning Inventory
■ + Purchases
■ = Cost of Goods Available for Sale
■ - Ending Inventory (physical count)
■ = Cost of Goods Sold
● Perpetual
○ 2 JEs at time of sale
○ No purchases
○ When bought, immediately debit inventory

Primary Inventory Cost Flow Assumptions

● Specific Identification Method
● Cost of each item is uniquely identified (VIN #)
■ Used for physically large or high-value items (cars, boats, diamonds)
● FIFO
● Sell the old; unsold are the newest
● Ending inventory and COGS are the same whether periodic or perpetual
● In periods of rising prices, FIFO results in highest ending inventory, lowest COGS, and highest NI
● Weighted-Average Method
● Periodic
● Determined by:
■ Total costs of inventory available / Total number of units of inventory available
● Moving-Average Method
● Perpetual
● Computes new weighted average cost after each purchase
■ Total costs of inventory available / Total number of units of inventory available
● LIFO
● Lower-of-cost-or-market
■ Market = middle value of
● Replacement cost
● Market ceiling (NRV = selling price - costs to sell)
● Market floor (NRV - normal profit margin)
● Does not generally represent physical flow of goods
● If used for tax purposes, must also be used in GAAP FS (LIFO conformity rule)
● Better matches expense against revenues because it matches current costs with current revenues
■ If sales exceed production (or purchases) for a given period, LIFO will result in a distortion of net income
because old inventory costs (called “LIFO layers”) will be matched with current revenue
■ In periods of rising prices, LIFO results in lowest ending inventory, highest COGS, and lowest NI (LIFO = lowest)
■ LIFO Layers
● Unlike FIFO, LIFO periodic does NOT = LIFO perpetual
 ● Dollar-Value LIFO
● Estimate of changes in price levels is required
■ Inventory is measured in dollars and is adjusted for changing price levels
● Internally computed price index
○ To compute the LIFO layer added in the current year at dollar-value LIFO:
■ LIFO layer at base year cost x Internally computed price index
● Price index = Ending inventory at current year cost / Ending inventory
at base year cost
● Determining ending inventory balance that ends up on the BS
■ Ending inventory in current-year dollars / Price index = Ending inventory in base-year dollars
■ Ending inventory in base-year dollars - Beginning inventory in base-year dollars = Change in
inventory in base-year dollars
■ Change in inventory in base-year dollars x Price index = LIFO layer for the year
■ Beginning inventory in base-year dollars + LIFO layer for the year = Ending inventory balance
● Gross Profit Method
● Quarterly reporting and periodic system
■ Used for interim FS
● Inventory is valued at retail, and average gross profit % is used to determine inventory cost for interim FS
■ GP % is used to calculate cost of sales

Firm purchase commitments

● Definition
● Buy inventory in the future at a price locked in today
■ Legally enforceable agreement to purchase a specified amount of goods at some time in the future
● Must disclose in FS
● What happens if losses?
● If contract price exceeds market price and losses are expected, loss should be recognized at time of decline in price
(rule of conservatism)
■ Journal Entry
● DR: Estimated loss XXX
○ CR: Estimated liability XXX
● Only make an entry if obligated to purchase a fixed number of units

Notes from MCQs

● Freight-out is a selling (period) expense, not an item that is capitalizable as inventory.
 F3: Module 4 PP&E: Cost Basis
Property, Plant, and Equipment
● Definition
○ Fixed assets for use in business NOT resale
○ Physical substance
○ Long-term
○ GR: subject to depreciation
● Examples
○ Land (Property): NO depreciation
○ Buildings (Plant)
○ Equipment
○ Accumulated depreciation: contra-asset account (normal CREDIT balance)

Valuation of fixed assets under GAAP

● Historical cost: purchase price “+”
● Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should
be valued at the PV of all future payments
● Donated Fixed Assets
● Come on the books at FV
■ Journal entry
● DR: Fixed Asset (FMV) XXX
○ CR: Gain on Nonreciprocal Transfer XXX

Property
● Cost of land
● No depreciation
● Includes all costs incurred up to excavation
■ Purchase price
■ Brokers’ commissions
■ Title and recording fees
■ Legal fees
■ Draining of swamps
■ Clearing of brush and trees
■ Site development
● Grading
● Filling in/leveling to make a “pad”
■ Existing obligations assumed by buyer
● Mortgages
● Back taxes
■ Costs of razing (tearing down) an old building
● Demolition
■ Less:
● Proceeds from sale of existing buildings, standing timber, etc.
● Land improvements
● Accounting treatment
■ Capitalize and the DEPRECIATE over useful life
● Examples
■ Fences
■ Water systems
■ Sidewalks
■ Paving - parking lots
■ Landscaping
■ Lighting
● Interest costs
● During construction - added to cost of land improvements based on weighted average of accumulated expenditures
Plant
● Cost of plant/building includes:
● Cost of excavation (digging foundation)
● Purchase price
● All repair charges “neglected” by previous owner (“deferred maintenance”) - not ordinary
● Alterations and improvements
● Architect’s fees
● Possible addition of construction-period interest (covered in detail later)
● PASS KEY
● When purchasing land for construction of building:
■ Land cost
● Filling in hole/leveling
■ Building cost
● Digging hole for foundation

Basket purchase of land and building

● Allocate purchase price based on ratio of appraised values

Equipment
● Examples
● Office equipment
● Machinery
● Furniture
● Fixtures
● Factory equipment
● Cost of equipment
● Includes all expenditures related directly to acquisition/construction of equipment
■ Invoice price “+”
■ Freight-in
■ Installation charges (including testing and preparation for use) “cost to rearrange”
■ Sales and federal excise taxes
■ Possible addition of construction period interest
■ Less: cash discounts
● Capitalize vs. expense
● Additions
■ Capitalize
● Improvements (betterments) and replacements
■ Capitalize
● If carrying value of old asset is known:
○ Remove it and recognize any G/L
○ Capitalize cost of improvement/replacement to asset account
● If carrying value of old asset is unknown, and:
○ Asset’s life is extended:
■ Debit accumulated depreciation for the cost of improvement/replacement
○ Usefulness (utility) of asset is increased:
■ Capitalize the cost of improvement/replacement to asset account
 ● Repairs
■ Ordinary repairs
■ Expensed to repairs & maintenance expense
■ Extraordinary repairs
■ Capitalized
● Additions
● Benefit several periods
● Improve efficiency

Fixed assets constructed by a company

● Costs to capitalize
● Direct materials and labor
● Repairs and maintenance expenses that add value to fixed asset
● Overhead, including direct items of overhead
● Construction period interest GR: interest is expensed as incurred
● Capitalization of interest costs
● EXCEPTION to expensing as incurred
■ Capitalized based on weighted average of accumulated expenditures as part of cost of producing fixed assets,
such as buildings, machinery, or land improvements, that are constructed or produced for others or to be used
internally
● Computing capitalized cost
■ Avoidable interest
● Interest paid on construction loan
○ Principal x rate x time for the construction loan
● Weighted-average accumulated expenditures
○ Each payment that is made for the period and multiply its amount by the
number of months in the year it was paid in
■ (EX: a payment made in March would be taken 10/12)
● Weighted-average interest rate on other borrowings
○ (Principle x rate x time for the borrowings, excluding the construction loan) / Face
amount of the borrowings, excluding the construction loan
● FINAL CALCULATION
○ Interest paid on construction loan + [(weighted-average accumulated expenditures -
construction loan face amount) * weighted-average interest rate on other borrowings]
■ Cap on capitalizable interest
● Actual interest costs during the year
● Do not reduce capitalizable interest
● PASS KEY
■ Two rules concerning capitalized interest
● Rule 1
○ Only capitalize interest on money actually spent, NOT on total amount borrowed
● Rule 2
○ The amount of capitalized interest is the LOWER of
■ Actual interest cost incurred, or
■ Computed capitalized interest (avoidable interest)
 ●

●
● Capitalization of “interest period”
■ BEGINS when three conditions are present:
■ Expenditures for the asset have been made - building decision made
■ Activities that are necessary to get the asset ready for its intended use are in progress - permits filed
■ Interest cost is being incurred
■ STOPS during intentional delays, but continues during ordinary construction delays (waiting on inspection)
■ ENDS when asset is “substantially complete” and ready for intended use
● Disclose in FS
■ Total interest cost incurred during the period
■ Capitalized interest cost for the period, if any

Notes from MCQs

● Leasehold improvements are capitalized and then amortized over the lesser of:
○ Life of the improvements, or
○ Remaining term of the lease
● Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be
valued at PV of all future payments.
● Interest costs incurred during the construction period of machinery to be used by a firm as a fixed asset should
be capitalized as part of the historic cost of acquiring the fixed asset.
● Interest costs on the fixed asset subsequent to the construction period as well as interest costs on the routine
manufacture of machinery for sale to customers (inventory) should be expensed in the IS for the period incurred.
● Machinery held for sale is always IMMEDIATELY expensed in the period. (all interest incurred is expensed)
 F3: Module 5 PP&E: Depreciation and Disposal
Rules to remember
● If you can touch it, depreciate it
● If it’s intangible, amortize it
● If it’s a natural resource, deplete it

Terms to remember
● Physical depreciation
○ Asset’s deterioration and wear over a period of time
● Functional depreciation
○ Obsolescence or inadequacy of the asset to perform efficiently
● Salvage value
○ Estimate of amount that will be realized at the end of the useful life of a depreciable asset
● Estimated useful life
○ Period of time over which an asset’s cost will be depreciated
■ Revision must be accounted for PROSPECTIVELY in current and future periods only (change in estimate)
● Depreciable base
○ Cost - salvage value

Component Depreciation
● Separately depreciate each part of an item of PP&E that is significant to total cost of the fixed asset
○ Permitted, but rarely used under GAAP

Composite (Group) Depreciation

● Definition
○ Process of averaging economic lives of a number of property units and depreciating the entire class of
assets over a single life (to simplify record keeping)
● Asset retirement
○ When individual asset is sold or retired, NO G/L on IS
■ The G/L is absorbed in accumulated depreciation account for the
difference between original cost & cash received
● Example

○
Basic Depreciation method
● Goal
● To provide for a reasonable consistent matching of revenue & expense by systematically allocating the
cost of the depreciable asset over its estimated useful life
● Methods
● Straight-Line
■ Definition
● Service potential declines with time
■ Formula
● Depreciation
○ (Cost - Salvage value) / Estimated useful life
● Sum-of-the-Years’-Digits
■ Definition
● Accelerated method that provides higher depreciation expense in the early years and
lower charges in later years
■ Formula
● Denominator
○ n(n + 1) / 2
■ Examples
● For 4 years = 4 * (4 + 1) / 2 = 10
● For 5 years = 5 * (5 + 1) / 2 = 15
● Depreciation
○ (Cost - Salvage value) x (Remaining life of asset / Sum-of-the-years’ digits)
● Units-of-production
■ Definition
● Service potential declines with use
● Converts depreciation to a variable cost
■ Formula
● Rate per unit or hour
○ (Cost - Salvage value) / Estimated units or hours
● Depreciation
○ Rate per unit or hour * Number of units produced or hours worked
● Declining balance
■ Definition
● Asset subject to rapid obsolescence
● SV ignored in calculation of annual expense, but do NOT depreciate below estimated SV
■ Formula
● Depreciation
○ 2 * (1/N) * (Cost - Accumulated depreciation)
■ Redo each year while keeping “n” constant
● Comparison of methods on a graph

■
● Partial-year depreciation
■ Unless told otherwise, use date placed in service
■ Half-year convention is permissible for FS purposes
Disposals
● When depreciation is taken “individually”, not as group, the G/L is recognized
● Journal entries
■ Sale of an asset during its useful life
● DR: Cash received from sale XXX
● DR: Accumulated depreciation XXX
● Difference is G/L (CR/DR) XXX or XXX
○ CR: Sold asset at cost XXX
● Write-off fully depreciated asset
● DR: Accumulated depreciation (100% of it) XXX
■ CR: Old asset at full cost XXX
● Total and permanent impairment
● Journal entry
■ DR: Accumulated depreciation (per records) XXX
■ DR: Loss due to impairment XXX
● CR: Asset at full cost XXX

Disclosure
● Depreciation expense for the period
● Balance of major classes of depreciable assets by nature/function
● Accumulated depreciation allowances by classes or in total
● The methods used in computing depreciation

Depletion
● Definition
● Allocation of the cost of wasting natural resources
● Purchase cost
● Includes expenditures necessary to purchase and prepare land for removal of resources
(drilling costs, costs for tunnels or shafts) or to prepare asset for harvest
● Residual value
● Similar to salvage value
● Monetary worth of depleted asset after resources have been removed
● Calculation of depletion
● Depletion base
■ Cost - Residual value
● Cost includes (“REAL”)
○ Residual value (subtract)
○ Extraction/development cost
○ Anticipated restoration cost
○ Land purchase price
● Unit depletion rate
■ Depletion base / Estimated recoverable units
● Final calculation
■ Unit depletion rate * Number of units extracted
● Recognition of depletion
● If all units extracted are “not sold”, then depletion must be allocated between COGS and inventory
● PASS KEY
● When computing depletion of land, remember it is REAL property:
● Residual value (subtract)
● Extraction/development cost
● Anticipated restoration cost
● Land purchase price
 F3: Module 6 Non-Monetary Transactions
Exchanges Having Commercial Substance
● Definition
○ Exchange has commercial substance if the future cash flows change as a result of the transaction
■ Economic position of the two parties changes
■ Fair value approach is used
■ Gain/loss is recognized
○ PASS KEY
■ The fair value of assets given up is assumed to be equal to the fair value of assets received
including any cash given or received in the transaction
● Recognizing Gains and Losses
○ Gains and losses are always recognized in exchanges having commercial substance
■ Calculation
● FV old - BV old > 0 = Gain
● FV old - BV old < 0 = Loss
■ Cash given up/received does not factor into the calculation of gain/loss on exchange
● Calculation of Basis of Acquired Asset
○ Calculation
■ Cash paid
■ + FV assets/stock given up
■ + PV liability
■ = Basis
○ Check
■ Initial BV should be FV
● Journal Entries
○ To record the exchange and gain on exchange
■ DR: New Asset XXX Initial BV “cost”
■ DR: Accumulated Depreciation - Old Asset XXX Wipe off
● CR: Old Asset XXX Historical cost
● CR: Gain on Disposal of Asset XXX Recognized
● CR: Cash XXX Paid
○ To record the exchange and loss on exchange
■ DR: New Asset XXX Initial BV “cost”
■ DR: Accumulated Depreciation - Old Asset XXX Wipe off
■ DR: Loss on Disposal of Asset XXX Recognized
● CR: Old Asset XXX Historical cost
● CR: Cash XXX Paid
○ Example

■
Exchanges Lacking Commercial Substance
● Definition
○ Exchange lacks commercial substance if projected cash flows after the exchange are not expected to change significantly
● Steps
○ Step 1
■ FV old
■ - BV old
■ = “Math” gain/loss
○ Step 2
■ Follow rules
● Gains
○ No boot
■ No gain is recognized

■
○ Boot is paid
■ Boot is less than 25% of total consideration
● No gain is recognized

●
■ Boot is 25% or more of total consideration
● Both parties account for the transaction as a monetary exchange
○ Gains and losses are recognized in their entirety
○ Boot is received
■ Boot is less than 25% of total consideration
● Recognize proportional gain
○ Total boot received / Total consideration received = % of gain realized that is recognized

●
■ Boot is 25% or more of total consideration
● Both parties account for the transaction as a monetary exchange
○ Gains and losses are recognized in their entirety

●
 ● Losses
○ Losses should be recognized immediately in full

Involuntary Conversion
● Think about it like this:
○ “Sell” to insurance company, where the selling price = insurance proceeds
● Overview
○ Entire gain/loss is recognized

Notes from MCQs

● Trading vehicles for vehicles, or inventory for inventory, generally lacks economic substance
 F3: Module 7 Intangibles
Intangible assets
● Definition
● Long-lived legal rights and competitive advantages developed or acquired by a business enterprise
● Classification
● Patents, copyrights, franchises, trademarks, and goodwill
● May be either specifically identifiable (patents, copyrights, franchise, etc.) or not specifically identifiable (goodwill)
● Manner of acquisition
● Purchased intangible assets
■ Capitalize at cost
● Internally developed intangible assets
■ General rule
● Expensed
■ EXCEPTIONS that are capitalized:
● Legal fees and other costs related to successful defense of the asset
○ Unsuccessful is expensed
■ Then, test asset for impairment
● Registration or consulting fees
● Design costs (of a trademark)
● Other direct costs to secure the asset
● Capitalization of costs
● Cost is measured by:
■ Amount of cash disbursed
■ FV of other assets distributed
■ PV of amounts to be paid for liabilities incurred
■ FV of consideration received for stock issued
● Cost may be determined by FV of consideration given or FV of property acquired, whichever is more clearly evident
● Cost of unidentifiable intangible assets is measured as the difference between cost of group of assets or enterprise
acquired and the sum of the costs assigned to identifiable assets acquired, less liabilities assumed (residual $)
● Cost of identifiable assets should not include goodwill
● Amortization
● Must have a finite life
● PASS KEY
■ A patent is amortized over shorter of
● Estimated life, or
● Remaining legal life
● Method
■ Straight-line
● Change in useful life
■ Treated as a change in estimate
● Prospective (recalculate)
● Sale of intangible assets
● Calculate gain/loss
■ SP - BV
● Valuation
● Finite life
■ Cost – amortization – impairment
● Indefinite life
■ Cost – impairment
Franchisee Accounting
● Initial franchise fees
○ Intangible asset and amortized over the expected period of benefit
■ Capitalize:
● Cash
● FV asset
● PV note
● FV stock

○
● Continuing franchise fees
○ Expense as incurred

Start-Up Costs
● Definition
○ Expenses incurred in the formation of a corporation (i.e., legal fees)
● Accounting Treatment
○ Expense as incurred
● Examples
○ Legal fees for starting the entity
○ Opening a new facility
○ Introducing a new product or service
○ Conducting business in a new territory or with a new class of customer
○ Initiating a new process in an existing facility
● Do not include
○ Routine, ongoing efforts to refine, enrich, or improve the quality of existing products, services, processes, or facilities
○ Business mergers or acquisitions
○ Ongoing customer acquisition
Research & Development Costs
● Accounting Treatment
○ General rule
■ Expense as incurred
○ Exceptions
■ Materials, equipment, or facilities that have alternative future uses (PP&E)
● Capitalize and depreciate as R&D expense over asset’s useful life
■ Undertaken on behalf of others under a contractual arrangement
● Expense right away as operating expense (not R&D expense)
● Things that are not R&D (expense as operating expense)
○ Routine periodic design changes
○ Troubleshooting in the production stage
○ Engineering follow-ups
○ Marketing Research
○ Quality control testing
○ Reformulation of a chemical compound
Computer Software Development Costs
● Computer Software Developed to Be Sold, Leased, or Licensed
○ Accounting for Costs

■
○ Amortization of Capitalized Software Costs
■ GREATER of:
● Percentage of revenue
○ Total capitalized amount x (Current gross revenue for period / Total
projected gross revenue for product)
■ Similar to percentage-of-completion
● Straight-line
○ Inventory
■ Costs incurred to actually produce the product are product costs charged to inventory
● EX: packaging
■ Capitalized software costs are reported at the lower-of-cost-or-market
● Market = NRV
● Computer Software Developed Internally or Obtained Only for Internal Use
○ Accounting for Costs

■
■ Expense
● Costs incurred for the preliminary project state (idea)
● Costs incurred for training and maintenance
■ Capitalize
● Costs incurred after technological feasibility has been established
○ Direct costs of materials and services
○ Costs of employees directly working on the project
○ Interest costs incurred for the project
○ Amortization
■ Straight-line over the life of the product
○ Revenue Recognition
■ If software previously developed for internal use is subsequently sold to outsiders:
● Proceeds are applied to:
○ First, carrying amount of software
○ Then, recognized as revenue after the carrying amount of the software = 0
 F3: Module 8 Impairment
Impairment of Intangible assets other than (NOT) goodwill
● Indefinite life
● Tested for impairment at least annually
■ 1 step impairment test
● Compare FV (discounted future cash flows) of intangible asset to its CV
○ If FV > carrying value
■ No impairment
○ If FV < carrying value
■ Asset is impaired
● Write down to fair value
● Finite life
● Tested whenever triggering events (bad things)
■ 2 step impairment test
● Step 1
○ Recoverability test
■ Compare sum of undiscounted future cash flows to CV
● If undiscounted future cash flows > carrying value
○ STOP, asset is not impaired
● If undiscounted future cash flows < carrying value
○ Asset is impaired, go to Step 2
● Step 2
○ Book impairment loss
■ Impairment loss equal to the difference between carrying value
and fair value (FV) or discounted (PV) cash flows
● PASS KEY
■ Step 1: Determining the impairment
● Use undiscounted future net cash flows
■ Step 2: Amount of impairment
● Use fair value (FV) or discounted (PV) future cash flows
● Reporting an impairment loss
● Goes in continuing operations
● General rule: write downs cannot be reversed
■ EXCEPTION: write downs can be reversed if asset is being held for sale
● Cannot go above previous write down amount

●
 Impairment of PP&E
● Test for recoverability
● If sum of undiscounted expected FCFs > BV
■ No impairment
● If sum of undiscounted expected FCFs < BV
■ Asset is impaired
● Reporting the impairment loss
● Goes in continuing operations
● General rule: write downs cannot be reversed
■ EXCEPTION: write downs can be reversed if asset is being held for sale
● Cannot go above previous write down amount

PASS KEY
● It is important to remember the following rules when performing your calculations:
○ Determining the impairment: use undiscounted future net cash flows
○ Amount of the impairment: use fair value (FV) or discounted (PV) future cash flows
 F4: Investments, Business Combinations, and Goodwill

F4: Module 1 Financial Instruments

Financial Assets
● Definition
● Receiving payments - investor, bondholder, lender
● Examples
● Cash
● Evidence of an ownership interest in an entity (stock certificates, partnership interests)
● Contract that conveys to one entity a right to receive cash or another financial instrument from a second entity
■ Bond investments
■ Notes receivable
● Exchange other financial instruments on potentially “favorable terms” [winner] with the second entity
■ Stock options
■ Futures/forward contracts
■ Other derivatives

Financial Liabilities
● Definition
○ Make payments - borrower, issuer, seller bond
● Examples
○ Obligation to deliver cash or another financial instrument to a second entity
■ Bond obligations
■ Notes payable
○ Obligation to exchange other financial instruments on potentially “unfavorable terms” [loser] with the second entity
■ Stock options
■ Futures/forward contracts
■ Other derivatives

Fair Value Option (follow same rules as trading securities)

● Accounting treatment
● Unrealized gains/losses are reported in IS
● Irrevocable once elected
● Eligible financial instruments
● AFS
● Equity - significant influence
● FV changes (change in credit rating) attributable to instrument-specific credit risk (change risk debtor default)
● Notes/bonds
■ OCI
● Derivative liabilities
■ NI
Investments in Debt Securities (Asset)
● Definition
● Buyer/bonds in “other” entities
● NO voting thus significant influence
● Debt Securities
● Definition
■ Any security representing a creditor relationship (lender/bondholder) with an entity
● Examples
■ Corporate bonds
■ Redeemable preferred stock (thus has maturity date)
■ Government securities
■ Convertible debt
■ Commercial paper (notes/drafts)
● Classification
● Trading Securities
■ GR - Current asset
■ When sold, goes in cash flows from operating activities
■ FV
■ All gain/losses on IS
● Available-for-Sale Debt Securities
■ Current or non-current asset, depending on when plan to sell
■ When sold, goes in cash flows from investing activities
■ FV
■ Realized gains/losses on IS
■ Unrealized gains/losses to OCI (“PUFIE”)
● Held-to-Maturity Debt Securities
■ Current or non-current asset, depending on maturity date from BS date
■ When sold, goes in cash flows from investing activities
■ Amortized cost (FV is a distractor)
■ Must have both intent and ability to hold securities to maturity
● Valuation
● Debt securities reported at FV (Trading or AFS)
■ Unrealized G/L: TS - IS
● Accounting treatment
○ Goes in IS - included in earnings
● Journal entry
○ DR: Unrealized Loss on TS XXX
■ CR: Valuation Account (FV Adj) XXX contra-asset
■ Unrealized G/L: AFS - OCI
● Accounting treatment
■ Goes in OCI - equity
● Journal entry
■ DR: Unrealized Loss on AFS XXX
● CR: Valuation Account (FV Adj) XXX contra-asset
■ Realized G/L: TS or AFS
○ Accounting treatment
■ Goes in IS
● Financial Assets reported at amortized cost (HTM - debt only) FV distracter
■ Unrealized G/L are not recognized in FS, as HTM are NOT marked-to-market all period end

●
● Reclassification
● Definition
■ Transfers between categories should occur only when justified
● Accounting treatment
■ Any transfer is accounted for at FV; any unrealized G/L is accounted for as follows:

● Income from investments in debt securities

● Definition
■ Interest income from TS or AFS
● Journal entry
■ DR: Cash XXX
● CR: Interest Income XXX

● Impairment of debt securities

● Applies to
■ AFS
■ HTM
● Expected credit loss (ECL)
■ PV - Amortized cost
● AFS treatment
■ Change in FV = gain/loss
■ Max loss = Expected credit loss (ECL)
● Goes in IS
■ Any excess loss (losses greater than expected credit loss)
● Goes in OCI
● HTM treatment
■ Expected credit loss (ECL) = PV - Amortized cost
● Goes in IS
● Current expected credit losses model (CECL)
■ AFS & HTM reported at net amount expected to be collected (PVFCF)
■ A credit loss is recognized as a current period expense on the IS and as an offsetting allowance on the BS
■ Impairment of HTM
● Credit Loss on IS to write down to PV
○ Journal entry
■ DR: Credit Loss XXX
● CR: Allowance for Credit Losses XXX

○
● Impairment for AFS
○ Accounting treatment
■ Change in FV = gain/loss
■ Max loss = Expected credit loss (ECL)
● Goes in IS
■ Any excess loss (losses > expected credit loss)
● Goes in OCI
○ NOTE
■ When making changes to carrying value of security:
● Unrealized gain/loss uses valuation account
● ECL uses allowance for credit losses

●
 ● Sale of Debt Securities
● Trading securities
● Gain/loss calculation
■ SP - CV at time of sale
● Journal entry
■ DR: Cash XXX
● CR: Trading Security XXX
● CR: Realized Gain on TS XXX (Selling price - Carrying value)
● Cash flows from operating activities
● Available-for-Sale securities
■ Gain/loss calculation
● SP - original cost
● Any unrealized gain/loss in AOCI must be reversed at time of sale
■ Journal entry
● DR: Cash XXX
○ CR: Unrealized Gain on AFS XXX PUFIE
○ CR: AFS Security XXX
○ CR: Realized Gain on AFS XXX (Selling price - Original cost)
■ Cash flows from investing activities

Investments in Equity Securities

● Preferred stock
○ No significant influence
■ Treat as trading security
● Common stock
○ No significant influence
■ Treat as trading security
○ Significant influence (20% - 50%)
■ Equity method
○ Control (> 50%)
■ Consolidate
● Equity securities
● Definition
■ Public or non-public
■ Security that represents an ownership interest
● Examples
■ Ownership shares (common or preferred)
■ Rights to acquire ownership shares (stock warrants, rights, and call options)
■ Rights to dispose of ownership shares (put options)
■ Do NOT include redeemable preferred stock
● Classification
● General rule: FV through NI (FVTNI)
■ Public securities
■ Treat as trading security
● FV
● All gains/losses go in IS
● Practicability exception
■ Non-public securities
■ Measured at cost - impairment
■ No readily determinable FV
● Valuation
● Common equity or preferred equity - no significant influence
■ Journal entry
● DR: Unrealized Loss on Equity Security XXX
○ CR: Valuation Account (FV adj) XXX contra-asset
 ● Income from Investments in Equity Securities
● Normal (non-liquidating) dividend
■ Definition
● Non-liquidating
● Cash NOT stock dividend [stock dividend = basis per share v; # of shares owned ^]
■ Journal entry
● DR: Cash XXX
○ CR: Dividend income XXX
● Liquidating dividend
■ Definition
■ Any dividend that is granted in excess of investee’s retained earnings
● Take total investee RE x % owned by entity to see if any dividends are liquidating
● Treated as return of capital for investor
■ Journal entry
■ DR: Cash XXX
● CR: Investment in Investee (ROC) XXX ROC = Return of Capital
● Impairment of Equity
● FVTNI = loss is already on IS
● Exceptions = must get loss on IS
■ Non-public or no readily determinable FV are measured at cost - impairment
● Qualitative factors suggesting impairment is necessary
○ Heightened concerns regarding ability of investee to continue as going concern
○ Significant and adverse changes in industry, geographic area, technology, etc.
○ A significant decline in earnings, busn prospects, asset quality or credit rating
○ Offers to buy from investee (& willingness to sell) for less than investor’s CV
● When qualitative assessment indicates impairment, security is written down to FV
and all realized loss is included in earnings
● Sale of Security
● Realized gain/loss goes in IS
■ SP - CV at time of sale

Required Disclosures
● General
○ FV/amortized cost/carrying value
○ Realized vs. unrealized gain/loss
○ Impairment charges
○ Concentration/credit risk
■ Possibility of loss from failure of other party to perform
■ Lots of investments in the same industry or region
○ Market risk (OPTIONAL)
■ Possibility of loss due to changes in economic circumstances
● Debt Securities
○ FV
○ Gross unrealized holding gains/losses
○ Amortized cost basis by major security type
○ Maturities
● Equity Securities

○
● Fair Value
○ All fair values of all financial assets and liabilities, grouped by measurement category
○ Public business entities (PBEs) must provide level of classification used to value (Levels 1, 2, 3)
Notes from MCQs
● Dividend revenue, under FV method, should be recognized to the extent of cumulative earnings since acquisition
and return of capital beyond that point
● Not allowed to use FV option:
○ Investments in subsidiaries
○ Pension benefit
○ Leases
 F4: Module 2 Equity Investments

Equity Method
● Applicability
● 20% - 50% and/or exercise significant influence
■ Significant influence
● Largest shareholder
● Majority of board
● Do NOT use equity method when:
● Bankruptcy
● Investment is temporary
● Lawsuit/complaint is filed
● “standstill agreement” is signed
● Another small group has majority ownership and operates the company without regard to investor
● Investor cannot obtain financial information necessary to apply equity method
● Investor cannot obtain representation on the board of directors in order to exercise significant influence

Equity Method Accounting

● Accounting treatment
● Investment initially recorded at price paid + legal fees
● Adjusted as net assets of investee change through earning of income and payment of dividends
● Journal entries
● Record investment at cost (FV of consideration + legal fees)
■ DR: Investment in Investee XXX
● CR: Cash XXX
● Record increase in investment by investor’s share of earnings
■ DR: Investment in investee XXX + % share of income
■ CR: Equity in earnings/investee income XXX
● Record decrease in investment by investor’s share of cash dividends
■ DR: Cash XXX
■ CR: Investment in investee XXX - % share of dividends
● Random note (curveball on exam)
■ Stock dividends = memo entry only
● Investments in investee common stock and preferred stock
● “Significant influence”
■ Met by amount of common stock (voting stock)
● Calculation of income from subsidiary to be reported on income statement includes:
■ Preferred stock dividends
■ Share of earnings available to common shareholders (net income reduced by preferred dividends)
● Sub earnings
● - Preferred dividends
● = Sub net income available to common shareholders
● x % owned
● = Equity method income to investee
● Differences between the purchase price and book value (NBV) of the investee’s net assets (Equity method ONLY) attributable to:
● Asset FV differences
● Goodwill

●
● Accounting for asset FV differences
● Excess of asset FV > BV is amortized over life of asset (other than land and goodwill, which are not amortized);
■ Additional amortization causes the investor’s share of the investee’s net income to decrease
● Journal entry
○ DR: Equity in Investee Income XXX Reduce income
■ CR: Investment in Investee XXX Reduce asset
■ Accounting for equity method Goodwill “Premium”
○ FV excess attributable to goodwill is NOT amortized and is NOT subject to separate impairment test
■ However, the total equity method investment (including goodwill) must be analyzed at least annually
for impairment

■
 ● Equity Method Impairment
● Impairment loss is recognized when both:
■ FV of investment < CV of investment, and
■ Entity believes the decline in value is not temporary
● If both conditions are met:
■ Impairment loss is reported on IS, and
■ CV of investment is reduced to the lower FV on BS
● Impairment loss is not permitted to be reversed even if FV of investment increases in subsequent periods

Summary

●
Transition to the Equity Method
● When significant influence is acquired, it is necessary to record change from FV method to equity method
○ Steps
■ Add the cost of acquiring the additional interest in investee to CV of previously held investment
■ Adopt the equity method as of that date and going forward
● Retroactive adjustments are NOT required

●
● If no readily determinable FV
○ Transition to the equity method due to an observable transaction
■ Remeasure immediately before the transition
○ Transition from the equity method
■ Remeasure immediately after the transition

Notes from MCQs

● Dividends received on preferred stock will always go to dividend revenue
 F4: Module 3 Basic Consolidation Concepts

Voting Interest Model

● Control
○ > 50% ownership
○ Consolidate for external reporting purposes
■ EXCEPT when subsidiary is in legal reorganization OR bankruptcy
● Controlling interest and noncontrolling interest (NCI)
○ Business combinations that do not establish 100% ownership of subsidiary by parent company result in
portion of subsidiary’s equity (net assets) being attributable to noncontrolling shareholders
● Controlling interest
○ Consolidate all > owned 50% subs
● Noncontrolling interest
○ May have stand-alone FS
○ Reported at FV in the equity section of the consolidated BS, separate from the parent’s equity

Variable Interest Entity (VIE) model

● General qualifications
○ You have a variable interest (financial stake in them)
○ In a VIE (they lack basic equity items)
○ You are the primary beneficiary (you will be the biggest winner/loser)
● Variable interest entities (VIEs)
○ Corporation, partnership, trust, LLC (NOT a person) used for business purposes that either does not
have equity investors with voting rights or lacks sufficient financial resources to support its activities
● Primary beneficiary
○ Entity that is required to consolidate the VIE
○ Usually the entity that has power to direct activities of a VIE that most significantly impact the entity’s
economic performance
■ Absorbs the expected VIE losses, OR
■ Receives the expected VIE individual returns (profits)
● Identifying a variable interest in a business entity
● Company & business entity have an arrangement
■ Significantly participated in business entity’s design
■ Substantially all of business entity’s activities
■ More than half of the total equity, subordinated debt is provided by the company
● Business entity is a legal entity
■ Not a person
● Business fails to qualify for an exclusion
■ NOT
● Non-profit
● Employee benefit plan
● Registered investment company
● Separate accounts of life insurance companies
● Governmental organization
● Interest is more than insignificant
● Company has an explicit or implicit variable interest in the entity
 ● Business entity is a variable interest entity (VIE)
● Insufficient level of equity investment at risk $
■ Sufficient when:
● Entity can finance its own activities
● Entity's equity investment at risk is at least as much as the equity investment of
other non VIE entities that hold similar assets of similar quality
● Other facts that indicate equity investment at risk is sufficient
● FV of equity investments at risk > expected losses
● Inability to make decisions or direct activities
● No obligation to absorb entity’s expected losses
● No right to receive expected residual returns (profits)
● Disproportionately few voting rights
● Primary beneficiary consolidates
● Company is primary beneficiary if it has the power to direct the activities
● Who consolidates?
■ Absorbs the expected VIE losses; OR
■ Receives expected VIE residual returns (profits)
● If one party receives the expected residual returns and another party absorbs the
expected losses, the party that absorbs the expected losses consolidates

Private Company Rules for VIE

● Under US GAAP, private companies may elect not to consolidate under existing VIE (Estate planning)

Notes from MCQs

● Vertical chain concept
○ If Company A owns 50+% of Company B, and Company B owns 50+% of Company C, then Company C
would be consolidated into Company B, and Company B would be consolidated into Company A, which
effectively makes Company C consolidated into Company A
● Companies that have different year-ends can be consolidated
○ The subsidiary would prepare FS that correspond closely to the parent’s year-end
■ Significant transactions during the gap period would also require disclosure
● A different location, different industry, different year end, and no daily business relationship would not change
the control as a result of majority investment
 F4: Module 4 Acquisition Method: Part 1

Calculating the Acquisition Price

● JE to record acquisition for cash: Fair Value
● DR: Investment in Subsidiary XXX
■ CR: Cash XXX
● JE to record acquisition for parent common stock (use FV at date transaction closes) NOT announcement date
● DR: Investment in Subsidiary XXX
■ CR: Common Stock (parent at par) XXX
■ CR: APIC (parent/FV - par value) XXX

Application of the Acquisition Method

● 100% of net assets acquired are recorded at FV with any unallocated balance remaining to goodwill
● When companies consolidate, subsidiary’s entire equity (including common stock, APIC, and RE) is eliminated
● PASS KEY
○ Parent’s basis is the acquisition price
■ FV = acquisition price = investment in subsidiary
● Consolidation adjustments
● For external reporting “CAR IN BIG”
■ Common stock (sub’s old equity eliminated)
■ APIC (sub’s old equity eliminated)
■ RE of subsidiary are eliminated (sub’s old equity eliminated)
■ Investment in subsidiary is eliminated (parent’s investment eliminated)
■ Noncontrolling interest (NCI) is created (if not 100% owned)
■ Balance sheet of subsidiary is adjusted to FV at acquisition date (100% assets; 100% liabilities)
■ Identifiable intangible assets of subsidiary are recorded at FV (premium paid)
■ Goodwill (or gain) is required (plug)

Consolidated workpaper eliminating JE

● External Reporting
● Done on workpaper (NOT on company books)
○ DR: Common stock - subsidiary XXX Eliminate sub’s old owner’s equity
○ DR: APIC - subsidiary XXX Eliminate sub’s old owner’s equity
○ DR: Retained earnings - subsidiary XXX Eliminate sub’s old owner’s equity
■ CR: Investment in subsidiary XXX Eliminate parent’s investment account
■ CR: Noncontrolling interest XXX Create NCI if not 100% owned
○ DR: Balance sheet adjustments to FV XXX Adjust to FV on acquisition date
○ DR: Identifiable intangible assets at FV XXX Record intangibles paid
○ DR: Goodwill XXX Plug goodwill for any excess premium paid
“CAR”: Subsidiary equity acquired
● CAR Formula
● Assets - Liabilities = Equity (or net assets)
● Assets - Liabilities = NBV
● Assets - Liabilities = CAR
● Acquisition date calculation (of CAR)
● Beginning RE
● + Income
● - Dividends
● = Ending RE

Investment in subsidiary
● Original cost
● FV (on date of acquisition completion)
● Business combination costs/expenses in acquisition
● NONE are capitalized to investment account
● Direct out-of-pocket costs & indirect costs
■ Expensed
● Debit: Expense account
● Stock registration and issuance costs such as SEC filing fees
■ Direct reduction of value of stock issued
● Debit: APIC of the parent

●
● Contingent consideration = “earn out”
● Recording contingent consideration
■ By parent on acquisition date by:
● Adding an estimate of probable settlement cost to “investment in subsidiary”; and
● Crediting the liability expected value of contingent consideration

● Changes in contingent consideration: included in earnings - IS

■
 ● Parent company accounting for investment in subsidiary INTERNALLY
● Cost method or equity method to account for investment INTERNALLY (external must consolidate)
■ Cost method
● Value of investment does NOT change after acquisition date
○ No adjustments are made
○ Dividends received from subsidiary are recorded by parent as dividend income
■ Equity method
● Value of investment (internally) does change after acquisition date
○ Sub’s retained earnings Investment in sub.
■ x Beginning Balance x
■ + Sub’s Income +
■ - Sub’s Dividends -
■ x Ending Balance x

Notes from MCQs

● With acquisition accounting, the net assets acquired are based on FV. The FV of finished goods and merchandise
inventory are based upon selling price less disposal costs and a reasonable profit allowance
 F4: Module 5 Acquisition Method: Part 2

Noncontrolling interest (NCI)

● Definition
● Business combinations that do not establish 100% ownership
● Balance sheet
● Report NCI in consolidated equity
● Computations
■ Acquisition date computation
● FV of subsidiary
● * NCI %____
● = NCI (in consolidated equity)
■ NCI after the acquisition date Accounted for using equity method
● Beginning NCI
● + NCI share of Subsidiary's Net Income
● - NCI share of Subsidiary’s Dividends
● = Ending NCI
■ Total consolidated equity
● NCI
● + Parent’s Common stock
● + Parent’s APIC
● + Parent’s Retained earnings
● = Total Consolidated Equity
● Income statement
● Includes 100% of sub’s revenues & expenses (after the acquisition date)
● Computation of NI attributable to NCI
■ Sub’s income
■ - Sub’s expenses
■ = Sub’s net income Equity Method
■ * NCI %____ Gets added to NCI
■ = NI attributable to NCI
○ Note: if “loss”, it is still allocated to NCI, even if it creates a negative balance
●

●
Balance sheet adjustment to FV, identifiable intangible asset adjustment to FV, and Goodwill (Gain)
● FV of subsidiary
○ Calculation
■ FV of subsidiary = Acquisition cost + NCI at FV
○ Balance sheet
■ Adjustment of sub’s assets & liabilities from BV to FV
○ Identifiable intangible assets
■ Related to acquisition of subsidiary and are recorded at FV
● Examples
● Agreements & contracts
● Rights, permits, patents, copyrights, trademarks and trade names, franchises
● Computer software and licenses
● Technical drawings and manuals
● Customer lists
● Unpatented technology
● Noncompetes
● In-process R&D
■ Expense “continuing” R&D to complete
■ Later
■ Project success: amortize
■ Project failure: impair/write-off in-process R&D
● In-process R&D
○ Recognize as an intangible asset separately from
goodwill at the acquisition date (need valuation)
■ Do not immediately write-off
■ In-process R&D meets the definition of
an asset - it has probable future
economic benefit
■ Two categories
● Finite life
○ Amortize
○ Subject to 2-step impairment test
● Indefinite life
○ Do NOT amortize
○ Subject to 1-step impairment test
○ Goodwill
■ Recognized for any excess of FV of sub over FV of sub’s net assets
○ If FV of sub < FV of sub’s net assets, a gain on bargain purchase is recognized
■ Goodwill = FV sub – FV sub’s net assets
■ NOT amortized
■ Test for impairment
○ Private company accounting alternative
■ Do NOT separately recognize the following intangible assets
● Noncompete agreements
● Customer lists
■ Instead, include assets in goodwill (elect to amortize 10 years max)
●

●
Acquisition with Gain
● When?
○ Parent acquired sub at big discount
○ Parent paid less than FV for sub
● Accounting treatment
○ Gain (CREDIT)

●
Measurement period adjustments
● Why?
● Values of assets and liabilities aren’t always known with certainty on the acquisition date
● Measurement period
● Cannot exceed one year from date of acquisition
● Ends when:
■ Improved information is available, or
■ It becomes obvious that no better information will become available
● Adjustments
● Sub’s assets and liabilities may be adjusted to better reflect their values on acquisition date (adjust “old”)
● New subsidiary assets and liabilities that existed on acquisition date may be recognized (create “new”)
● Measurement period adjustments
■ Offset against goodwill (or gain)
● Adjustments to depreciation and amortization
■ Reported in the period the adjustments are determined
● No restatement required
● Changes in value caused by events AFTER acquisition date
■ NOT included in measurement period adjustments

Notes from MCQs

● When an investor goes from non-control to control of a subsidiary through a step acquisition,
the previously held equity investment must be adjusted to FV
○ The FV adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition
■ FV of sub x Previous ownership % = Theoretical price
■ Theoretical price - CV of equity method investment = Gain/loss
● A subsidiary paying a dividend reduces NCI but has no impact on RE
 F4: Module 6 Intercompany Transactions

Eliminating intercompany transactions: eliminate 100% for external reporting (even if there is an NCI)

● Simple BS Eliminations
● Eliminate 100% of all intercompany receivables and payables
■ DR: AP XXX
● CR: AR XXX

● DR: Bonds Payable XXX (intercompany portion only)

● CR: Bonds Investment XXX (in affiliate)

● DR: Accrued Bond Interest Payable XXX

● CR: Accrued Bond Interest Receivable XXX

● DR: Dividends Payable XXX (affiliate portion only)

● CR: Dividends rcvbl XXX (from affiliate)

● Simple IS Eliminations
● Interest expense/interest income (bonds)
● Gain on sale/depreciation expenses (intercompany fixed asset sales)
● Sales/COGS (intercompany inventory transactions)

If NOT consolidating
● Do NOT eliminate
Commonly tested intercompany transactions
● Intercompany inventory/merchandise transactions (100% of gain & 100% of loss)
● DR: Intercompany Sales XXX
● DR: RE XXX (intercompany profit in the beginning inventory)
■ CR: Intercompany COGS XXX
■ CR: COGS XXX (intercompany profit included in COGS of purchasing affiliate)
■ CR: Ending inventory XXX (intercompany profit in the ending inventory)
● PASS KEY
■ Remember to
● Reverse original intercompany transaction (sale & COGS internally), and
○ Inventory sold to outsiders -- correct COGS
○ Inventory still on hand -- correct ending inventory

●
● Intercompany bond transactions
● Considered to be retired and gain/loss is recognized
■ Intercompany interest
● Eliminate:
○ Interest expense
○ Interest income
○ Interest payable
○ Interest receivable
■ Amortization of discount or premium
● Eliminate
○ Serves as increase or decrease in the amount of interest expense/revenue that is recorded
■ Subsequent years
● Elimination for realized but unrecorded gain/loss on extinguishment of bonds adjustment to RE
● Intercompany sale of land
● Gain/loss remains unrealized until it is sold to an outsider
● Intercompany profit on sale of depreciable fixed assets
● Gain/loss remains unrealized until it is sold to an outsider
● Fix depreciation for the year
● Dividend income
● Remove dividend income and dividends paid
Examples of intercompany eliminations

●
●
●
 F4: Module 7 Consolidated FS

Miscellaneous Notes
● Cash flows
○ The net cash spent or received in the acquisition must be reported in the investing section of the SCF
■ Reported net of cash acquired (cash that was already on the sub’s books)
○ In the reconciliation of net income to net cash provided by operations, total net income (including net income
attributable to both the parent and the NCI), should be included
○ Dividends paid by the subsidiary
■ To non-controlling shareholders
● Reported in the SCF
■ To the parent
● Not reported
● In an acquisition, the net income of a newly acquired subsidiary will only be included in consolidated net income
from the date of acquisition
● The assets and liabilities of any company that is > 50% owned should be included as assets and liabilities in the consolidated FS
● When additional shares are issued, the NCI % changes
○ Recalculate based on # shares owned / total # of shares
● Value of NCI at end of year
○ Beginning NCI
○ + NCI % of sub’s income
○ - NCI % of sub’s dividends
○ = Ending NCI
 F4: Module 8 Goodwill, Including Impairment

Goodwill
● Definition
○ Tangible resources that cannot be separately identified and reported on BS (management or marketing expertise)
○ Capitalized excess earnings power
● GW arising from business combinations
● Acquisition method
■ Goodwill is a separate asset on consolidated BS
■ Excess of an acquired entity’s FV over FV of net assets acquired, including identifiable intangible assets

●
● Equity method
■ Goodwill is embedded within investment account
■ Excess of stock purchase price over FV of net assets acquired
● Maintaining Goodwill
● Costs associated with maintaining, developing, or restoring goodwill are NOT capitalized
■ They are expensed as incurred
● Goodwill that is generated internally is NOT capitalized as goodwill

GW Impairment: FV < CV
● No reversal
● Under US GAAP, goodwill impairment is calculated at reporting unit level
● Definition of reporting unit
● Operating segment (or one level below an operating segment)
● Impairment steps
● Step 1
● Qualitative evaluation of goodwill impairment
■ If < 50% chance FV < CV
● STOP. Asset is not impaired
■ If > 50% chance FV < CV
● Go to step 2: quantitative impairment test
● Step 2
● Quantitative evaluation of goodwill impairment
■ If FV > CV
● STOP. Asset is not impaired
■ If FV < CV
● Asset is impaired. Must write down to FV
○ Journal entry
■ DR: Loss due to impairment XXX
● CR: Goodwill XXX
○ Impairment charge cannot exceed value of goodwill that is
allocated to that reporting unit
 ● US GAAP Private Company Accounting Alternative
○ Amortize goodwill on a straight-line basis over 10 years or less
○ Test goodwill for impairment at entity level OR reporting unit level when a “triggering event” occurs
that indicates FV may be below CV
○ Because goodwill is being amortized, impairment is less likely to occur

Example of Impairment

●
 F5: Liabilities

F5: Module 1 Payables and Accrued Liabilities

Trade Accounts Payable

● Methods of recording
○ Gross method
■ Records the purchase without regard to the discount
● If invoices are paid within discount period, purchase discount is credited when taken
○ Net method
■ Recorded net of the discount
● If payment is made after discount period, a purchase discount loss account is debited

Trade Notes Payable

● Definition
○ Formal, written promise to pay
■ May include a stated interest rate
● Interest Payable
○ Always note the DATES

Current portions of LT debt

● Current obligations expected to be refinanced
● Classify as long-term (non-current) if both intent and ability to refinance
■ Actual refinancing must occur prior to issuance of FS, OR
■ Existence of non-cancelable financing agreement from lender

Accrued Liabilities/Expenses
● Taxes Payable
● Property taxes payable
■ Accrued prior to receipt of tax invoice, OR
■ Recorded as payable upon receipt of tax invoice and expensed in year of receipt
● Sales tax payable
● Credited to payable account after collection & until remitted
● Sales taxes are NOT an expense or a revenue of company collecting sales taxes from customers
● Journal entry
■ DR: Cash XXX
● CR: Sales revenue XXX
● CR: Sales tax payable XXX
Employee-related liabilities
● Unemployment taxes & employer’s share of payroll taxes
○ Expense
● Payroll deductions
○ From employee (taken out of paycheck)
○ NOT an expense
■ Credited to payable account

○
● Bonuses
○ Record to salaries and wages expense
● Accrued Vacation
○ Vacation must either:
■ Vest, or
■ Accumulate (carries over)
● Liability recognition
● Accrued in year earned if the following conditions are met:
■ Employer’s obligation to compensate employees for future absences is attributable
to services already rendered by employees
■ Obligation relates to rights that vest (are not contingent on employee’s future service) or accumulate
(may be carried forward to one or more accounting period subsequent to that in which earned)
■ Payment for compensation is probable
■ Amount can be reasonably estimated

●
Exit or disposal activities
● When?
○ Closing location OR downsizing
● Examples
○ Exit and disposal costs
○ Involuntary employee termination benefits
■ Severance pay
○ Costs to terminate a contract that is not a capital lease
■ Landlord makes you pay
○ Other costs associated with exit or disposal activities, including costs to consolidate facilities or relocate employees
■ Moving employees and equipment
● Criteria for liability recognition
● An entity’s commitment to exit/disposal plan is disclosed as footnote until:
■ An obligating event has occurred
● Announced publicly in detail
■ The event results in a present obligation to transfer assets or to provide services in the future
■ The entity has little or no discretion to avoid the future transfer of assets or providing of services
● Future operating losses are recognized in period incurred
● Liability measurement
● FV (usually discounted NPV)
● Income statement presentation
● Loss in continuing operations
● Loss in discontinued operations
■ Major strategic shift
● Disclosure
● Description of exit or disposal activity
● For each major cost:
■ Total amount expected to be incurred
■ Amount incurred in the period
■ Cumulative amount incurred to date
■ A reconciliation of beginning and ending liability balances showing the changes during the
period for costs incurred, costs paid, and any other adjustments with explanation of reasons
● Line item in IS in which costs are aggregated
● For each reportable segment:
■ Total amount of costs expected to be incurred
■ Amount incurred in period and to date
■ net any adjustments with an explanation of the reasons
● If a liability for a cost associated with the activity is not recognized because FV cannot be reasonably estimated:
■ The fact and reasons for that should be disclosed
Asset Retirement Obligations (ARO)
● Definition
● Legal obligation associated with retirement of tangible long-lived asset that results from acquisition,
construction or development, and/or normal operation of a long-lived asset, except for certain lease obligations
● ARO Recognition
● Qualifies for recognition when it meets the definition of a liability
■ Duty or responsibility
■ Little or no discretion to avoid Record when met
■ Obligating event
● Initial measurement (BS approach)
● Measured at FV (PV/discounted amount)
● Asset Retirement Obligations (ARO)
■ Liability
● Asset Retirement Cost (ARC)
■ Asset
● Journal entry
■ DR: Asset Retirement Cost (ARC) XXX Asset At PV (risk-free rate)
● CR: Asset Retirement Obligation (ARO) XXX Liability
● Subsequent measurement
● Accretion expense
■ Applies to ARO
■ Similar to “interest” expense
■ Increase in liability over passage of time (goal is to reach predicted cost)
■ Journal entry
● DR: Accretion Expense XXX IS Expense
○ CR: ARO XXX Liability increase
● Depreciation expense
■ Applies to ARC
■ Decreases the ARC asset’s net BV (goal is to reduce to 0)
■ Journal entry
■ DR: Depreciation expense XXX IS Expense
● CR; Accumulated depreciation XXX Decrease asset

● PASS KEY
■ The cumulative accretion expense plus depreciation expense recognized on the income statements
over the accretion period should be equal to the total ARO
■ Accretion (interest) Expense + Depreciation Expense = Obligation (ARO)
■ Cumulative Cumulative Asset retirement

● Revisions to cash flow estimates

■ Upward revisions to undiscounted cash flows are “new” liabilities
■ Use current discount rate
■ Downward revisions require removal of “old” liabilities
■ Use historical (or weighted average discount rate)
● Example of ARO

■
Notes from MCQs
● Completely ignore sick days in any problem
● Deferred compensation
○ If the terms of a deferred compensation arrangement attribute all or a portion of expected future
benefits to a period of service greater than one year, the cost of benefits should be recognized over
that required period of service.
■ Basically, accrue evenly in the years before the year the guy can start earning it
● Short-term debt that is expected to be refinanced is classified as long-term to the extent of post-balance sheet
refinancing. Support must exist for the refinancing.
○ Any “prepayments” made before the plan to restructure don’t count and are still classified as current liabilities
● Asset Retirement Cost is an asset
● Interest payable is calculated on the outstanding principal balance, not the face vale of the bond/note
● All DTLs are non-current liabilities
● Sales taxes
○ Sales revenue / (1 + tax rate) = sales tax payable
● A debit balance in AP should be reclassified as a prepaid asset and NOT included in year-end AP
● Checks must be mailed in order to correctly reduce AP
● Vested retirement benefits are not paid until those people actually retire, so don’t accrue for them
 F5: Module 2 Contingencies and Commitments

Contingency
● Definition
● Existing condition involving uncertainty as to possible gain or loss that will ultimately be determined
when a future event occurs or fails to occur
● Loss contingencies
● Recognition and measurement
■ Loss is probable and can be reasonably estimated
● Accrue
○ DR: Loss XXX
■ CR: Liability XXX
● Use minimum range if no amount in range is a better estimate
○ Accrue for the minimum, disclose the maximum
■ Loss is reasonably possible
● Disclose (do NOT record JE or accrue)
○ Nature of contingency, AND
○ Estimate of possible loss or range of loss
■ Loss is remote
● Ignore
● Exception: disclose (“DOG”)
○ Debts of others guaranteed (officers/related parties)
○ Obligations of commercial banks under standby letters of credit
○ Guarantees to repurchase receivables (or related property) that have been sold or assigned
■ Potential loss contingencies
● If it is probable than an unasserted claim will be filed, then it is treated similarly to
any other loss contingency
● Examples
■ Collectability of receivables
■ Warranties
■ Pending or threatened litigation
■ Guarantees of indebtedness of others
■ Agreements to repurchase receivables
● Gain contingencies
● Recognition and measurement
■ Do NOT record JE
● Even if received before FS issue date, don’t go back and “fix’ PY financials
■ Disclose in footnotes
● If range, state range
● Examples
■ Expected favorable settlement form pending court case
■ Possible refunds regarding tax disputes

●
 ● Appropriation of RE
● NOT a substitute for accrual
● Must be show in SE and clearly identified
● No impact on income
● Any appropriation should be restored to RE as soon as its purpose is no longer deemed necessary

Premiums and Warranties

● Premiums
● Calculation of expense/liability amount
■ Total # of coupons issued * Estimated redemption rate = Total estimated coupon redemptions
■ Total estimated coupon redemptions - Coupons already redeemed = Coupons to be redeemed
■ Coupons to be redeemed / # coupons required to get the thing = Outstanding premium claims
■ Outstanding premium claims * Net cost to entity for each claim = Expense/Liability amount
● Journal entry
■ DR: Premium expense XXX
● CR: Premium liability XXX

●
 ● Warranties
● Accrued for entirely in the year of sale (matching principle)

Notes from MCQs

● A note endorsed “with recourse” means the endorser is liable if the maker of the note does not pay
● This contingent liability should be disclosed
● Contingently liable for full amount (no discounting) if sold with recourse
 F5: Module 3 Long-Term Liabilities

Time Value of Money

● Definition
● Use of money over a period of time
■ Leases, pensions, bonds, and LT debt
● Computations
● Present value of $1 Single lump sum
● Future value of $1 Single lump sum
● Present value of an ordinary annuity Multiple equal cash flows
● Future value of an ordinary annuity Multiple equal cash flows
● Present value of an annuity due Multiple equal cash flows
● Future value of an annuity due Multiple equal cash flows

● Annuities
● Definition
■ Multiple cash flows (identical periodic payments or receipts)
● Bonds & leases
● Ordinary annuity
■ Payments made at end of each period (assume ordinary annuity unless told otherwise)
● Annuity due
■ Payments made at beginning of each period

●
● Present value of $1
● Single cash flow
● Used for
■ Bonds
● PV of principal
■ Leases
● PV of salvage value
● Method 1
■ PV = FV * PV factor
● PV factor = 1 / (1 + r)n
● Method 2
■ PV = FV / (1 + r)n

●
● PASS KEY
■ If interest compounds on an “other-than-annual basis”, the number of periods and the
interest rate must be adjusted
● For example: if the annual interest rate is 12% and the interest compounds quarterly over 10 years,
then the periodic interest rate is 3% and the total number of compounding periods is 40
● Future value of $1
● Single cash flow
● Compound interest
■ Amount that would accumulate at a future point in time if $1 were invested now
● How much will I have in future? What will savings be worth?
● Method 1
■ FV = PV x FV factor
● Method 2
■ FV = PV x (1 + r)n

●
● PASS KEY
■ PV factors and FV factors are inverses of each other
● Present value of an ordinary annuity
● Definition
■ Identical periodic payments at the end of the period
● Bonds
○ PV of coupon payments
● Leases
○ PV of lease payments
● Calculation
■ PV of ordinary annuity = Annuity payment x PVFOA

●
● Present value of an annuity due
● Definition
■ Beginning now
■ First payment starts today
● PV of lease payments
● Calculation
● In an annuity due, each cash flow is discounted one less period

■
●
 ● Future value of an ordinary annuity
● Definition
■ Save multiple equal parts at the end of each period
● Calculation
■ FV of ordinary annuity = Periodic payment x FVFOA

Long-term liabilities
● Definition
● Probable sacrifices of economic benefits associated with present obligations that are NOT payable
within the current operating cycle or reporting year, whichever is greater
● Accounting treatment
● Record at PV
● Examples
● LT promissory notes payable
● Bonds payable
● LT leases
● LT contingent liabilities
● Purchase commitments
● Equipment purchase obligations
● Deferred compensation arrangements
● Pension and other benefits payable (defined benefit)
● Distinguishing liabilities from equity
● Liabilities = maturity date
● Equity = no maturity
● Preferred stock
■ GR: Equity
■ Exception: Shares that are mandatorily redeemable and represent an unconditional obligation;
● Obligation = liability

Notes Payable
● Measurement
○ GR: At PV
■ Maturity value (principal + interest) x PV factor
■ Calculation of discount is required for LT
■ Must impute market rate of note if no interest or interest is unreasonably low
● Calculation of discount
○ Pmt. * # of payments = Gross Notes Payable
○ Less: (PV)
○ = Discount contra-account (deferred interest)
● Stated interest factors
● Note issued solely for cash equal to face amount is presumed to earn the interest stated
■ However, if rights or privileges are attached to the note, they must be evaluated separately
● Imputing interest
● When?
■ Done when no interest or interest is at an unreasonably low rate
■ Interest expense must be recorded whether cash payment is made or not
● What?
■ Involves determining the PV of the obligation at the appropriate market interest rate, and:
● Recording the payable at its face amount
○ # of payments * payment amount = gross note payable
● Recording the item received in exchange for the note at the PV of the obligation
● Recording any difference between the face amount of the note and its PV as a discount
○ Must be amortized over the life of the note
● Imputing interest not required
● PV calculation at market rate of interest is not required for payables that:
■ Arise in ordinary course of business, the terms of which do not exceed one year (ST notes)
■ Are paid in property or services (not in cash)
■ Represent security deposits
■ Bear an interest rate determined by government agency
■ Arise from transaction between a parent and its subsidiaries
● Amortization of the discount
● Must amortize over life of the note payable
■ Effective interest method
● Each payment on a note is allocated to interest and principal
○ Beginning carrying value of the note x Effective (market) rate = interest expense
○ Payment - Interest expense = Principal payment (plug)

○
● Presentation and disclosure
● Discount is inseparable from related NP and is added to NP to determine the CV to be reported on BS
● Must disclose:
■ Full description of the payable
■ Effective interest rate
■ Face amount of note
Debt covenants
● Definition
○ “Promises”
○ Creditors use them to protect their interest by limiting or prohibiting the actions of debtors that might
negatively affect the positions of the creditors
● Goal
○ Maintain debtor’s credit rating to protect value of debt
● Violation of debt covenants
● Debtor is in technical default and creditor can demand repayment immediately
■ Most concessions are negotiated and real default is avoided
● Concessions can result in violated covenants being waived temporarily or permanently
● Concessions can also result in change of interest rate or other terms of the debt

Notes from MCQs

● The present value of any future payments/receivables on long-term items always equals the payable/receivable balance
● Sinking-fund requirements are disclosed in the notes but are not considered to be maturities of LT debt because they are assets
● The effective interest rate paid by a company includes all costs charged by the bank

○
● Loan origination fees are deferred and recognized over the life of the loan as an adjustment of interest income
(similar to bond discount amortization)

○
● Amount due at maturity x PV factor = Present value of note (what it is booked at)
● Total payments - Discounted note = Total interest earned over life of note payable
 F5: Module 4 Bonds: Part 1

Bonds Payable
● Terminology
● Bond indenture
■ Document that describes the contract between issuer (borrower) and bond holders (lenders)
● Face (par) value
■ Total dollar value of bond and basis on which periodic interest is paid
■ $1,000
● Stated (nominal or coupon) interest rate
■ Interest paid in cash
● SCF
● Market (effective) interest rate (yield)
■ Interest expense
● IS
● Discount
■ Market rate > stated rate
● Premium
■ Market rate < stated rate
● Types of bonds
● Debentures
■ Unsecured bonds
● Mortgage bonds
■ Secured by real property
● Collateral trust bonds
■ Secured bonds
● Convertible bonds
■ Bonds that are convertible into common stock
● Indicate a complex capital structure
● Warrants
○ Nondetachable warrants
■ Convertible bond itself must be converted into capital stock
○ Detachable warrants
■ Bond is NOT surrendered upon conversion, only the warrants plus
cash representing the exercise price of the warrants
■ Warrants can be bought and sold separately from the bonds
● Participating bonds
■ Have a stated rate of interest and may participate in income if certain earnings levels are obtained
● Term bonds
■ Single fixed maturity date
● Serial bonds
■ Mature in installments
● Not on same date
● Income bonds
■ Only pay interest if certain income objectives are met
● Zero coupon bonds
■ “Deep discount bonds”
■ No stated interest, but rather at a discount and redeemed at face value without periodic interest payments
● Commodity-backed bonds
■ Redeemable either in cash or a stated volume of a commodity

Bonds payable vs. notes payable

Attribute Bonds Notes
Payments prior to maturity Interest only Negotiated
Payments at maturity Principal Negotiated
Overview of bond terms
● Premium gain
● Causes future interest expense on IS < coupon paid
■ Unamortized premium
● Deferred unrecorded gain
● Discount loss
● Causes future interest expense on IS > coupon paid
■ Unamortized discount
● Deferred unrecorded loss
● Bonds are usually issued in denominations of $1,000
● Price is always quoted in 100s (% of par value)
● Indenture
● Contract for purchase of a bond
● Coupon rate
● Stated interest on bond
● Bond interest payable (check amount)
● Coupon rate x face value
■ Generally pay interest semiannually
■ Cash outflow from operating activities on SCF
● Principal payoff is always the full face amount at maturity
● Premium/discount is the result of the buyer and seller “adjusting” the coupon rate to the prevailing market rate of interest
Accounting for the issuance of bonds
● Bond selling price
● Dictated by market rate “yield to maturity”
■ PV of future principal payments + PV of future periodic interest payments
● Both cash flows are discounted at prevailing market rate of interest on date of issuance
● Bonds issued at par value
■ Coupon rate = market rate
● Interest expense on IS same as coupon paid on SCF

■
●
● Bonds issued at a discount
■ Market rate > stated rate
■ Deferred loss to issuer
● Cause proceeds on sale < principal repaid
● Cause interest expense > coupon paid

■
● Bonds issued at a premium
■ Market rate < stated rate
■ Deferred gain to issuer
● Cause proceeds on sale > principal repaid
● Cause interest expense < coupon paid

■
● Stated interest rate
● Dictates coupon payment = annuity
● Does not change
● Regular interest payment
● Effective interest rate
● Market rate = yield to maturity at issuance
● Dictates selling price and PV factors
● Interest expense on IS
● Discounts
● Market rate > stated rate
● Unamortized discount
■ Unrecognized initial loss
● Spread out over bond life by interest expense > coupon paid
● Amortization of the discount
■ Interest expense - coupon paid
● Premiums
● Market rate < stated rate
● Unamortized premium
■ Unrecognized initial gain
● Spread out over bond life by interest expense < coupon paid
● Amortization of the premium
■ Interest expense - coupon paid
● Carrying value
● Initial CV = Proceeds on sale + premium - discount
● CV is pulled toward par over time

FACE FACE
+ Unamortized premium $ rcvd > par - Unamortized discount $ rcvd < par
Carrying value Carrying value
● Bond issuance costs
● Definition
■ Transaction costs incurred when bonds are issued
● Include
■ Legal fees, accounting fees, underwriting commissions, engraving, printing, promotion
● Accounting treatment
■ Presented on BS as a direct reduction to carrying value of bond, similar to bond discounts
● Causes initial carrying value to decrease
● When bonds are issued, bond proceeds are recorded net of bond issuance costs
■ Amortized as interest expense over life of bond using effective interest method
● Effective interest rate: includes impact of bond issue costs

●
■ Deferred bond issuance costs
● “Prepaid” asset
● Incurred before issuance of bonds

●
Notes from MCQs
● If a bond is purchased between interest dates at a discount, the carrying amount of the bond will be less than
both the cash paid and the face value of the bond
○ Accrued interest is included in the cash paid
○ A discount reduces the carrying value
● Detachable warrants
○ Can allocate purchase price based on FV of warrants and FV of bonds
○ If issued alongside bonds, only the detachable warrants increase equity via APIC
■ The increase would be equal to the fair value of the warrants at issuance
● Get the total FV of the transaction and back out the FV of the warrants
○ The remainder is the price allocated to the bonds
● If bonds are issued after a date on which interest will be paid in the future (i.e., issued March 1 with interest
payable January 1 and July 1), included in the calculation is accrued interest from those prior months
 F5: Module 5 Bonds: Part 2

Bond Amortization Methods

● Amortization period
● Period over which to amortize premium/discount and bond issuance costs is the period that the bonds
are outstanding/contractual life of bond
● Period starts when the bond is sold
● Straight-line method
● Amortize the same amount each period (constant dollar amount)

● Premium/discount + bond issuance cost = period amortization

Number of periods bond is outstanding

● Interest expense
■ Face value x stated interest rate – premium amortization, OR
■ Face value x stated interest rate + discount and bond issuance cost amortization
● Not GAAP, but is allowed under GAAP if results are not materially different from effective interest method
● Effective interest method
● Beginning CV of debt x “constant rate” market or effective rate at issuance
● Interest expense on IS vs. coupon paid = amortization of discount/premium
● Required by GAAP (constant rate amount)
● Discount = interest expense – interest payment Interest expense > coupon payment
● Premium = interest payment – interest expense Interest expense < coupon payment

●
● Bond Amortization Table Format
■ Date Interest Expense Coupon Payment Amortization Carrying Value
● Example: Premium

■
● Example: Premium

●
Bonds issued “between” interest dates
● Bonds are usually sold between interest dates, which requires additional entries for accrued interest at time of sale
○ Amount of interest accrued since last interest payment is added to the price of the bond
■ Accrued interest = face value x coupon rate x months/year

Year-end bond interest accrual

● Regardless of if/when coupon is paid, interest is accrued for each quarter (matching principle) (Form 10Q)
● Disclosure requirements
○ Companies with many debt issues often report only one BS total, supported by comments and
schedules in accompanying notes
○ Notes often show details regarding:
■ Liability maturity dates
■ Interest rates
■ Call and conversion privileges
■ Assets pledged as security
■ Borrower-imposed restrictions
 F5: Module 6 Troubled Debt Restructuring and Extinguishment

Troubled debt restructuring

● Accounting and reporting by debtors (the company in financial trouble)
● Transfer of assets
■ Recognize gain/loss
○ FV asset transferred Adjust to FV —> ordinary G/L
○ (NBV asset transferred)
○ Gain/ loss Reported separately
■ Recognize gain
○ Carrying amount of payable
○ (FV asset transferred) Amount of debt discharged
○ Gain = gain (never a loss)
■ Example

○
● Transfer of equity interest
■ Recognize gain
● Carrying amount of payable
● (FV equity transferred) Amount of debt discharged
● Gain = gain (never a loss)
■ Example

●
● PASS KEY
■ Whether transfer of asset or equity, once transfer takes place, debt has been extinguished
● Modification of terms
■ Lower interest rate OR longer period to pay back the loan
■ Usually accounted for prospectively
■ PASS KEY
● Under modification, the debt has NOT been extinguished
○ The terms have simply been adjusted so the debtor has a greater ability to
fulfill future obligation
■ Total future cash payments
● Principal and any accrued interest that continues to be payable
■ Interest expense
● Effective interest method
● Discount rate at which the carrying amount of the debt is equal to the PV of future cash payments
■ Future payments
● When the total (undiscounted) future cash payments < carrying value, debtor should:
○ Reduce the carrying value, and
○ Recognize the difference as a gain
● When there are indeterminate future payments, or any time the future payments > carrying value,
the debtor:
○ Not adjust the carrying value, and
○ Not recognize any gain
■ Combination of type
● 1st assets and/or equity —> gain
st

● 2nd = modification (no gain recorded)

■ Example

●
Accounting and reporting by creditors (the company willing to make concessions to improve chances of getting paid back)
● Recognition of impairment
■ Loan is impaired if it is probable that the creditor will be unable to collect all amounts due
● Measurement of impairment
■ May use EITHER:
■ The loan’s observable market price, or
■ The FV of the collateral if the loan is collateral dependent
■ Receipt of assets or equity
○ Accounted for at FV at time of restructuring
■ Receivable
■ (FV asset/equity received)
■ Shortfall ----------------------------------> Loss (bad debt expense)
■ Modification of terms (use PV)
○ Impairment should be measured based on the loan’s PV of expected future cash flows
discounted at the loan’s historical effective interest rate
■ DR: Bad debt expense xxx
● CR: Allowance for credit losses xxx

Extinguishment of debt
● Corporations may call or retire bonds prior to maturity
○ Callable bonds
■ Can be retired after a certain date at a stated price
○ Refundable bonds
■ Allow an existing issue to be retired and replaced with a new issue at a lower interest rate
● Definition of extinguishment
● Debtor pays or is is legally released
■ Debtor pays
● Bond extinguishment at maturity
○ CV = face amount
○ No gain or loss is recorded
■ DR: Bonds payable XXX
● CR: Cash XXX
● Bond extinguished before maturity
○ Gain/loss is generally recorded for the difference between the CV and the
cash paid to extinguish the bond
■ Debtor legally released
● Either judicially or by the creditor
● Modification of terms is not extinguishment
● In substance defeasance
● Collateral as security
● NOT extinguishment
● Gain or loss on bond extinguishment before maturity
● Adjust items in the FS
■ Any related unamortized bond issuance costs
■ Any related unamortized discount or premium
■ The difference between the bond’s face value and the reacquisition proceeds
● Calculation of the gain/loss
■ Reacquisition price = face x % paid
■ (Carrying value) = face - unamortized discount OR + unamortized premium AND – unamortized issuance cost
■ (Gain) Loss

●
 F6: Leases, Derivatives, Foreign Currency Accounting, and Income Taxes

F6: Module 1 Leases: Part 1

Lease
● Definition
○ Contractual agreement between lessor who conveys the right to use real or personal property (an asset)
and lessee who agrees to pay consideration for this right over a specific time period
■ Contract must depend on an identifiable asset in which the lessor does NOT have a
substantive substitution right
■ Contract must convey right to control use of asset over lease term to lessee
● Protective rights are OK

Lease contracts
● Lease vs. non-lease components
● Decision made at contract inception, and only may be reassessed of terms of contract change
■ Once determined that contract contains a lease, the lessee must:
■ Assess whether multiple contracts should be combined
■ Identify the separate lease components
■ Determine whether separate lease components should be combined or separated
from any related nonlease components
● Combine contracts if all criteria is met:
■ One or more contracts contains or is a lease
■ Contracts are entered into at approximately the same time
■ Parties of the contract are the same, or related parties
■ One or more of the following:
1. Performance or price of one contract affects the consideration paid in the other
2. Contracts have same commercial objectives
3. The rights to use the assets do not meet the accounting criteria for separate lease components
● Separate lease components
■ Step 1: Identify each right to use an underlying asset within the contract
● One right to use an asset = one separate lease component
● Separate if both are met:
○ The right benefits the lessee on either a stand-alone basis or together with
other resources that are readily available to the lessee
○ Rights are neither highly dependent on each other nor highly interrelated
■ Step 2: For a contract that includes both lease and nonlease components, the lessee has two options:
● Option 1: lease components are separate
● Option 2: each separate lease components is combined
● Contract allocations
● Consideration = All components of lease payments + Other required payments in the contract – incentives owed/provided
to the lessee (not accounted for in lease payments)
■ If option 1 (separate) is chosen
○ Consideration is allocated to the separate lease and nonlease components based on
relative stand-alone prices
■ If option 2 (combine) is chosen
○ Consideration is allocated to each combined unit of account based on relative stand-alone prices

●
Lease Classification as Operating or Finance
● Leases transfer substantially all of the benefits and risks inherent in ownership of property to the lessee
○ This is an accounting transaction like an installment purchase
○ Lessee - finance or operating
○ Lessor - operating, sales-type, or financing

■
● Criteria
● “OWNES”: If any 1 of the 5 is met, lease will be classified as:
■ Lessee - finance
■ Lessor - sales-type
■ O - Ownership transfers from lessor to lessee at end of lease term
■ W - Lessee has written option to purchase the asset & lessee is “reasonably certain” to exercise
■ N - Net PV of all lease payments and any guaranteed residual value is equal to or
substantially exceeds the underlying assets FV (substantial: 90% or more)
■ E - Term of lease represents major part (75% or more) of the remaining economic life
for the underlying asset
■ S - Asset is specialized such that it will not have an expected, alternative use to the
lessor when lease term ends
● “PC”: If none above are met or if lease is short-term:
■ Lessee - operating
■ Lessor
● If both criteria below are met - direct financing
● If one or none of the below criteria are met - operating
■ P - Present value of sum of lease PAYMENTS + residual value is equal to or
substantially exceeds the underlying asset’s FV
■ C - Collection is probable

●
■ ***NOT capitalized = term is short-term (less than 12 months)
 ● PASS KEY
● Assuming that a lease is > 12 months
■ Lessee
■ Finance lease
○ At least 1 of OWNES criteria is met
■ Operating lease
○ None of OWNES criteria are met
■ Lessor
■ Sales-type lease (all of risks/rewards are transferred)
○ At least 1 of OWNES criteria is met
■ Direct financing lease (most of risks/rewards transferred)
○ None of OWNES is met
○ Both PC criteria are met
■ Operating lease (some of risks/rewards are transferred)
○ None of OWNES is met
○ 1 or none of PC are met
● GAAP does not allow a lessee to have recognition and measurement exemption for leases of assets < $5,000

Calculating leases
● Lease term
● Signed lease: July, commencement date: Jan. ------> July-Dec. = footnote
● Commencement date = date for which the lessor makes the underlying asset available to the lessee for use
● An option to terminate exists when one or the other (but not both) has the right to terminate
■ The lease term will also need to account for any options to extend or terminate the lease as follows:
■ Periods covered by option to extend the lease are included if lessee is reasonably certain to
exercise that option
■ Periods covered by option to terminate the lease are included if lessee is reasonably certain to
not exercise that option
■ Periods covered by option to either extend or terminate the lease are included if
the exercise is controlled by the lessor
● Lessees must recognize right-of-use (ROU) assets and lease liabilities for all leases not short-term (<12 months)
● Lease payments (“REPORT N GO”)
● In calculation of lease payment, Lessee will include all of the following
■ R - Required contractual fixed payments
■ E - Exercise option reasonably assured to be exercised
■ P - Purchase price at end of lease
■ O - Only indexed or rate variable payments (variable payments are included in initial PV calculation)
■ R - Residual guarantees likely to be owed
■ T - Termination penalties reasonably assured to be assessed
● Lessee may or may not (lessee option) include:
■ N - Non-lease components
● Lessee lease payments will specifically EXCLUDE:
■ G - Guarantees of lessor debt by the lessee
■ O - Other variable lease payments
● Discount rate
● When calculating PV of minimum lease payments, the lessor will use the rate implicit in the lease
■ Lessee uses either:
■ 1st - the rate implicit in the lease (if known)
■ 2nd - the incremental borrowing rate
● Initial direct costs
○ Capitalize if incurred as a result of execution of lease
■ NOT costs incurred before signing the lease (negotiations, document preparation, credit checks)
● Lease receivable (lessor)
○ PV minimum lease payments + Residual value
● Annual lease revenue
○ Total lease revenue from the lease / Full life of the lease (in years)
Sale-leaseback transactions
● Definition
○ Sale of asset to buyer (control is transferred); then lease it from the buyer
○ Must be operating capital lease
● If an asset transfer involves either of the two key situations below, the transfer may or may not be considered a sale,
depending on the circumstances:
○ Repurchase option
■ If “OWNES” is met [financing] on a sale-leaseback it is a “failed sale” (treat as borrowing)
● Residual value guarantee
○ A sale cannot be met if control hasn’t been transferred
■ The more significant the guarantee, the more likely it is that control has not been transferred
● Sale-leaseback — sale criteria met
● If the criteria are met for a sale, each party must determine whether the transaction is at FV
■ Step 1: What information is more readily determinable?
● Set 1: Asset sale price and FV, OR
● Set 2: PV of lease payments and PV of market rental payments
■ Step 2: Identify any difference between the two data points
■ If difference exists, adjustment is required to either sale price or purchase price
○ Increases - treated as prepaid rent
○ Decreases - treated as additional financing provided
● Upon execution of sale-leaseback, two transactions will take place:
■ The sale, along with the recognition of profit/loss, would be recorded
■ The lease would be recorded, based on same accounting rules as other leases

■
● Sale-leaseback — sale criteria NOT met
● “Failed sale” is treated as financing transaction

●
● Loss must be recognized immediately if FV of property at the time of the sale-leaseback < BV
 F6: Module 2 Leases: Part 2

Lessee accounting
● Operating capital leases
● Characteristics
■ No “OWNES”
■ One expense on IS - interest expense
■ Recognize both ROU asset and lease liability
● Calculated using the PV of the lease payments, using appropriate discount rate
● Amortized over life of lease using effective interest method
● Journal entries
■ Initial entry: capitalize lease
■ DR: ROU asset XXX
○ CR: Lease liability XXX
■ Subsequent entries:
■ DR: Lease expense XXX (Depreciation and interest): 1 expense on IS
○ CR: Cash/lease payable XXX
■ DR: Lease liability XXX
○ CR: Accumulated amortization XXX
■ Accumulated amortization = depreciation and interest

■
● Finance capital leases = “OWNES” met
● Recognize both ROU asset and a corresponding lease liability
■ ROU asset includes initial direct costs
● Commissions, legal fees, consulting fees
● Any lease payments made by the lessee at or before commencement
● Less: any incentives received by the lessee
■ Lease liability = PV of lease payments
● Journal entries
■ Initial entry: capitalize lease
● DR: ROU asset XXX
○ CR: Lease liability XXX
■ Subsequent entries:
● DR: Interest expense XXX EIM - 2 separate expenses on IS
● DR: Lease liability XXX Reduce principal lease liability
○ CR: Cash/lease payable XXX
■ Interest expense = CV lease liability x implicit/borrowing rate - eff.int. method
■ Lease liability reduction = cash payment - interest expense
● DR: Amortization expense XXX SL - 2 separate expenses on IS
○ CR: Accumulated amortization XXX If PO is likely, depreciate over that life

●
● Accounting policy election
○ Short-term/less than 12 months
■ Lessees can make an accounting policy election to NOT recognize ROU assets and lease liabilities
● Done by class of underlying asset
Lessor accounting
● Sales-type lease
● Characteristics
■ All risks and rewards (lessee “OWNES” asset)
■ Lessee gains control
● Lessor will derecognize the asset and recognize a net investment in the lease, and profit or loss
○ FV of asset - NBV of asset = Profit (loss)
● Journal entries
■ DR: Lease expense XXX Direct costs
■ DR: Residual asset XXX Junk at PV
■ DR: Lease receivable XXX Book receivable
● CR: Fixed asset XXX Remove asset
● CR: Gain XXX IS: FV - BV
● CR: Cash XXX Paid for expenses
● Initial direct costs incurred as part of lease
■ If there is profit or loss
● Expense direct costs at commencement date
■ If no profit or loss
● Defer and recognize over lease term

●
● Direct financing lease
● Characteristics
■ Most risks and rewards (No “OWNES”; both “PC”)
● P - PV of lease payments and guaranteed residual value = FV asset
● C - Collectibility is probable
■ Lessee does NOT gain control
● Lessor will derecognize the asset and recognize a net investment, but NO profit or loss
○ Any gain will be deferred and amortized over life of lease
○ Any loss will be recognized immediately
● Journal entries
■ Initial entry
● DR: Lease receivable XXX
● DR: Residual asset XXX Junk at PV
○ CR: Fixed asset XXX Remove asset
■ Subsequent entries
● DR: Cash (lease payment) XXX
○ CR: Interest income XXX
○ CR: Lease receivable XXX Principal payment
● Initial direct costs incurred as part of lease
■ Defer and amortize over lease term

●
 ● Operating lease
● Characteristics
■ Lessor keeps the asset on their BS & depreciates it
■ Initial direct costs will be deferred and amortized over lease term
■ Lessor recognizes income on a SL basis
● Journal entries
■ Initial entry
● DR: Lease receivable XXX lease payment amount x # payments
○ CR: Unearned lease rental income XXX
■ Subsequent entries
● DR: Cash XXX cash received
○ CR: Lease receivable XXX cash received
● DR: Depreciation expense XXX carries fixed asset & depreciates it
○ CR: Accumulated depreciation XXX
● DR: Unearned lease rental income XXX cash received
○ CR: Rental income XXX cash received

Financial Statement Presentation

● Balance sheet
● ROU assets and associated lease liabilities may either be:
■ Recognized as separate line items on the BS, or
■ Included with other assets/liabilities and disclosed separately
● Finance and operating leases cannot be presented together
● Finance lease
■ ROU asset
● Amortize
○ If ownership or written option criteria are met (“OW”)
■ Amortize over asset’s useful life
○ If NPV, economic life, or specialized asset criteria are met (“NES”)
■ Amortize over the SHORTER of:
● Lease term, OR
● Asset’s useful life
■ Lease liability
● Principal paid down over life of lease
● Income statement
● Operating lease
■ One expense
● Lease expense
● Finance lease
■ Two expenses
● Interest expense
● Amortization (depreciation) expense
● Cash flow statement
● Operating lease
■ Lease expense
● Operating activity
■ Preparing asset for intended use (condition, location)
● Investing activity
● Finance lease
■ Principal portion
● Financing activity
■ Interest
● Operating activity
■ Variable lease payments
● Operating activity
Disclosures
● Lessee Disclosures
● Must disclose several qualitative pieces of info
■ Qualitative disclosures:
● Nature of leases - restrictions and covenants
● Options to extend or terminate
● Residual value guarantees
● Information on leases that have not commenced but create significant obligations
and/or rights for the lessee
● Significant assumptions and judgments
● Sale-leaseback terms and conditions
● Entity's accounting policy related to ST leases
■ Quantitative disclosures:
● Finance lease costs
● Operating lease costs
● Short-term lease costs
● Weighted-average remaining lease and discount rate
● Separate maturity analyses for operating & finance lease liabilities for 5 years
● Lessor disclosures
■ Qualitative disclosures:
● Description of the lease
● Existence and terms/conditions of options to extend or terminate
● Options for the lessee to purchase the leased asset
● Significant assumptions and judgments
● Related party leases
● Accounting policies on lessor accounting
■ Quantitative disclosures:
● Profit or loss recognized at commencement date
● Interest income
● Income related to operating lease payments received
● Components of net investment in sales-type and direct financing leases
● Information on assets that are subject to operating leases
● Separate maturity analysis of lease receivables

Notes from MCQs

● Residual value is NOT included in the calculation of the lease obligation if it is paid by a third party and not the lessee
● Leasehold improvements
○ Amortization of leasehold improvements should be over the shorter of:
■ Life of the improvements, or
■ Remaining life of the lease
○ Amortization is included in rent expense for the year
 F6: Module 3 Derivatives and Hedge Accounting

“OFFS”
● O - Options
● F - Forwards
● F - Futures
● S - Swaps

Definitions and Concepts

● Derivative instrument
● “Under/over” contract - legalized gambling
● One or more underlyings and one or more notional amounts or payments provisions (or both)
● Requires no initial net investments (“FFS”); or one that is smaller than would be required (“O”)
● Net settlement of cash or by delivery of an asset
● Underlying
● What are we gambling on that will change value? - note “strike price”
● Specified price rate or other variable (interest rate, security/commodity price, foreign exchange rate)
● Notional amount
● Used to calculate G/L
● Specified unit of measure
● Value or settlement amount
● Paid by loser at expiration
● Payment provision
● Determinable settlement that is to be made if the underlying behaves in a specified way
● Hedging
● Reduces risk of holding/trading certain assets or liabilities
■ Offset anticipated losses or reduce earnings volatility
■ When a hedge is effective, the change in the value of the derivative offsets the change in
value of a hedged item or the cash flows of the hedged item
● “Perfect” hedge = no possibility of gain or loss

Common derivatives: “OFFS”

● Option contract
● Definition
■ Contract between two parties that gives one party the right (but not the obligation) to buy or sell
something to the other party at a specified price (strike price or exercise price) at a specified time
● Characteristics
■ Option buyer or holder must pay a premium to the option seller or writer to enter into option
contract (buyer - initial cost/cash outflow)
● Future impacts
■ Buy a call option
● Hope price goes up
■ Buy a put option
● Hope price goes down
● Futures contract
● Definition
■ (PUBLICLY traded) made through a clearinghouse and have standardized notional amounts and
settlement dates
● Characteristics
■ No initial cost
● Future impacts
■ Long/buy
● Profit up
■ Short/sell
● Profit down
 ● Forward contract
● Definition
■ (PRIVATELY) similar to futures, except that they are PRIVATELY negotiated
● Characteristics
■ No initial cost
● Swap contract
● Definition
■ PRIVATE agreement between two parties to exchange future cash payments (interest rate swaps,
currency swaps, equity swaps, commodity swaps)
● Characteristics
■ No initial cost
● Future impacts
■ Hope what you receive in swap goes up in value

Derivative Risks
● Market risk and credit risk are the “inherent” risks of all derivative instruments
○ Market risk
■ Risk that entity will incur a loss on the derivative contract
● Risk of the “loser”
○ Credit risk
■ Risk that other party to derivative contract will not perform according to terms of contract
● Risk of the “winner”
● Lowest with futures

Accounting for derivative instruments including hedges

● Balance sheet
● All derivative instruments are recognized in the BS
■ Assets - receivables - winner
■ Liabilities - payables - loser
● All derivative instruments are measured at FV
● Changes in FV creates gains/losses
■ Reporting gains and losses
● If no hedging designation
○ Recognize gain/loss on IS
● FV hedge
○ Instrument designated as a hedge of the exposure to changes in FV of a
recognized asset or liability or of an unrecognized firm commitment
■ Recognize gain/loss on IS
● Own stock
○ Loss if profit goes down
● Buy put
○ If stock goes down, gain on put offsets stock loss
● Cash flow hedge: OCI - “PUFIE”
○ Hedging the exposure to variability in expected future cash flows
attributed to a particular risk
■ Gain/loss on ineffective portion of cash flow hedge
● Recognize gain/loss on IS
■ Gain/loss on effective portion of cash flow hedge
● Deferred and reported in OCI
○ Long hedge
■ Offset risk that cost of asset you will buy in future goes up in value and
outflows go up
○ Short hedge
■ Offset risk that asset you sell in future will go down in value and inflows go down

● Private companies
● Accounting alternative intended to make it easier for certain interest rate swaps to qualify for hedge accounting
Foreign currency hedge:
■ AR denominated in foreign currency
○ Risk foreign currency goes down in value
■ AP denominated in foreign currency
○ Risk foreign currency goes up in value
■ Foreign currency FV hedge
○ Gain/losses go on IS
■ Foreign currency cash flow hedge (“PUFIE”)
○ Effective portion
■ Direct to equity (OCI)
○ Ineffective portion
■ IS
■ Foreign currency net investment hedge (“PUFIE”)
○ Effective portion
■ Direct to equity (OCI)
○ Ineffective portion
■ IS

Reporting on statement of cash flows:

● Derivative with no hedging designation -------------------------------------> Investing activities
● Derivative with no hedging designation, but held for trading -----------> Operating activities

Notes from MCQs

● To minimize the risk of currency fluctuation, focus on forward rate
● Liquidity risk is another factor to consider
● Gain/loss calculation is net of premiums paid to get the option
 F6: Module 4 Foreign Currency Accounting

Overview
● Foreign currency transactions
○ Transaction with a foreign entity denominated in a foreign currency
■ 1 customer - receivable or payable
● Foreign currency translation
○ Conversion of FS of a foreign entity into FS expressed in domestic currency (the dollar)
■ Sub’s entire FS

Terminology
● Exchange rate: price of one unit of currency expressed in units of another currency
● Direct method
■ Domestic price of one unit of another currency (1 euro costs $1.47)
● Indirect method
■ Foreign price of one unit of domestic currency (0.68 euro buys $1)
● Currency exchange rate (spot rate)
● Exchange rate at the current date
● Year-end
● Use for BS accounts
● Forward exchange rate
● Exchange rate existing now for exchanging two currencies at a specific future date
● Bet
● Historical exchange rate
● Rate in effect at the date of issuance of stock or acquisition of assets
● Use for equity accounts
● Weighted-average rate
● Rate assumed to have occurred evenly throughout the period
● Use for IS accounts
● Forward exchange contract
● Agreement to exchange at a future specified date and rate a fixed amount of currencies of different countries
● Denominated or fixed in a currency
● If going to use currency to settle a transaction
● Reporting currency
● Currency of the entity ultimately reporting financial results of the foreign entity
● U.S. $ if parent is U.S. company
● Functional currency
● Currency of the primary economic environment in which the entity operates
■ Use that country’s currency
■ Self-contained (do their own banking)
■ Not hyperinflationary (100% in 3 years)
● Foreign currency translation
● Restatement of FS denominated in the functional currency to the reporting currency
■ If sub has functional currency
● Foreign currency remeasurement
● Restatement of foreign FS from the foreign currency to the entity’s functional currency
■ Dysfunctional currency used by sub
 ● Monetary items
● Assets and liabilities that are fixed
■ Cash
■ Bonds: non-convertible
■ Accounts/notes receivable (and allowance) contra-account = same address account it relates to
■ Long-term receivables
■ Accounts/notes payable
■ Accrued expenses
■ Bonds/notes payable
● Nonmonetary items
● Assets and liabilities that are non-fixed/fluctuate
■ Marketable common stock
■ Inventory
■ Investment in subsidiary (Equity)
■ PP&E (and accumulated depreciation) contra-account = same address account it relates to
■ Intangible assets: patents and trademarks
■ Deferred charges and credits
■ Preferred & common stock

Foreign FS translation
● Steps in restating foreign FS
● Prepare in accordance with GAAP
○ Is sub using “same” GAAP as parent? - Answer must be yes to continue
● Determine the functional currency
○ Rules
■ Functional - translation
■ Non-functional - remeasurement
○ Local currency qualifies as functional currency (and thus, use translation method) if:
■ Self-contained and integrated within the country (use that country’s currency)
■ Day-to-day operations do NOT depend on parent’s functional currency (do their own banking)
■ Not hyperinflationary (NOT inflation of 100% over three years)
● Determine appropriate exchange rates
○ Functional currency of the foreign entity dictates
● Remeasure and/or translate the FS

○
● Remeasurement method (temporal method) = “dysfunctional”
● Balance sheet 1st step to convert to $
■ Monetary items
● Current/year-end rate
○ Fixed
■ Non-monetary items
● Historical rate
○ Fluctuate
● Income statement 2nd step to convert to $
■ Non BS related items
● Weighted-average rate
■ BS related items
● Historical rate
■ Depreciation/PP&E
■ COGS/inventory
■ Amortization/bonds and intangibles
■ Remeasurement gain/loss (IS)
● “Plug” to balance ------> goes to IS
● GAAP requires use of remeasurement when foreign subsidiary operates in highly inflationary economy

● Translation method (current rate method) = functional

● Income statement 1st step to convert to $
■ All IS items
● Weighted-average rate
■ Transfer net income to RE
● Balance sheet 2nd step to convert to $
■ Assets
● Current/YE rate
■ Liabilities
● Current/YE rate
■ Common stock/APIC
● Historical rate
■ RE
● Roll forward
■ Translated RE = Beginning translated RE + Translated NI for current period - Translated dividends
declared for the current period
● Translation gain/loss (OCI)
○ “Plug” to balance --------> BS: OCI = “PUFIE”
○ Journal entry
■ DR: CTA or OCI XXX
● CR: CTA or OCI XXX
○ CTA = cumulative translation adjustment (“plug”)
Example

●
Individual foreign single transactions
● Changes in exchange rate
○ Adjust to current exchange rate and recognize gain/loss in IS
● Transaction not settled at BS date
○ Mark to market using “spot” rate
■ Gain/loss is recognized in IS
● Valuation of assets and liabilities
○ Historical rate
● Example

○
 F6: Module 5 Income Taxes: Part 1

Overview
● Income for federal tax purposes and financial accounting income frequently differ
● Intraperiod tax allocation: within this year’s income statement
● I - Income from continuing operations
● D - Discontinued operations
● A - Accounting principle change (retrospective)
● Other comprehensive income
■ P - Pension funded status change
■ U - Unrealized gains/losses on AFS debt security
■ F - Foreign currency translation adjustment
■ I - Instrument-specific credit risk
■ E - Effective portion of cash flow hedge
● Components of stockholders’ equity
■ RE for prior period adjustments and accounting principle changes
■ Items of AOCI
● Comprehensive interperiod tax allocation: permanent and temporary differences
● Objective
■ Matching principle - IRS tax code vs. FASB GAAP FS
■ Current year taxes
○ Payable (liability) or refundable (asset) - BS liability (owe now + owe later) = IS (expense)

Or:

■ Future year taxes

○ Deferred tax asset or deferred tax liability
● Differences:
■ Permanent differences
○ Impact current taxes/not deferred taxes
■ Temporary differences
○ Impact current and deferred taxes
■ Liability = future taxable amounts
■ Asset = future deductible amounts
● Comprehensive allocation
■ Asset and liability method (BS approach) is required by GAAP
● Accounting for interperiod tax allocation
■ Current income tax expense (benefit) = income taxes payable (refundable) on corporate tax return
○ Owe now
■ Deferred income tax expense (benefit) = determined from BS approach (temp difference x future rate)
○ Owe later
■ Total income tax expense/benefit = current (owe now) +/- change in deferred (owe later)

■
 ● PASS KEY
■ Total tax expense for FS = current tax +/- deferred taxes
● Do NOT use FS income (includes permanent differences) or current tax rate (ignores future changes
to enacted rate)

Permanent differences
● Definition
○ No deferred taxes - ONLY impact current taxes
○ A transaction that affects only income per books or taxable income, NOT both (this year only)
○ No deferred taxes: creates differences in current year only - FS or tax return
● Examples
● Non-taxable
■ Tax-exempt interest (municipal, state)
■ Life insurance proceeds on officer’s key man policy
● Non-deductible
■ Life insurance premiums when corporation is the beneficiary
■ Certain penalties, fines, bribes, kickbacks, etc.
■ Non-deductible portion of meals and entertainment expense
● Special tax allowances
■ Dividends-received deduction (DRD) for corporations
■ Excess percentage depletion over cost depletion
■ Deduction for business interest expense is limited to sum of business interest income + 30% of
adjusted taxable income

●
Temporary differences
● Definition
● Causes deferred taxes
● Transactions that cause temporary differences (reverse in future)
● Revenues/gains that are included in taxable income AFTER they have been included in financial income
○ Results in DTL
■ Installment sales
■ Contractors accounting (% vs. completed)
■ Equity method (undistributed dividends)
● Revenues/gains that are included in taxable income BEFORE they are included in financial accounting income
○ Results in DTA
■ Unearned rent
■ Unearned interest
■ Unearned royalties
● Expenses/losses deducted from taxable income AFTER they have been deducted from financial accounting income
○ Results in DTA
■ Bad debt expense (allowance vs. direct write-off)
■ Estimated liability/warranty expense
■ Start-up expenses
● Expenses/losses deducted from taxable income BEFORE they are deducted from financial accounting income
○ Results in DTL
■ Depreciation expense in excess of book
■ Amortization of franchise
■ Prepaid expenses (cash basis for tax)
● Deferred tax liabilities and assets recognition
● DTL
■ Future tax accounting income > future financial accounting income = pay taxes later
■ Tax deductible now; FS expense later
■ FS income now; Tax return income later

■
 ● DTA
■ Future tax accounting income < future financial accounting income = pay taxes early
■ Taxable income now; FS income later
■ FS expense now; tax deduction later

■
■ Valuation allowance (contra-account)
● For amount not expected to be used
● If more likely than not (> 50%) that part or all of the deferred tax asset will NOT be realized,
valuation allowance is recognized

Notes from MCQs

● If NOL, required to book full valuation allowance against DTA
● The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances is
included in income from operations
● Deferred tax assets and deferred tax liabilities are classified as non-current
● All deferred tax liabilities and assets must be offset (netted) and presented as one amount (a net non-current asset or a
net non-current liability)
 F6: Module 6 Income Taxes: Part 2

Uncertain tax positions

● Definition
● Aggressive tax positions
● GAAP requires more-likely-than-not (> 50%) confidence level before reflecting a tax benefit in an entity’s FS
● Scope
● A tax deduction (most common)
● A decision to not file a tax return
● An allocation or shift of income between jurisdictions
● The characterization of income, or a decision to exclude reporting taxable income, in a tax return
● A decision to classify a transaction, entity, or other position in a tax return as tax-exempt
● Two step approach
● Recognition of the tax benefit: would you win > 50% of the time
■ Test more likely than not
● Based on expected outcome if taken to highest court
■ Test failed: < 50% chance of winning
● FS tax expense is increased
○ DR: Tax expense XXX
■ CR: Other liabilities XXX
● Measurement of tax benefit: even if you win —> by how much
■ Recorded amount
● Recognize largest amount of tax benefit that has a > 50% chance of being realized
upon ultimate settlement

Enacted tax rate

● Used for deferred taxes (temporary difference)
● Use the law of what the future tax rate is going to be
● PASS KEY:
○ Use the tax rate in effect when the temporary difference reverses itself
Treatment of and adjustment for changes
● Changes in tax laws or rates in the next (following year)
○ Recognized in the period of change (change in estimate)
■ Amount of the adjustment is measured by the change in applicable laws/rates applied to the
remaining cumulative temporary differences
■ Adjustment enters into income tax expense for that period
● Calculating income tax expense on an interim statement:
○ Step 1
■ Multiply year-to-date income by the effective income tax rate
○ Step 2
■ Subtract from that number the income tax expense already recorded in previous quarters
● Change in the valuation allowance
● Related to deferred tax benefit (asset)
● Recognized in income from continuing operations
● Change in tax status of an enterprise
● C Corp to S Corp
■ Recorded at that point in time
● Non-taxable entity to taxable entity
■ DTL/DTA should be recognized for any temporary differences
● Taxable entity to non-taxable entity
■ Any existing DTL/DTA should be eliminated (written off)
● Net temporary adjustment (from beginning balance)
● Like allowance for doubtful accounts - netted
■ Deferred tax
■ + Calculated ending balance
■ - Current balance
■ = Required adjustments

●
Balance sheet presentation
● DTL/DTA is non-current regardless of expected reversal date
● All DTLs and DTAs must be netted and then presented as one amount (a net non-current asset or a net non-current liability)

Operating losses
● Creates a DTA
○ NOL - 2018, 2019, or 2020
■ Can be carried back 5 years and then forward indefinitely - no 80% limit
○ NOL - 2021 or later
■ No carry back, carryforward indefinitely - 80% limit
○ Amount x tax rate is amount carried forward as a DTA
● NOL carrybacks
● Refund (no valuation)
● Tax receivables
■ Shown on BS as a separate item from deferred taxes
■ Current asset
■ Journal entry
● DR: Tax refund receivable XXX
○ CR: Tax benefit XXX
● Operating loss carryforwards
● DTA
■ May require a “valuation allowance”
● Recognized to the extent that the tax benefit is more likely than not to be realized
■ Should be valued using the enacted tax rate for the period(s) they are expected to be used
■ Journal entry
● DR: Deferred tax asset XXX
○ CR: Tax benefit XXX (reduce book loss)

●
Investee’s undistributed earnings
● Income tax return
● Report dividend income (only)
● DRD - permanent difference
■ 0 - 19% —> 50% exclusion
■ 20% - 80% —> 65% exclusion
■ Over 80% —> 100% exclusion
● GAAP FS
● Equity method (20% - 50%) = report % share of sub’s income
● Temporary difference: income tax return VS. GAAP
● DR: Income tax expense - current XXX IS
● DR: Income tax expense - deferred XXX IS
■ CR: Income taxes currently payable XXX BS
■ CR: Deferred tax liability XXX BS

Income tax disclosures More is better & do NOT repeat or be too positive
● BS disclosures
● All DTLs
● All DTAs
● Valuation allowance for DTAs
● Net change during year in total valuation allowance
● Tax effect of each type of temporary difference and carryforward that is significant to DTL/DTA
● IS disclosures
● Current tax expense or benefit
● Deferred tax expense or benefit
● Investment tax credits
● Government grants
● Benefits of NOL carryforwards
● Tax expense allocated to shareholders equity items
● Adjustments of deferred taxes from change in tax laws or rates
● Adjustments of beginning of year deferred tax asset valuation due to changes in expectations
● The types and amounts of permanent differences are not required disclosures
 F7: Equity, EPS, and Cash Flows

F7: Module 1- Stockholders’ Equity: Part 1

Overview
● Stockholders’ equity: owners’ claims to net assets (residual on “assets”)
● Like BS - “As of” particular date

Capital stock (legal capital)

● Definition
● The amount that must be retained by corporation for the protection of creditors
● The par or stated value of BOTH preferred and common stock is legal capital
● Par value
● GR: preferred stock is issued with a par value
● Common stock “may be” issued with or without par value
■ No-par common stock may be issued as true no-par stock or no-par stock with a stated value
● Any excess of actual amount received over par or stated value of the stock is accounted for as additional paid-in capital
(APIC)
● Authorized, issued, and outstanding
● Authorized
■ Listed in corporation’s charter - total they can put out there
● Issued
■ Total number out there
● Outstanding
■ Total number out there held by others (net of treasury)
● The number of shares of each class of stock authorized, issued, and outstanding must be disclosed
● Common stock
● Characteristics
■ Basic ownership interest
■ Bear the ultimate risk of loss
● “Last in line” behind creditors and preferred shareholders
■ Not guaranteed dividends or assets upon dissolution
■ GR: common shareholders control management
● Right to vote
● Right to share in earnings of corporation
● Right to share in assets upon liquidation AFTER the claims of creditors and preferred shareholders
are satisfied
■ PASS KEY
● Common shareholders may have preemptive rights to a proportionate share of any
additional common stock issued IF granted in the articles of incorporation
● Common stockholders’ equity formula
■ Step 1
● Assets - Liabilities = Total shareholders’ equity
● - Preferred stock outstanding (at greater of call price or par value)
● - Cumulative preferred dividends in arrears
● = Common shareholders’ equity
● BV per common share
○ Step 2
● BV/common share = common shareholders’ equity / common shares outstanding (issued – repurchased)
● Preferred stock
● Characteristics
■ May include a preference relating to dividends
■ May be cumulative or non-cumulative
■ May be participating or non-participating
■ May include a preference relating to liquidation
■ GR: no voting rights
● Cumulative preferred stock
■ All or part of preferred dividend not paid in any year accumulates (dividends in arrears) and
must be paid in future before dividends can be paid to common shareholders
● The amount of dividends in arrears is not a legal liability
● Must be disclosed in BS or footnotes
● Non-cumulative preferred stock
■ Dividends not paid do not accumulate
● Shareholders lose the right to receive dividends that are not declared
● Participating preferred stock
■ Share equally then pro rata
● Fully participating means that preferred shareholders participate in excess dividends without limit
○ First, preferred shareholders receive their preference dividend and any dividends in arrears
○ Then, common shareholders receive an equal percentage of dividends based on their holdings
○ Finally, remaining dividends are shared between common and preferred shareholders
pro rata based on their market capitalizations (# of shares x par value of those shares)

■
 ● Nonparticipating preferred stock
■ Preferred shareholders are limited to the dividends provided by their preference
● Preference upon liquidation
■ Ahead of common shareholders if corporation liquidates
● Convertible preferred stock
■ At the option of the stockholder, may be exchanged for common stock
● Corporation has complex capital structure - basic and diluted
● Callable (redeemable) preferred stock
○ Preferred stock may be called (repurchased at a specified price) at the option of the corporation
● Mandatorily redeemable preferred stock (liability)
○ Issued with a maturity date (similar to debt)

Additional paid-in capital (APIC)

● Definition
● Generally contributed capital in excess of par or stated value
● Examples:
● Sale of treasury stock at a gain
● Liquidating dividends
● Conversion of bonds
● Small stock dividends

Retained earnings
● Definition
● Accumulated earnings (or losses) during the life of the corporation that have not been paid out as dividends
● If RE has negative balance = deficit
● Calculating change in RE
● Net income/ loss
● - Dividends (cash, property at FMV, and stock) declared Small or large stock?
● +/- Prior period adjustments (net of tax) Corrections of an error
● +/- Accounting changes reported retrospectively (net of tax) NOT to LIFO or change in depreciation
● = Change in RE
● Classification of RE (appropriations) - restricted
● Appropriated RE is not available to pay dividends
● Journal entry
■ DR: RE (unappropriated) XXX
● CR: RE appropriated for [purpose] XXX
○ This entry is reversed when the purpose of the appropriation has occurred

Accumulated Other Comprehensive Income

● Definition
○ “PUFIE”
○ Not included in determining NI and therefore do not enter into RE

Treasury stock
● Definition
● Reduces SE, “debit” balance
● Corporation’s own stock that has been issued to shareholders and subsequently reacquired (but not retired)
● Not entitled to any rights of ownership, rights to vote, or right to dividends
● NI or RE will NEVER increase through treasury stock transactions
● Methods of accounting for treasury stock *** 2 methods
● Cost method
■ Gain/loss is calculated upon reissuance of the stock
■ Treasury shares are recorded and carried at reacquisition cost
■ APIC-Treasury Stock is credited for gains and debited for losses
■ Losses decrease RE if there is not enough in APIC-Treasury Stock to absorb the loss
■ NI or RE will NEVER increase through treasury stock transactions

■
● Legal (or par/ state value) method
■ Gain/loss is calculated immediately upon repurchase
● Treasury stock is reported at par value
● APIC-Common Stock is reversed from the original issuance (to extent bought back)
● If there are remaining debits needed on initial buyback, RE is debited (reduced)
● If there are remaining credits needed on initial buyback, APIC-Treasury Stock is credited (increased)

■
Retirement of treasury stock
● When treasury stock is acquired with the intent of retiring it

Donated stock
● At FV
● Causes 0 net change in SE
○ DR: Donated treasury stock XXX FV
■ CR: APIC XXX FV
● If the donated stock is sold
○ DR: Cash XXX Selling price
○ DR: APIC XXX If SP < original FV
■ CR: APIC XXX If SP > original FV
■ CR: Donated treasury stock XXX BV or original FV
 F7: Module 2- Stockholders’ Equity: Part 2

Accounting for a stock issuance (to non-employees)

● Stock issued above par value
○ DR: Cash XXX Proceeds
■ CR: Common/preferred stock XXX Par value
■ CR: APIC XXX Excess
● Stock issued at par value
● DR: Cash XXX Proceeds
■ CR: Common/preferred stock XXX Par value
● Stock issued below par value
● DR: Cash XXX Proceeds
● DR: APIC XXX Discount
■ CR: Common/preferred stock XXX Par value
● The discount represents a contingent liability to the original owners
● Stock subscriptions
● Definition
■ Agreement to sell specified number of shares at an agreed-upon price on credit is entered into
● Upon full payment, a stock certificate is issued
● Journal entries
■ Sale of subscriptions: no cash received yet
● DR: Subscriptions receivable XXX Contra-equity account
○ CR: Common stock subscribed XXX Par value
○ CR: APIC XXX Excess
■ Collection of subscriptions
● DR: Cash XXX
■ CR: Subscriptions receivable XXX
■ Issuance of stock previously subscribed
● DR: Common stock subscribed XXX
○ CR: Common stock XXX
■ Default/forfeiture of a subscription
○ Reverse the original entry and either:
■ Issue stock in proportion to the amount paid
■ Refund the partial payment
■ Retain the partial payment by a credit to APIC
● Stock rights
● Definition
■ Provides existing shareholder with the opportunity to buy additional shares of stock
● Journal entries
■ NO JE until exercised - memorandum entry only
■ Exercise of stock rights
● DR: Cash XXX Amount received
○ CR: Common stock XXX Par value
○ CR: APIC XXX “Plug”
● Other stock valuation issues
● Stock issued for outside services should be recorded at FV of stock
● Stock issued in a basket sale with other securities should be allocated a portion of the sales proceeds
based on the relative FVs of the different securities
Distributions to shareholders
● Not on IS
● A dividend represents a distribution of earnings
● Terminology
● Date of declaration
■ Date the BOD formally approves a dividend
● DR: RE XXX
○ CR: Dividends payable XXX
● Date of record
■ Date the names of the shareholders to receive the divided are determined
● No JE
● Date of payment
■ Date on which the dividend is actually disbursed
● DR: Dividends payable XXX
○ CR: Cash XXX
● Cash dividends
● Financial outflow upon payment
● No dividends on treasury stock
● Property (in-kind) dividends
● No cash outflow
● FV - on date of declaration, property is restated to FV and any gain/loss should be recognized in income
■ Journal entry
● DR: RE XXX FV
● DR: Accumulated depreciation XXX Wipe-off
○ CR: Asset at cost XXX Wipe-off
○ CR: Gain XXX FV - BV
■ If loss, loss is debited
● Scrip dividends
● No cash outflow yet
● Notes payable whereby corporation commits to paying a dividend at some later date
● May be used when there is cash shortage
● Some notes bear interest
● Liquidating dividends
● Dividends to shareholders exceeding RE = return of capital (reduce additional paid in capital)
■ Journal entry
● DR: APIC XXX First
● DR: Common stock XXX If necessary
● DR: Preferred stock XXX If necessary
○ CR: Dividends payable XXX
● Stock dividends
● 0 net impact on Total SE
● No cash out
● No dividend income to owner
■ Cost basis goes down
● Small stock dividend (< 20%)
■ Reduce RE by FV of stock on declaration date
■ Common stock is credited at par (as usual)
■ Plug is APIC-Common Stock

●
● Large stock dividend (> 25%)
■ Reduce RE by par value of stock
■ Common stock is credited at par (as usual)
○ Common stock distributable would be credited if the distribution takes
place on a different day than the declaration date (see example below)

●
● If between 20% - 25%, use FMV or par (your choice)
 ● Stock splits
● No JE
● Total equity = no change
● Increase number of shares and decrease par value proportionately
● Total legal capital = no change = memo entry only
● Reverse stock splits
■ Reduce number of shares and increase par value proportionately

Statement of changes in shareholders’ equity

● Provides specific info about changes in an entity’s primary equity components
● Like IS and CF, “for the year ended”
● *** GAAP vs. SEC
○ GAAP permits presentation of statement of changes in SE as either primary or in notes to FS
○ SEC requires statement of changes in SE to be presented as primary FS

Notes from MCQs

● Calculating number of shares outstanding:
○ Original shares outstanding
○ - Shares in treasury
○ + Treasury shares sold
○ + New shares issued
○ = Total shares outstanding before split
○ * Two-for-one stock splits
○ = Shares O/S after stock split
● Stock rights
○ When stock rights are “issued” without consideration, no entry (only disclosure) is made by either the
“issuer” or the “recipient”
○ At the time the rights are “exercised,” APIC would be credited if the purchase price > par value
○ RE is not impacted
 F7: Module 3- Stock Compensation

Employee stock options

● Noncompensatory stock option/purchase plans
● No JE until employee buys stock
● Intention
■ Used by entities to raise capital OR diversify ownership among employees or officers
● Characteristics
■ NO compensation expense
■ Available for all FT employees meeting limited employee qualifications
■ Stock is offered to eligible employees equally
■ Time permitted is a reasonable period of time
■ Discount is relatively small
■ *KEY POINT
○ Do NOT require recognition of compensation expense by sponsoring company
● *Compensatory stock option
● Book compensation expense
● Valued at FV of options issued
● Definitions
■ Option price (or exercise price/strike price)
○ Price at which stock can be purchased for
■ Exercise date
○ date by which option holder must use the option
■ *FV of the option
○ Determined by an economic pricing model (Black-Scholes method)
■ Grant date
○ Date the option is issued and FV is calculated
○ NO JE yet
■ *Vesting period
○ Time from the grant date to the vesting date
○ Employee has to perform services in order to earn the option
■ *Service period
○ Period over which expense is recognized
● Compensation expense
■ Calculated on grant date, is allocated over service period, in accordance with the matching principle
■ Service period = vesting period

■
 ● Expiration of options
■ Reclass remaining balance in APIC
● DR: APIC - stock options
○ CR: APIC - expired stock options
■ Compensation expense is not affected by the expiration of options

Stock Appreciation Rights (SARs)

● No cash received by corporation
● Entitles an employee to receive an amount equal to excess of market price of stock at exercise date over a
predetermined amount (usually market price at grant date)
● Excess $ x # of rights outstanding = compensation expense and a liability, which is then is allocated over service period
● Compensation expense for stock appreciation rights outstanding must be adjusted annually to account
for changes in market price of stock —> prospectively - do NOT restate

●
 F7: Module 4- Earnings Per Share

Overview
● All public entities are required to present EPS on the face of IS
● Entity with simple capital structure
■ Only has common stock outstanding
■ Presents basic per-share amounts for income from continuing operations and for NI on face of IS
● All other entities (complex structure)
■ Must present both basic and diluted per-share amounts for income from continuing operations and for NI
on face of IS
● If entity reports discontinued operations, must present both basic and diluted per-share amounts
EITHER on face of IS or in notes to FS

Simple capital structure (report basic EPS ONLY)

● Basic EPS = income available to common shareholders / Weighted-average number of common shares outstanding
● Income available to common shareholders = NI – Preferred dividends
■ Dividends declared in period of noncumulative preferred stock (regardless of whether it’s been paid)
■ Dividends accumulated in the period on cumulative preferred stock (regardless of whether it’s been declared)
● weighted-average # of common shares outstanding “WACSO”
■ Shares outstanding at beginning of period
■ + Shares sold during the period (on a time-weighted basis)
■ - Shares reacquired during the period (on a time-weighted basis)
■ + Stock dividends and stock splits (retroactively adjusted)
■ - Reverse stock splits (retroactively adjusted)
■ = Weighted Average # of Common Shares Outstanding
■ Stock dividends and stock splits
○ Treated as though they occurred at the beginning of the period
■ Shares outstanding before the stock split must be restated for the portion of the period before
the stock dividend/split
● Even for prior periods that are being presented in comparative form

■
Complex capital structure (report basic and diluted EPS)
● Complex if has any one of these:
● Securities that can potentially be converted to common stock (convertible securities)
● Warrants
● Contract that may be settled in cash or stock
● Contingent shares
● Diluted EPS = income available to CS shareholders + interest on dilutive securities

weighted average # of common shares (assuming all dilutive securities are converted to CS)

● Dilution from options, warrants, and their equivalents

● Overview
■ No change to the numerator
● Dilutive vs. anti-dilutive
■ Dilutive only if average market price > strike (exercise) price “in the money”
○ Meaning holder of the option has a bargain price
● Treasury stock method
■ Assumes that the proceeds from exercise of stock options, warrants, and their equivalents
will be used by the company to repurchase treasury shares at the prevailing market price,
resulting in an incremental increase in shares outstanding
■ Additional shares outstanding = # of shares – [(number of shares * exercise price)
/ average market price]

●
● Dilution from complex convertible securities
● Overview
■ Bonds or preferred stock
■ Assume securities are converted to CS at beginning of period
● Convertible bonds
■ Add to numerator
● Interest expense saved x (1 - T) = saved interest expense “net of tax”
■ Add to denominator
● # of common shares associated with assumed conversion
■ If the convertible bonds were issued during the period, assume that the stock was issued at
that date for the weighted average calculation

■
● Anti-dilution - rule of conservatism
■ Use results of each assumed conversion only if it results in dilution (reduces EPS)
● Do NOT include results of assumed conversion if it is anti-dilutive (increases EPS)
■ Each issue will be considered separately in sequence from most to least dilutive
● Options and warrants generally included first

■
 ● Convertible preferred stock
■ Overview
● Ignore taxes
■ Steps
● Adjust the numerator
○ Save the preferred dividends
● Add to the denominator
○ # of shares associated with the assumed conversion
■ Anti-dilution rules apply to convertible preferred stock

Dilution from contracts that may be settled in cash or in stock

● Diluted EPS is “worst case scenario”
○ Assume settled in common stock and include shares in diluted EPS if effect is more dilutive

Dilution from contingent shares

● Basic EPS
○ Included in if conditions have been fully satisfied
● Diluted EPS
○ Included based upon conditions having been met to date
● Includes shares issuable upon:
○ Passage of time, issuance of a patent, net income targets

Disclosures
● Cash flow per share should NOT be reported
● Report basic and diluted EPS on face of IS
● If discontinued operations are reported, put on face of IS or in notes
 F7: Module 5- Statement of Cash Flows

Overview
● SCF is a required part of full FS for ALL business enterprises
○ Operating cash flows
■ Core business
■ Most current assets and current liabilities (operating assets and operating liabilities)
○ Investing cash flows
■ Non-current assets
○ Financing cash flows
■ Non-current liabilities (debt)
■ Equity
● Disclosures
○ SCF also presents info about material non-cash events
○ Cash flow amounts per share are NOT disclosed under GAAP
● Purpose of SCF
○ Why did cash change?
■ Reconciles beginning and ending BS amounts

Cash and cash equivalents

● Definitions
○ Cash
■ Currency and demand deposits
○ Cash equivalents
■ Short-term liquid investments
■ So near maturity (the original maturity date to investor 90 days or less of purchase date)
that the risk of changes in value because of interest rate changes is insignificant
■ Not presented in SCF
● Does not change the cash position of the entity
● Treat bank overdrafts as financing CF

Methods of presenting the SCF

● Direct method (encouraged by GAAP)
○ Cash collected from customers - cash paid for operating expenses
● Indirect method: (reconciliation)
○ NI + depreciation + losses – gains (non-operating gains and losses)
● Regardless of method chosen, the investing and financing sections will be exactly the same
○ Method chosen only impacts how cash flows from operations is presented

Sections of the formal statement

● Operating activities
● Overview
■ Change in operating assets = all current assets except cash and cash equivalents
■ Change in operating liabilities = all accruals except interest-bearing liabilities
● Note, debt, bond, debenture, line of credit, negotiated, financing
● Methods
■ Direct method
○ Ignore NI, depreciation, gains and losses
● Cash received from customers
○ Net revenues (inflows)
○ - Increase in receivables (no cash - outflow)
○ + Decrease in receivables (cash received - inflow)
○ + Increase in unearned revenue (cash received - inflow)
○ - Decrease in unearned revenue (no cash - outflow)
○ = Cash received from customers (net inflow)
● Interest received
○ Increases cash
● Dividends received
○ Increases cash
● Insurance proceeds and lawsuit settlements
○ Increases cash
● Sale of trading securities
○ Increases cash
● Cash paid to suppliers and employees
○ COGS (outflows)
○ + Increase in inventory (buy - outflow)
○ - Decrease in inventory (sell - inflow)
○ - Increase in AP (borrow - inflow)
○ + Decrease in AP (repay - outflow)
○ = Cash paid to suppliers (net outflow)
● For every other operating expense on IS, do a T account
○ v Payable ^
○ | Beg.- BS
○ $ paid |CY Exp.- IS
○ End.- BS

○ Salaries and wages expense

○ - Increase in wages payable
○ + Decrease in wages payable
○ = Cash paid to employees
● Interest paid —> principal paid = financing outflow
○ Decreases cash
● Income taxes paid
○ Decreases cash
● Cash paid to acquire trading securities
○ Decreases cash
● SG&A - use T account
○ Decreases cash
 ■ Indirect method
○ Ignore cash received from customers, cash paid to vendors, etc.
● Operating activities
○ NI
○ + Depreciation/amortization
○ + Losses
○ - Gains/amortization of bond premium
○ - Equity earnings
○ - (+/-) change in OA
○ + (+/-) change in OL
○ = CFO (Cash flow from operating activities)
● Investing activities
○ Change in non-current assets
■ Making loans to other entities
■ Purchasing or disposing of trading securities (If non-CA), AFS, &
HTM securities (debt or equity)
■ Acquiring or disposing of PP&E
● Gains and losses (nonoperating)
○ Back into SP - proceeds on sale - invest inflow
■ SP - NBV = gain/loss
● ^ NBV PP&E v
● Beg. | CY depreciation exp
● + CAPEX (investing outflow) | NBV PP&E sold_______
● End.- BS
■ Acquiring another entity under acquisition method using cash
● Financing activities
○ Change in own debt (interest-bearing) and own equity
■ Equity (owner-oriented) activities
● Issuing stock (cash inflow)
● Paying cash dividends or repurchasing stock (cash outflow)
○ v Div. Payable ^
○ | Beg.- BS
○ $ paid | CY declared
○ End.- BS
■ Non-current liability (creditor-oriented) activities
● Issuing bonds & notes (cash inflow)
● Payments of principal on amount borrowed (cash outflow)
● Non-cash investing and financing activities (required supplemental disclosure)
■ Definition
● Required supplemental disclosure
● Material non-cash financing and investing activities that do NOT result in cash receipts or payments
■ Examples
● Purchase of fixed assets be issuance of stock
● Conversion of bonds to equity
● Acquiring assets though incurrence of capital lease obligation
● Exchange of one non-cash asset for another
● SCF disclosures
■ 1st disclosure (depends on method company used for CFO)
● Direct method
○ Supplemental “reconciliation” (indirect method format)
● Indirect method
○ Cash paid for interest and taxes
 F7: Module 6- FS of Employee Benefit Plans

Overview
● A pension plan and the sponsoring company are two separate legal entities

Required FS for Defined Benefit Pension Plans

● GAAP requires the FS of a defined benefit plan to include the following
○ Statement of Net Assets Available for Benefits same as contribution plan
■ BS assets
○ Statement of Changes in Net Assets Available for Benefits same as contribution plan
■ IS
○ Statement of Accumulated Plan Benefits additional for benefit plan
■ BS liabilities
○ Statement of Changes in Accumulated Plan Benefits additional for benefit plan
■ Liability changes
● Change in actuarial assumptions
● Definitions
● Accumulated plan benefits
■ The future benefit payments that are attributable to the employee’s services rendered to the
benefit information date
● Actuarial PV of accumulated plan benefits
■ The amount that results from applying actuarial assumptions to the accumulated plan benefits
● Net assets available for benefits
■ The difference between a plan’s assets and liabilities, excluding the participant’s
accumulated plan benefits
● Measurement
● Plan assets at FV

Required FS for Defined Contribution Pension Plans

● Statement of Net Assets Available for Benefits same as benefit plan
○ BS assets
● Statement of Changes in Net Assets Available for Benefits same as benefit plan
○ IS

Notes from MCQs

● Footnote disclosures in FS for pensions do NOT require inclusion of the differences in executive and non-executive plans
● SCF is NOT required for either defined benefit pension plans and defined contribution plans
● Entity reports the net periodic pension cost on its own IS and the funded status of the plan on its own BS
 F8: NFP Accounting and Governmental Accounting - Part 1

F8: Module 1- Not for Profit financial reporting: Part 1

Introduction to Not-for-Profit Accounting FASB (not GASB - govt)

● Characteristics of not-for-profit organizations Codification 958
● Revenues come from contributions
● Operating purpose does not include profit
● Ownership interest are unlike business enterprises
● Industries that use NFP accounting
● Health care organizations
■ Hospitals, nursing homes, hospices
● Educational institutions
■ Colleges & universities, other schools
● Voluntary health and welfare organizations
■ United Way, American Red Cross, March of Dimes
● Other private (not governmental) NFP organizations
■ Cemetery, fraternities, labor unions
● Users of NFP FS
● Donors, members, creditors, and others who provide resources
■ Needs of users
● The ability to assess:
■ The services the organization provides
■ The organization’s ability to continue to provide those services
■ The method the organization’s managers use to discharge their stewardship responsibility
■ FS information
■ Statement of financial position
■ Statement of activities
■ Statement of cash flows
● Full accrual basis of accounting
● Placing emphasis on disclosing source of resources and how they were expended
● PASS KEY
■ External FS of NFP entities do not present funds
● The focus of FS is on basic information of organization taken as a whole

NFP financial reporting standards

● FASB ASC: 958-280
● Consistent external reporting
● Fund accounting is NOT used
● Must focus on basic information for organization as a whole
● Governmental NFPs are governed by GASB, not FASB
● Required FS
● Statement of financial position - BS
● Statement of activities - IS
● Statement of cash flows - SCF
● Reporting expenses by nature and function
● All NFPs must report information about the relationships between functional classifications and natural classifications
■ Functional classifications
● Categorizes cost by major classes of program (purpose and mission of NFP) and
support (management & general, fundraising, and membership development) services
■ Natural classifications
● Salaries, rent, utilities
■ Report in 1 of 3 ways
● On the face of the statement of activities
● As a schedule in notes to FS
● In a separate FS
Statement of Financial Position (balance sheet)
● Components
● Assets
● Liabilities
● Net assets (equity)
● Sequence of account display for assets and liabilities
● Current or non-current
● Assets sequenced by nearest to cash
● Liabilities sequenced by nearest to maturity
● Assets restricted or designated for non-current purposes should be displayed as non-current
● Net assets (with and without donor restrictions)
● Without donor restrictions
■ Are available to finance general operations of NFP and may be expended at the discretion of the board
■ Are not otherwise restricted by external donors
■ Internal board-designated funds are classified as net assets without donor restrictions
● With donor restrictions
■ Subject to specific, externally imposed limitations made by a donor
■ Support of particular operating activity
■ Investment for a specified term
■ Use in specific period
■ Acquisition of long-lived assets
■ Assets that are to be used for a specified purpose and not sold
■ Donor-restricted endowments that are perpetual in nature
● Statement of financial position disclosures
● Qualitative information useful in assessing liquidity, including how the organization manages its liquid resources to
meet cash needs for general expenditures within one year of the statement of financial position date
● Quantitative information that displays or discloses the availability of its liquid resources

Statement of Activities (income statement)

● Reports revenues and expenses (gross), gains and losses (net), and reclassification between
classes of net assets (with donor restrictions to without)
● Elements
● Change in total net assets
● Change in net assets without donor restrictions
● Change in net assets with donor restrictions
● Classification of revenue, gains, and other support
● Without donor restrictions
■ Examples
■ Fees from rendering services
■ Contributions that have no explicit donor stipulation restricting use
■ Gains/losses recognized on investment not accompanied with explicit donor restrictions
● With donor restrictions
■ Examples
■ Contributions subject to expenditure for a specified purpose
■ Contributions subject to passage of time
■ Contributions associated with temporary restrictions
■ Contributions requiring investment in perpetuity with returns eligible for appropriation
● Journal entries
○ Satisfying the restriction
■ DR: Satisfaction of program restriction - donor restrictions XXX
● CR: Satisfaction of program restriction - without donor restrictions XXX
○ Use of the resources
■ DR: Program expense XXX
● CR: Program revenue XXX
 ● Reclassification of restrictions
● Contributions with donor-imposed restrictions are recognized as donor-restricted support in the period
in which they are received
● When a donor restriction is satisfied, a reclassification is reported on the statement of activities
■ Donor imposed restrictions that are met in same fiscal year they are received may be
recorded as increase to net assets without donor restrictions
■ Support that results in perpetually restricted net assets ordinarily are not reclassified
● Expense classification in statement of activities
● Program services
■ Definition
● Activities for which the organization is chartered
■ Examples
■ Universities: education and research
■ Hospitals: patient care and education
■ Union: labor negotiations and training
■ Day care: child care
● Support services
■ Definition
● Everything not classified as program service
■ Fundraising
■ Management and general (administrative expenses)
■ Membership development
● Combined costs
■ Definition
● NFPs that combine fundraising efforts with educational (or program) services should
allocate the combined cost between functions
■ Example
● Fundraising & education
● Note: All expenses are reported as decreases in net assets without donor restrictions
■ You cannot restrict an expense
● Reporting expenses by nature and function
● Expense information should include the relationships between functional classifications and natural classifications
■ Functional expenses should be classified as:
● Major classes of program services, OR
● Supporting activities
■ Natural expenses include:
● Salaries
● Rent
● Utilities
● Supplies
● Interest expense
● Depreciation
● Awards and grants
● Professional fees
■ Gains and losses and external and direct internal investment expenses that have been netted
against the investment return should not be included in the functional expense analysis

Notes from MCQs

● A promise embedded within a will is not a pledge and is not revenue
○ Uncertainty about a person's death and the potential for future modification of a person's will makes
inclusion of bequests in wills ineligible for recognition
● An unconditional gift-in-kind for the use of a long-lived asset is recognized at fair value as a donation without
donor restrictions and an equal expense in the period used
○ This leads to 0 net effect on net assets
● A multi-year pledge is, by definition, with donor restrictions, since the contribution has yet to be collected
○ There is an implied time restriction on receivables
 F8: Module 2- NFP Financial Reporting: Part 2

Statement of cash flows

● Overview
● Either the direct or the indirect method may be used
■ Direct method does not require the reconciliation (indirect method) like commercial does
● Classification of sources and uses of cash
● Operating activities
■ Cash contributions without donor restrictions
■ Receipts/payments for settlement of lawsuits
■ Proceeds from insurance settlements
■ Refunds from suppliers or refunds to suppliers
■ Charitable contributions/disbursements
■ Reported activity by major class of gross receipts (contributions, program income, interest/dividend income)
■ Receipts of unrestricted resources designated by the governing body to be used for long-lived assets
■ Proceeds from the sale of financial assets not restricted for long-term purposes
■ Cash payments to suppliers and employees
■ Cash payments for interest
■ Cash activity associated with agency transactions
● Investing activities
■ Investments in PP&E
■ Proceeds from the sale of works of art or disbursements for purchases of works of art
■ Proceeds from the sale of assets that were received in the prior period and whose sale
proceeds were restricted to investment in equipment
■ Insurance proceeds associated with the loss of long lived assets
● Financing activities
■ Proceeds from issuing bonds, mortgages, notes, and other short- or long-term borrowing
■ Repayment of amounts borrowed
■ Receipts from contributions restricted for purposes of acquiring, constructing, or improving PP&E
■ Receipts from contributions restricted for purpose of establishing or increasing
donor-restricted endowment fund
● Cash and cash equivalents
■ Exclude donor-restricted securities
● Non-cash transactions
■ Disclose
● Contributed securities
● Construction in progress and other fixed asset purchases included in AP
● Contributions of beneficial interests
● Non-cash debt refinancing transactions
● Direct method
■ Supplemental reconciliation of cash flows from operations is NOT required
 F8: Module 3- NFP Revenue Recognition (Full accrual)

Revenue from exchange transactions

● Definition
○ An exchange transaction is one in which the NFP earns resources in exchange for a service performed
● Increases to net assets without donor restrictions
● Student tuition and fees earned by educational NFPs
● Patient service revenue earned by health care NFPs
● Membership fees earned by membership organizations NFPs

Contributions received
● Contributions defined
● Unconditional transfer of cash or assets
● Recognition
● If it is part of ongoing major or central activities
■ Revenue
● if transaction is incidental to the purpose
■ Gain
● Cash contributions
● Overview
■ Revenue when received
■ Measured at FV on date of gift
● Journal entry
■ DR: Asset XXX
● CR: Contribution support revenue XXX
● Promises to give (pledges)
● Unconditional promises
■ Overview
● Revenue when pledged
● Measured at FV when the promise is made
■ Journal entry
● DR: Asset XXX
○ CR: Contribution support revenue XXX
● Conditional promises
■ Overview
● Revenue when earned
○ Recognition does not occur until the conditions are substantially met
■ Good faith deposits
○ Overview
■ Accounted for as a refundable advance in the liability section
■ Conditions are not synonymous with donor restriction
○ Journal entry
■ DR: Cash XXX
● CR: Refundable advance XXX
● Multi-year pledges
■ Recorded at the NPV at the date the pledge is made
■ Future collections are considered donor-restricted revenues and net assets (time-restricted)
■ Now = revenue Future = donor restricted
● Placed in service approach
■ In absence of specific donor restrictions - use to report the expiration of restrictions on
contributions of long-lived assets
● If no donor restrictions
○ Recognize the entire donation as a contribution without donor restrictions
● If donor restrictions
○ Record the asset as donor-restricted for the full amount
○ Each year, record depreciation expense and reclassify it from with to without restrictions
 ● Allowance for uncollectible pledges
■ Same as commercial
● Recorded at NRV (full accrual)
■ Different from commercial
■ No bad debt expense, ever
○ Both the pledge and related contribution revenue are reported net of any allowance
● Split-interest agreements
● Definition
■ Benefits that are shared with other beneficiaries
● Accounting
■ Measured at FV at date of acquisition
■ Estimated based on PV of estimated future distributions
■ Displayed as donor-restricted
● PASS KEY
■ Unconditional pledges are assured of collection and may be recognized with or without donor restrictions
■ Conditional pledges are still subject to important contingencies and are NOT reported
● Donated services
● (SOME) = contribution at FV
● GR
■ Donated services are not recorded
● Exception
■ Donated services should be recorded as a contribution and expense at FV if the services:
● Create or enhance a non-financial asset (land, building, inventory, etc.), OR
● Meet all of the following:
■ S - Specialized skills are required and possessed by the donor
■ O - Otherwise needed by the organization
■ M - Measurable
■ E - Easily (at FV)
■ Journal entry
● DR: Expense/asset XXX
○ CR: Contributions - without donor restrictions XXX
■ Net 0 on statement of activities
● Volunteer recruitment
■ Costs of soliciting contributed services are considered fundraising expense
● Donated collection items
● Works of art or historical treasures
■ NOT required to be capitalized if all are met:
● The item is part of a collection - held for public viewing, educations, or research
● The collection it cared for, preserved, and protected by the organization
● The organization has a policy that required any proceeds from the sale of donated
items to be reinvested in other collection items
■ If all are not met, the donation must be recognized as an asset and revenue
● Donated materials
● Overview
■ Revenue at FV
● Journal entry
■ DR: Asset XXX
● CR: Contribution - support XXX
● Donated materials that merely pass through the organization to an ultimate beneficiary (clothes)
■ Should not be recorded unless amounts involved are substantial
■ If amounts are substantial:
● DR: Expense XXX
○ CR: Contribution - supplies XXX
● When donated items are sold > FV, amount received in excess is considered an additional contribution
 ● Gifts-in-kind
● Overview
■ Revenue at FV
● The difference between FV at time of donation and time of sale is accounted for as
an additional contribution
● Examples
■ Non-cash contributions, such as donated investments

Accounting for promises to contribute and other support transactions

● Contributions without donor restrictions
● Unconditional promises to contribute in the future
■ Overview
● With donor restrictions (implied time restriction)
● Record at PV of estimated future cash flows
● If expected to be paid in < 1 year, measure at NRV
■ Journal entries
● Pledges with donor restriction (initial recognition)
■ DR: Pledge receivable - with donor restriction XXX
○ CR: Allowance for doubtful accounts XXX
○ CR: Contributions - with donor restriction = Net amount (NRV) XXX
● Later, when collected (move it when restriction is released)
■ DR: Cash - with donor restriction XXX
○ CR: Pledge receivable - with donor restriction XXX
■ DR: Satisfaction of time restriction - with donor restriction XXX
○ CR: Cash - with donor restriction XXX
● Asset without donor restrictions
■ DR: Cash - without donor restriction XXX
○ CR: Satisfaction of time restriction - without donor restriction XXX

■
● Donor-restricted support (contributions with donor restrictions)
● Overview
■ Spend it = earned it (remove restrictions)
● Journal entries
■ Increase to net assets with donor restrictions:
■ DR: Pledge receivable - with donor restrictions XXX
○ CR: Allowance for doubtful accounts XXX
○ CR: Donor-restricted support XXX
■ Later, after receivable is collected and when money is spent
■ DR: Reclassification - satisfaction of donor restrictions XXX
○ CR: Cash - with donor restrictions XXX
■ Net assets without donor restrictions are simultaneously increased and decreased
● DR: Cash - without donor restrictions XXX
○ CR: Reclassification - satisfaction of donor restriction XXX
● DR: Operating expense XXX
○ CR: Cash - without donor restrictions XXX
Fundraising
● GR - Difference between contribution made by donor and FV of any premiums transferred is classified as contribution revenue
● PASS KEY
■ For amounts recognized as contributions received through fundraising appeals is:
■ Total contribution received
■ - FV of premiums
■ = Contribution revenue

Industry-specific revenue recognition

● Educational institutions (colleges and universities (most religiously owned ones))
● Revenues
■ All increases in net assets without donor restrictions and all donor-restricted resources that
were actually expended during the period
● Examples
■ Student tuition and fees
○ Reported at gross amount
● Assessed student tuition and fees
● - Canceled classes and tuition refunds
● = Gross revenue from tuition and fees
■ Government aid, grants, and contracts
■ Gifts and private grants
■ Endowment income
■ Sales and services, such as publications and testing services
■ Revenues of auxiliary enterprises, such as food service, residence halls, campus store, and
athletics
● Gains and losses
■ Classified as with or without restrictions
■ Reported in statement of activities
● Healthcare organizations
● Patient service revenue
■ Calculation
■ Gross patient service revenue
■ - Contractual adjustments
■ - Charitable services
■ = Patient service revenue
■ Charity care
● Services provided but never expected to result in cash flows
○ Not recognized as receivable or revenue
■ Deductions
● Deductions from patient service revenue to arrive at “net patient service revenue”
■ Contractual adjustments to 3rd parties
■ Policy discounts
■ Administrative adjustments
■ Bad debts associated with services billed prior to organization’s
assessment of patient’s ability to pay
● PASS KEY
○ Bad debt may be classified in one of two ways:
● Operating expense
○ Failure to collect revenues expected to be earned
● Deductions from revenue
○ Inability to collect large volumes that
organization never assessed for quality
■ Premium revenue for capitation agreement
○ Fixed amount per individual paid monthly to provider as compensation for providing HC services
● Other operating revenue
■ Tuition from schools
■ Revenue from education programs
■ Donated supplies and equipment
■ Specific purpose grants
■ Revenue from auxiliary services
■ Cafeteria revenue
■ Parking fees
■ Gift shop revenue
■ Medical transcription fees
● Non-operating revenue and support gains and losses
■ Recognized without donor restrictions
● Interest and dividend income from investment activities
● Gifts and bequests
● Grants
● Income from endowment funds
● Income from board-designated funds
● Donated services
● Summary
■ Patient service revenue
■ Other operating revenue (donated supplies)
■ Non-operating revenue (donated services)
 F8: Module 4- NFP Transfer of Assets and Other Accounting Issues

Transfers of assets to a NFP organization or charitable trust that raises or holds contributions for others
● Overview
○ DR: Asset
■ CR: Contribution, Liability, or Change in interest in net assets
● Financially interrelated organizations
● Defined as:
■ One organization has the ability to influence the operating and financial decisions of the other AND
■ One organization has an ongoing economic interest in the net assets of the other
● Recipient and beneficiary accounting
● Depends on whether the recipient has variance power and whether they are financially interrelated
■ Variance power: beneficiary has unilateral authority to redirect assets to another beneficiary
■ Regardless, all assets received are measured at FV
■ If the giver has power, liability. Any one of the following must be met for liability treatment:
● Resource provider can change the beneficiary
● Asset transfer is conditional, revocable, or repayable
● Resource provider controls recipient organization and specified an unaffiliated beneficiary
● Resource provider specified itself or its affiliate as the beneficiary and does not
qualify for equity accounting

■
Other Accounting Issues
● Financial instruments
● Fair Value at date of gift
■ All debt & equity securities that have readily determinable FVs are measured at FV in the
statement of financial position (BS)
● Gains and Losses
■ Realized & unrealized gains and losses on investments are reported in statement of activities as
increases/decreases in net assets without donor restrictions unless use of investment is donor-restricted
● Gains and losses that are limited to specific uses by donor stipulations may be reported as increases in
net assets without donor restrictions if the stipulations are met in the same reporting period
● Derivatives
■ Recognize change in FV in the period of change
● Dividends, interest, and other investment income
■ Investment income (dividends & interest) is reported in period earned as increases in
unrestricted net assets unless use of investment is restricted
● Endowment funds
● Used to account for assets established to provide income for the maintenance of the NFP entity
■ Duration
● In perpetuity or for specified period of time
■ Source of restriction
● Board-designated endowment funds
○ To provide income for a long but no necessarily specified period of time
● Donor-restricted endowment funds (most common)
○ Created by donor stipulation requiring investment of donor’s gift in perpetuity or
for a specified term
■ Accounting and reporting for endowment funds
● Reported in statement of financial position in 1 of 2 ways:
○ Net assets with donor restrictions
○ Net assets without donor restrictions
● Specific issues regarding changes in value of donor-restricted endowments
■ Inception
● The original gifted amount and (generally) related returns shall be initially classified
as net assets without donor restrictions
● Unrestricted investment income is classified as net assets without donor restrictions
■ Returns on the endowment assets subject to donor restriction
● Investment returns subject to restriction by donor or by law shall be reported within
net assets with donor restriction
● Upon approval for expenditure, the funds are deemed to have been appropriated for expenditure
■ Underwater endowments
● Definition
○ Donor-restricted gifts for which FV at reporting date < original gift amount
● Accounting treatment
○ Report accumulated losses together with the endowment fund in NA with donor restrictions
● PASS KEY
○ Underwater endowments must disclose FED:
■ F - Fair value of underwater endowment
■ E - Endowment gift’s original amount
■ D - Deficiency

●
 ● Required disclosures for ALL endowment funds
■ Governing board’s interpretation of requirements & ability to spend from underwater endowment funds
■ Policies for appropriation of endowment assets
■ Investment policies
■ Composition of the NFP endowment by net asset class
■ Reconciliation of beginning and ending balance of NFP endowments by net asset class
● Basis of assets
● Purchased fixed assets
■ Carried at cost (required by GAAP)
● Donated fixed assets
■ Recorded at FV at date of gift
● Depreciation is recorded in accordance with GAAP
■ HOWEVER, works of art and historical treasures (intangibles) are NOT depreciated
 F8: Module 5- Governmental Accounting Overview

Governmental accounting and reporting concepts

● Objectives of governmental reporting
● Designed to demonstrate the accountability of each organization for the stewardship of the resources in their care
● FS
■ Timeliness
■ Consistency
■ Comparability
● Objectives of fund accounting and reporting
● Legal restrictions
● Fiscal accountability & operational accountability

Industries that use governmental accounting and reporting principles

● Overview
● Financial control & legal restrictions
● Government accountability office (GAO) = prescribes auditing standards (single audit act)
● Industries
● Governmental units
● Colleges and universities
● Health care organizations
○ PASS KEY
■ NFP organizations not ran by governments do NOT use governmental accounting and reporting

Generally accepted accounting principles for governmental entities Government = GASB; NFP = FASB
● Governmental accounting principles and standards
● Hierarchy
■ GASB accounting standards board statements (most authoritative)
■ GASB technical bulletins, GASB implementation guides, and literature of the AICPA cleared by GASB
● GASB conceptual framework
● Information used by financial report users
● Governmental type and business type activities
■ Governmental-type vs. business-type activities
● Governmental type
■ Supported by taxes
● Business type
■ Supported by user fees
● Users of governmental financial reports
● Citizens, taxpayers, voters
● Legislative and oversight bodies
● Investors/creditors
■ Users of financial reports
● Used to make economic, social, and political decisions and to assess accountability by:
■ Comparing actual to budget
■ Assessing financial condition and results of operation
■ Assisting in determining compliance with finance-related laws, rules, and regulations
■ Assisting in evaluating operating efficiency and effectiveness
 ● Accountability and interperiod equity
■ Accountability
● Justifying the raising of resources (taxes) and demonstrating the purpose for which they’re going to be used
● Minimum disclosures includes whether the government operated within legal constraints imposed by citizens
■ Interperiod equity
● Balanced budgets
● Users assess whether current year revenues are sufficient to pay for the services provided
● Characteristics of information in governmental financial reports
■ U - Understandability
■ R - Reliability
■ M - make a difference (Relevance)
■ I - In Timelines
■ C - Consistency
■ E - Entity to entity Comparability
● Limitations on governmental financial reporting
■ Financial reports use approximate measures that often are based on judgments or estimates
■ Financial reporting is only one source of info for users and might be more useful when used in
combination with other pertinent data
■ Financial reports may not meet the diverse needs of all users
■ Cost-benefit relationships must be considered
● Financial reporting objectives
■ Assist in fulfilling a governmental duty to be publicly accountable and should enable users to assess by:
● Did current year revenues pay for current year services?
● Demonstrating budgetary and legal or contractual compliance
● Providing info that allows users to assess service efforts, costs, and
accomplishments of governmental entity
■ Assist users in evaluating the operating results of govt entity for the year by providing info about:
● Sources and users of financial resources
● How government financed its activities and met its cash requirements
● Whether financial position has improved or deteriorated
■ Assist users in assessing the level of services that can be provided by the government and its
ability to meet obligations as they come due providing info about:
● The financial position and condition of the government
● No current physical assets available to government and their service potential for future periods
● Legal or contractual restrictions on resources and risks of potential loss of resources

Key concepts in governmental accounting and reporting

● Fund structure
● GASB 34
● Governmental funds GRaSPP
● Proprietary funds SE
● Fiduciary funds CIPPOE
● Fund accounting
● Affect the basis of accounting and the measurement focus principles associated with each fund category
● External reporting
● Fund-based
● Government-wide FS = consolidated
● Supported by notes and required supplementary information
● Presentation of reconciliation of fund FS to government-wide FS

Notes from MCQs

● Relevance is the most difficult characteristic for government to report
 F8: Module 6- Governmental Fund Structure and Fund Accounting

Fund Structure
● Overview
● Funds are generally classified into 3 generic categories
■ Governmental funds GRaSPP
■ Proprietary funds SE
■ Fiduciary funds CIPPOE
● Governmental funds no profit motive
● Fund accounting
■ Modified accrual basis of accounting
■ Current financial resources measurement focus
● Current only (no FA and no LTD accounts)
● Fund types (“GRaSPP”)
■ G - General fund
● Ordinary operations
● All transactions not accounted for in other funds
■ R - Special revenue funds
● Revenues from specific taxes or other earmarked sources
■ A - and
■ S - Debt service funds
● Accumulation of resources and the payment of interest and principal on all “general obligation debt”
■ P - Capital projects funds
● Acquisition or construction of major capital assets
■ P - Permanent fund
● Legally restricted to the extent that income, and not principal, may be used for
purposes supporting the reporting government’s programs
● Current financial resources measurement = Current only

■
● Proprietary funds treat like a customer/ not a citizen
● Fund accounting
■ Full accrual basis of accounting
■ Economic resources measurement focus
● Fund types (“SE”)
■ S - Internal service funds
● Goods and services provided by designated departments on a cost-reimbursement fee basis to other
departments and agencies within a single governmental unit or to other governmental units
○ Customers are primarily internal
■ E - Enterprise funds
● Acquisition and operation of governmental facilities and services that are intended
to be primarily self-supported by user charges
○ Customers are primarily external
● Required when any 1 of 3 are met:
○ Activity of fund is financed by debt secured by a pledge of fee revenue
○ Laws require collection fees adequate to recover costs
○ Pricing policies are established to produce fees to recover costs
■ Economic resource measurement focus = Carry Everything (FA & LTD)

■
 ● Fiduciary (trust) funds trust accounts
● Fund accounting
■ Full accrual basis of accounting
■ Economic resources measurement focus
● Fund types
■ C - Custodial funds
● Resources in temporary custody of government unit
● Fiduciary activities that are not required to be reported in other fiduciary fund classifications
■ I - Investment trust funds
● External investment pools
■ P - Private purpose trust funds
● Activities not properly accounted for either as pension or investment trust funds
■ POE - Pension (and Other Employee benefit) trust funds
● Resources of defined benefit plans, defined contribution plans, post-employment
benefit plans, and other long-term employee benefit plans
● Economic resource measurement focus = carry Everything (FA & LTD)

Fund Accounting
● Measurement focus
● Current financial resources (GRaSPP) = modified accrual
■ No FA
■ No non-current liabilities Current ONLY
○ PASS KEY
■ Adding fixed assets excluded and subtracting non-current liabilities excluded are two of the
most significant reconciling items between governmental funds and government-wide FS
● Economic resources (SE-CIPPOE and Government-wide) = full accrual
■ FA are reported
■ Non-current liabilities are reported Everything is reported
● Basis of accounting
● Modified accrual (GRaSPP)
■ Revenue
○ Recognized when measurable and available (collectible during year + 60 days)
■ Expenditures
○ Recorded when related fund liability is incurred
■ PASS KEY
○ Addition of accrual basis revenues in excess of modified accrual revenues along with
subtraction of accrued interest expenses not recognized in governmental FS are
frequent reconciling items between governmental funds and government-wide FS
● Full accrual (SE-CIPPOE and Government-wide)
■ Revenue
○ Recognized when earned
■ Expenses
○ Recognized when incurred
 ● Fund accounting summary
● Governmental funds are “MAC-GRaSPP”
■ M - Modified
■ A - Accrual accounting
■ C - Current financial resources measurement focus
■ G - General fund
■ R - Special revenue fund
■ a - and
■ S - Debt service fund
■ P - Capital projects fund
■ P - Permanent fund
● Proprietary and fiduciary funds “SCARE” me
■ S - SE
● Internal service funds
● Enterprise funds
■ C - CIPPOE
● Custodial fund
● Investment trust funds
● Private purpose trust funds
● Pension and other employee benefit trust funds
■ A - Accrual accounting
■ R - Record non-current assets and liabilities
■ E - Economic resources measurement focus

Notes from MCQs

● The government fund measurement focus is on the determination of:
○ Financial position
○ Current financial resources
● Cash outflows for fixed assets are still shown in governmental funds even if the PP&E item is excluded
 F8: Module 7- Budgetary and Activity Accounting

Accounting for governmental funds

● Budgetary Accounting
○ Overview
■ Used by the “GRaSPP” funds
● Book Close ------> BS ------> Next year
● Budget -----------------> Budget
● Activity -----------------> Activity
● Encumbrances ------> Encumbrances
■ Budgetary accounting is used to control expenditures
■ Activity accounting emphasizes the flow of current financial resources
■ Encumbrance accounting is used to record purchase orders
○ Governmental resources are typically derived from the following sources:
■ Revenue
● Taxes - income and sales
● Taxes - property and real estate
● Fines and penalties
● Intergovernmental revenues
■ Other financing sources (NOT revenue)
● Debt proceeds (bonds and notes)
● Interfund transfers
○ Budgetary accounting JEs
● Beginning of year
■ BAE – BAE; use opposite side for budget
● Overview
○ At the beginning of the year, the difference between estimated revenues
and appropriations goes to an account called “budgetary control”
■ Budgetary equity account
● The JE that records the budgeted amounts for estimated revenue and
approved expenditures (appropriations) is posted on the opposite side of
the T account compared with actual amounts
■ DR: Estimated revenue control 2,000,000
■ DR: Budgetary control (negative/deficit) ---
○ CR: Appropriations control (approved spending) 1,950,000
○ CR: Budgetary control (positive/surplus) 50,000
■ End of year
● BAE – BAE ; reverse for same amount
○ Overview
■ The JE at period end to reverse the budget is always for the same dollar
amounts as the original budgetary JE +/- any amendments
■ Do not be confused by question fact patterns that provide additional
information regarding actual activity in amounts different from the budget
● The budgetary accounts and actual activity are closed out separately
○ DR: Appropriations 1,950,000
○ DR: Budgetary control (positive) 50,000
■ CR: Estimated revenue control 2,000,000
■ CR: Budgetary control (negative) ---
Activity
● Overview
● Governmental fund FS emphasize the flow of current financial resources and has an annual budgetary focus
● The matching principle is NOT used
● Receivables are recognized if the government has an enforceable claim (e.g., a tax levy on property)
● Non-exchange revenue 20X1 collections Jan-Dec + 20X2 items outstanding Jan-Feb = revenue
● Definition
■ Transaction in which an entity gives/receives value without directly receiving/giving equal value in return
● Types of non-exchange revenues
■ Derived tax revenues
● Sales taxes & income taxes
■ Imposed non-exchange revenues
● Fines & property taxes

○
■ Government-mandated non-exchange transactions
● Environmental cleanup
■ Voluntary non-exchange transactions
● Grant agreements
● Revenue recognition requirements
■ Time requirements
● Revenues are first recognized in the period in which resources must be used or when
use may begin (applicable to all non-exchange revenues)
■ Eligibility requirements (applicable to government-mandated and voluntary non-exchange transactions)
● Measurable and available criteria
■ Under modified accrual accounting, governmental fund revenues are recorded when measurable and available
● Not to exceed 60 days after year-end

■
● Expenditures
● Overview
■ Capital purchases, debt service payments, and operating expenditures are considered
spending of funds and are treated as current-year expenditures
■ The timing of expenditure recognition is consistent with accrual accounting and is governed
by when the voucher payable is recorded
● DR: Expenditure XXX
○ CR: Voucher payable XXX
■ Transfers between funds
■ Not spending dollars
■ Not “expenditures”
■ Debit: other financing uses
● Alternatives for expenditure recognition
■ Purchase method
● Record expenditure when purchased
● Record current asset and nonspendable fund balance at year end for any items not used
■ Consumption method
● Record current asset when purchased
● Record an expenditure as consumed during the period

■
■ Regardless of the method used, inventory asset amounts must be balanced with a non-spendable fund
balance account to ensure the unassigned fund balance represents available resources
● Classification of governmental expenditures
■ Function or program
● Provides information on the overall purpose of the expenditures
○ Public or safety
■ Organizational unit
● Corresponds to the organizational structure of the governmental entity
○ Police or fire
■ Activity
● Allows the economy and efficiency of operations to be measured
○ Drug or highway
■ Character
● Determining the basis of the fiscal period the expenditures are presumed to benefit (When)
○ Current expenditures
■ Benefit the current period (period expense)
○ Capital outlays
■ Benefit both the present and future periods (fixed assets)
○ Debt service
■ Benefits prior fiscal periods as well as current and future periods (pay off LTD)
○ Intergovernmental
■ One governmental unit transfers resources to another (transfer)
■ Object classes
● Type of items purchased or services obtained (chart of accounts)
● Fixed assets
● Expenditure
■ Not capitalized
■ Not depreciated
■ Timing of expenditure
● When liability is incurred (voucher payable)
● Not when cash payment is made
■ JE
● DR: Expenditure - capital outlay XXX
○ CR: Vouchers payable (or cash) XXX
■ PASS KEY
● Governmental funds (“GRaSPP”)
○ Use modified accrual
○ Expenditure fixed asset acquisitions
● Proprietary and fiduciary funds (“SE-CIPPOE”)
○ Use full accrual
○ Capitalize fixed-asset acquisitions and depreciate them
● Debts (long-term) = other financing sources
● Governmental funds do not record or carry the long-term debt
● Repayment of long-term debts are recorded as expenditures of both principal and interest
■ JE
● Proceeds from bond issuance
○ DR: Cash XXX
■ CR: Other financing sources - bonds issued XXX
○ Operating statement
● Debt service payments
○ DR: Expenditure - principal XXX
○ DR: Expenditure - interest XXX
■ CR: Cash XXX
■ PASS KEY
● Governmental funds (“GRaSPP”)
○ Use modified accrual
○ Record process from long-term debt as “other financing sources”
○ Debt service fund pays the currently due interest and principal
● Proprietary and fiduciary funds (“SE-CIPPOE”)
○ Use full accrual
○ Record the long-term debt
● Other financing: leases
● Lease classifications
■ Short-term
● Max term of 12 months
● Lessee
○ Recognize expenditure/expense
● Lessor
○ Recognize rent revenue based on payment provisions
■ Contracts that transfer ownership (sale-type)
● Lessee - governmental funds
○ Capital outlay expenditure and other financing source

○
○ Note: Amortization is NOT recorded in the governmental fund financial statements
● Lessor - governmental funds
○ Recognize deferred inflows as revenue over time

○
● Lessee - proprietary, fiduciary, and government-wide
○ Financed purchase
● Lessor - proprietary, fiduciary, and government-wide
○ Derecognize asset sold, record a receivable, and recognize revenue
■ Leases other than ST and Sale-type (direct financing)
● Lessee - governmental funds
○ Capital outlay expenditure and other financing source
● Lessor - governmental funds
○ Unavailable revenue
● Lessee - proprietary, fiduciary, and government-wide
○ Intangible “right of use” asset
○ Book lease liability

○
● Lessor - proprietary, fiduciary, and government-wide
○ Recognize lease receivable and deferred inflow of resources
○ Not derecognized

○
 ●

Notes from MCQs

● Major difference between exchange transaction and non-exchange transaction for governmental units
○ The relationship between the amount of value given and received
● Expenditures extending over more than one period may be allocated between or among accounting periods OR
may be accounted for as expenditures of the period of acquisition
● Items paid + increase in current liability = expenditures
● Special items are reported separately after revenues over (under) expenditures in the statement of revenues,
expenditures, and changes in fund balances
 F9: Governmental Accounting - Part 2

F9: Module 1- Encumbrances and Other Transactions

Encumbrances
● Overview
● Record purchase orders & designed to monitor spending for increased budgetary control
■ Must reflect not only the expenditures but also the obligation to spend (purchase orders)
● Recording encumbrances
● JE to set up encumbrance: BAE – BAE
■ DR: Encumbrances XXX
● CR: Budgetary control XXX
● JE to reverse estimated encumbrance: BAE – BAE
● DR: Budgetary control XXX
■ CR: Encumbrances XXX
● Booked at full amount of estimation, regardless of what final price was
● Encumbrances outstanding at year-end
● If an encumbrance is still outstanding at year-end and appropriations do not lapse, reverse the JE and
include outstanding encumbrances in “Fund balance, committed”
● JE to close outstanding encumbrances at year-end and reserve the fund balance
■ DR: Budgetary control XXX
● CR: Encumbrances XXX
○ Booked at full amount of estimation, regardless of what final price was
● JE to close budgetary accounts related to outstanding purchase orders
■ DR: Unassigned fund balance (year-end surplus) XXX
● CR: Fund balance - committed XXX
○ “NU CAR”
● Accounting in the following year
● JE to record the receipt of last year’s item and pay for it
■ DR: Expenditure - prior year XXX
● CR: Vouchers payable XXX
○ Important to put “prior year” in debit so know it was a last year thing

●
Other Transactions and events
● Interfund activity
● Flow of resources between funds and between the primary government and its component units
■ Reciprocal interfund activity
● Exchange type transactions
■ Interfund loans
○ Temporary extensions of credit
■ Interfund receivables and payables
■ Interfund services provided and used
○ Sales of water and sewer services
■ Revenues and expenditures
■ Non-reciprocal interfund activity
● Non-exchange transactions
■ Interfund transfers
○ Flows of assets between funds without the exchange of equivalent value
■ Other finance sources and uses
■ Interfund reimbursements
○ Payments of expenses made by one fund on behalf of another fund
■ Not displayed as interfund transactions
● Special items
● Characteristics of special items
■ Under the control of management that are either unusual OR infrequent but not both
● Examples of special items
■ Sales of certain governmental capital assets
■ Termination benefits resulting from workforce reductions
■ Early retirement program offered to all employees
■ Significant forgiveness of debt
● Extraordinary items
● BOTH unusual and infrequent
■ Examples
■ Environmental disaster created by a chemical spill from a train wreck
■ Significant damage in a community as the result of a terrorist attack
● FS presentation
■ Special items are reported BEFORE extraordinary items
● Deferred inflows and outflows
● Deferred outflows
■ Positive effect on net position
■ Reported following assets before liabilities
● Deferred inflows
■ Negative effect on net position
■ Reported following liabilities before equity
● Sources of deferred outflows/inflows of resources
■ Imposed non-exchange revenue transactions (time requirements not met)
■ Government-mandated non-exchange transactions and voluntary non-exchange transactions
■ Refunding of debt
○ Difference between reacquisition price and net carrying amount of old debt
■ Recognized as component of interest expense
■ Sales and intra-equity transfers of future revenues
○ Factor their receivables
■ Deferred inflow
■ Leases
○ Gains and losses arising from sale and leaseback result in deferred inflow or outflow
recognized systematically over life of the lease
○ Leases classified as other than short-term and contracts that transfer ownership are
accounted for as lease receivable and deferred indoor by lessor
 ■ Regulated operations
○ Deferred inflows of resources may result from rate actions by a regulator that
impose limitations on the assets of a govt
○ Assets associated with unavailable revenues (modified accrual criteria not met)
■ Measurable but not collected until more than 60 days after year end
● Government should report deferred inflow
■ Asset retirement obligations (ARO)
○ Deferred outflow
● Derivative instruments and hedge accounting
■ Derivatives are reported at FV
● Changes in the value of derivatives used as investments
○ Displayed within the investment revenue classification
● Changes in the value of derivatives used for hedging activities
○ Reported as either deferred outflows or deferred inflows of resources

Fund balances and components thereof (GRaSPP) = modified accrual

● Categories of fund balance = “NU CAR” (5 degrees of constraint - limitations on use of current equity)
● N - Non-spendable fund balance
■ Practical
■ Monies that have been spent, assets are either maturing or expiring
■ Encompaasses
● Prepaid expenditures
● Inventories
● R - Restricted fund balance
■ External
■ Restricted by external authorities (creditors, grantors, legislation)
● C - Committed fund balance
■ Internal
■ Highest governing authority establishes limits
● A - Assigned fund balance
■ Internal
■ Intention without formal commitment (designation)
● U - Unassigned fund balance
■ No constraint as to use
■ Only the general fund, positive
● Summary of reported constraints by fund

Net position and components thereof (SE & Gov’t-wide)

● Categories of net position
● Restricted
■ Externally imposed by creditors, grantors, contributors, or laws
● Unrestricted
■ Representing management’s intentions for the use of resources should NOT be reported on
the statement of net position
● Net investment in capital assets
■ Tangible capital assets (land, buildings, etc.) and intangible capital assets (patents, rights, etc.)
 F9: Module 2- Governmental Funds FS: Part 1

General fund
● Overview
○ 5 star general - “boss” of the other funds
○ GRaSPP
■ Modified
■ Accrual accounting
■ Current items only
● Revenue sources
● Taxes
■ Revenue when recorded/billed (and owed)
● Public safety and regulations
■ Fees and fines
■ License and permits revenues
● Intergovernmental
■ Shared or grant revenues from other governments
● Charges for services
■ Exchange revenues
● Other revenues
■ Investment earnings and miscellaneous earnings
● Expenditure type
● General government
■ Administrative functions
● Public safety
■ Police, fire, jail, building inspections
● Culture and recreation
■ Parks, librairies
● Unique accounting issues
● Modified accrual and budgetary accounting BAE – BAE
● Only 1 general fund per reporting entity, and it is always reported as a major fund
● Financial statements
● Balance sheet
■ Current assets and Deferred outflows - Current liabilities and Deferred inflows = Fund balance
● Statement of revenues, expenditures, and changes in fund balance

Special revenue fund

● Overview
○ Legally restricted or committed for specific purposes
○ Resources are expendable
● Revenue sources
● Sales tax
■ To operate park and tourist facilities
● Gas fund tax
■ To operate and maintain streets
● Funds to account for specific fees
■ Admission fees to operate museums
● Grant funds
■ State and federal - restricted for special purpose
● Expenditure types
● Current operating expenditures
■ Street maintenance
● Capital outlays
■ Highway construction
 ● Unique accounting issues
● Expendable trust activities
■ Represent funding whose principal and income may be expended
■ Character of expenditures
○ May include capital outlay expenditures
■ Donations
○ May be donor/grantor restricted or government restricted
● Grants
■ When received, the recipient government monitors and/or determines eligibility
● PASS KEY
○ Rule of thumb use of correct fund
■ Monitoring (administrative involvement)
● Special revenue fund
■ Non-monitoring (no administrative involvement)
● Custodial funds

Debt service fund

● Overview
● Encumbrances N/A
● Pays off debt of GRaSPP funds only NOT SE-CIPPOE
● Revenue sources:
● Allocated portions of property tax
● Transfers from other funds
● Income from the investment of resources

■
 ● Expenditure types
● When payment is legally due, principal and interest are recognized as expenditures
■ No principal or interest accrual because no matching principle

■
● Unique accounting issues
● Debt service fund requirement
■ Legal mandate
■ Repayment of other governmental debt: “five-star general”
● Asset balances
■ Similar to sinking fund
● Debt balances
■ Only used to pay currently payable principal and interest (of GRaSPP funds only)
● Closing entries
■ Budget is closed at year-end: same amount
○ DR: Budgetary control XXX
○ DR: Appropriations control XXX
■ CR: Estimated revenues control XXX
■ Activity is closed at year-end: actual amount
○ DR: Interfund transfers from capital projects fund XXX
○ DR: Interfund transfers from special revenue fund XXX
○ DR: Interfund transfers from capital projects fund XXX
○ DR: Other revenues XXX
■ CR: Fund balance - restricted for debt service XXX
■ CR: Expenditures - principal XXX
■ CR: Expenditure - interest XXX
■ Encumbrances: N/A
○ There are no encumbrances in the debt service fund

Notes from MCQs

● Only the governmental funds report transfers to other funds as “other financing uses”
 F9: Module 3- Governmental Funds FS: Part 2

Capital projects fund

● Overview
○ Established for construction, purchase, or leasing of significant fixed assets (GRaSPP only)
○ Limited to a construction period of 1-3 years
● Revenue and other financing sources
● Investment earnings
● Tax revenue
● Capital grants
■ Restricted
● Revenue recognized when earned (when spent)
● Journal entries
○ JE to record restricted government grants
■ DR: Cash XXX
● CR: Revenue collected in advance XXX
○ JE to recognize revenue restricted (when spent)
■ DR: Expenditure XXX
● CR: Vouchers payable/cash XXX
■ DR: Revenue collected in advance XXX
● CR: Revenue XXX
■ Unrestricted
● Revenue recognized immediately
● Journal entry
○ JE to record unrestricted government grant
■ DR: Cash XXX
● CR: Revenue XXX
● General fund (or special revenue) interfund transfer
■ JE to record a general or a special revenue fund interfund transfer
● DR: Cash (or due from other fund) XXX
○ CR: Interfund transfers XXX
● Report on IS
● Special assessments
■ Revenue from taxes or fees levied against property owners who will directly benefit from the project
● Examples
○ Sidewalks and street lights
● Accounting depends on the degree to which the governmental unit is responsible, or
potentially liable for, debt associated with the assessment
■ Primarily or potentially liable
○ Governmental or proprietary fund
■ Not primarily or potentially liable
○ Custodial fund
○ Assets and liabilities are excluded from government-wide presentations
● Bond issue proceeds
■ Other financing sources —> IS
■ Bond premium or discount
○ No amortization of bond premiums or bond discounts
○ Bond premiums
■ Other financing source
○ Bond discounts
■ Other financing use
○ Other bond issuance costs (bond costs, underwriting fees, etc.)
■ Debt service expenditures when they are incurred
■ Reconciling items
○ Between the governmental fund and the government-wide FS
■
● Expenditure and encumbrance types
● Overview
■ Capital projects fund expenditures are usually entirely classified as capital outlays
■ During construction, encumbrances are recorded as commitments are incurred
■ Vouchers are recorded when a liability is incurred and the expenditure is known
■ As vouchers are recorded, the encumbrance entry is reversed
■ Cash is credited and vouchers payable is debited as payments are made

●
● Unique accounting issues
● Asset balances
■ Cumulative balance of constructed asset (inception to date CIP), is NOT displayed on BS, but is in gov’t-wide FS
● Liability balances
■ Bond liability
○ Not recorded in the fund FS of the capital projects fund (reported in government-wide FS only)
■ Short-term borrowings (other financing sources or current liabilities)
● Short-term borrowing to be refinanced with long-term debt
○ Bond anticipation notes are other financing sources if intent and ability to refinance
○ Journal entry
■ DR: Cash XXX
● CR: Other financing sources - debt proceeds XXX
● Short-term borrowing to be repaid with revenue
○ Tax anticipation notes (TAN) or revenue anticipation notes (RAN) should be
recorded as a current liability
○ Journal entry
■ DR: Cash XXX
● CR: Tax or revenue anticipation note payable XXX
■ Only carry “current liabilities”
● Closing entries
■ Budget is closed at year-end – same amount
○ DR: Appropriations XXX
■ CR: Estimated other financing sources XXX
■ Actual activity is closed at year-end - actual amount
○ DR: Other financing sources - bond issue proceeds XXX
○ DR: Investment revenue XXX
○ DR: Other financing sources- bond premium XXX
■ CR: Expenditures XXX
■ CR: Interfund transfers (to debt service, investment revenue) XXX
■ CR: Interfund transfers (to debt service, bond premium) XXX
■ CR: Fund balance, restricted XXX
■ Encumbrances are closed at year-end
○ DR: Budgetary control XXX
■ CR: Encumbrances XXX
■ Outstanding encumbrances at year-end should be carried forward as component of fund balance - “restricted”
○ (NU CAR)
■ The entire amount of the capital projects fund is presumed to be restricted for capital outlay
Permanent funds
● Overview
○ Encumbrances N/A
○ Legally restricted
■ Only earnings, NOT principal may be used – for benefit of public
○ Investments are valued at FV
● Revenue sources
○ Investment earnings from the trust
● Expenditure types
○ Related to operating purpose of the fund
● PASS KEY
○ Two of the governmental funds (GRaSPP) do NOT record encumbrances
■ Debt service fund
■ Permanent fund
● PASS KEY
○ The easy way to determine where public-restricted funds are recorded is:
■ Fund Available for public spending
■ Special revenue fund Principal and interest
■ Permanent fund Interest only
 F9: Module 4- Proprietary funds FS

Internal service fund

● Overview
● Customer, not citizen
● Other departments fund the operations by paying fees - they are customers
● SCARE mnemonic
■ S - SE
■ C - CIPPOE
■ A - Accrual
■ R - Record FA & LTD
■ E - Economic resources measurement focus
● Revenue sources
● Restricted grant revenues
■ Recognized as revenues in year monies are spent
● JE to record restricted revenue
○ DR: Cash XXX
■ CR: Revenue collected in advance XXX
● JE to recognize revenue restricted (when spent)
○ DR: Expenditure XXX
■ CR: Vouchers payable/cash XXX
○ DR: Revenue collected in advance XXX
■ CR: Revenue XXX
● Operating revenues
■ Recognized when earned
● JE to record billings for services rendered to other funds
○ DR: Cash (or due from other fund) XXX
■ CR: Billings to other departments (operating revenue) XXX
● Nonoperating revenues
■ EX: interest earnings
■ Segregated from operating revenues for FS display
● Expense types
● Operating expenses
■ Normal and customary expenses related to the delivery of services
● Non-operating expenses
■ EX: interest expense
■ Segregated from operating revenues for FS display
● Unique accounting issues
● BAE – BAE is NOT used
● Establishing an internal service fund
■ JE to record interfund transfer (nonreciprocal transfer)
○ DR: Cash XXX
■ CR: Interfund transfer XXX
■ JE to record contribution of assets to a new internal service fund from general fund
○ DR: Capital assets XXX
■ CR: Contribution XXX
■ JE to record sale of “general obligation bonds”
○ DR: Cash XXX
■ CR: Long-term bond payable XXX Carries LTD
■ JE to record long-term payable to another fund
○ DR: Cash XXX
■ CR: Due to other fund XXX
 ● Financial statements
● Statement of net position: BS
■ Displays net position instead of “fund balance”
○ “RUN” to SE your net position
■ R - Restricted
■ U - Unrestricted
■ N - Net investment in capital assets
● Reconciling item
■ Internal service funds are combined with governmental funds for purposes of displaying
governmental activities in government-wide FS
● Government-wide FS = GRaSPP S E CIPPOE

Enterprise Fund
● Overview
● Customer, not citizen
● Used to account for operations that are financed and operated in a manner similar to a private business enterprise
● Required to be reported as enterprise funds if any 1 of 3 are met:
■ Activity is financed with debt that is secured solely by a pledge of the net revenue from fees and charges
■ Laws and regulations require that the cost of providing services be recovered through fees
■ The pricing policies of the activity establish fees and charges designed to recover its costs
● Revenue sources
● Must be presented by a major source and distinguished between operating and non-operating
■ Operating revenues
● Definition
○ Defined by main purpose of the fund
● Examples
■ Charges for services
○ Water and sewer billings of a public utility
○ Greens fees of a golf course
■ Miscellaneous operating revenues
■ Non-operating revenues
● Definition
○ Earnings or non-exchange transactions and interest
● Examples
○ Shared revenues
■ Revenues (from gas or sales tax) collected by one government (state)
and shared on a predetermined basis with another (local) government
● Expense types
● Operating expenses
■ Classified by object, to include such major categories as personal service, utilities, and depreciation
● Non-operating expenses
■ Interest expense
● Unique accounting issues
● BAE – BAE is NOT used
● Reporting on statement of revenues, expenses, and changes in net position
■ Revenue valuation
○ Reported net (of discounts and allowance) or gross (with related discounts and allowances
on face of FS)
○ Bad debt expense is NOT recognized
■ Contributed capital
○ Resources from capital contributions or additions to endowments
○ Displayed separately after non-operating expenses and revenues
■ Special and extraordinary items
○ Reported separately after non-operating revenues and expenses
■ Transfers
○ Displayed after contributions and special and extraordinary items
 ■ Order of presentation on proprietary fund stmt of revenues, expenses, and change in net positions (“INCASET”)
○ I - Income (operating)
○ N - Non-operating income and expense
○ C - Capital contributions
○ A - Additions to endowments
○ S - Special items (unusual OR infrequent)
○ E - Extraordinary items
○ T - Transfers
● Establishing an enterprise fund
■ Capital contributions
○ Overview
■ Capital assets contributed to proprietary funds by governmental funds
■ NOT classified as transfers
○ JE to record contributions (nonreciprocal interfund activity)
■ DR: Capital assets XXX
■ CR: Capital contributions XXX
■ Long-term debt (or other long-term financing agreement, such as a lease contract that transfers ownership)
○ Overview
■ Enterprise fund will carry long-term debt, which is backed by the proprietary fund or paid
with revenues
○ JE to issue “general obligation bond” to be paid from proprietary fund revenues
■ DR: Cash XXX
■ CR: Long-term bond payable XXX Carry LTD
● Municipal landfills (the Dump)
■ GASB 18 refers to Environmental Protection Agency (EPA) rules and establishes standards of accounting and
reporting for MSWLF closure and post-closure costs required to be incurred by federal, state, or local laws
or regulations as a condition for the right to operate in the current period
○ Cost components
■ Estimated total current cost should include:
● Cost of equipment near or after date that MSWLF stops
● Cost of gas monitoring
● Cost of final cover (capping)
■ Estimate should be adjusted annually - just like depletion (“REAL”)
● R - Residual
● E - Estimated cost to close
● A - Additions
● L - Land
● Financial statements
● Statement of net position
■ Net position = “RUN”
● R - Restricted
● U - Unrestricted
● N - Net investment in capital assets
● Statement of revenues, expenses, and changes in fund net position
● Statement of cash flows
■ Direct method is required - with accompanying reconciliation to operating income (NOT to net income)
■ Cash flows from operating activities
■ Cash flows from noncapital financing activities
■ Cash flows from capital and related financing activities
■ Cash flows from investing activities Reverse order

Notes from MCQs

● The orientation of accounting and reporting for all proprietary funds of a government unit is Income determination
● Lotteries are included in enterprise funds
● An internal service fund is the appropriate fund for a city that establishes a self-insurance program because city
departments and funds are the exclusive users of the fund benefits
 F9: Module 5- Fiduciary Funds FS

Fiduciary Funds - General CIPPOE (trust funds)

● Assets
● Controlled by the government
■ Government holds the assets, OR
■ Government has the ability to direct the use of the asset
● NOT the government's “own source” revenue
● NOT subject to administrative involvement
■ Administrative involvement includes:
● Monitoring compliance
● Determination of eligible expenditures
● Ability to exercise discretion over how assets are allocated
● NO direct financial involvement with the assets
■ Government providing matching resources for the activity
● Must have one or more of the following:
■ Administered through a trust which the government itself is not a beneficiary
■ Dedicated to providing benefits to recipients
■ Legally protected from the creditors
■ For the benefit of individuals
■ Not derived from government provision of services or goods
● No SCF

Custodial fund
● Overview
● Simply acting as custodian
● Not obligated in any manner
● Revenue sources
● Expected to be held for 3 months or less
■ Property taxes collected for other governments
● Expense types
● Expected to be held for 3 months or less
■ Property taxes distributed to other governments
● Unique accounting issues
● Tax collection funds
■ Exist when one local government collects a tax for an overlapping governmental unit and
remits the amount collected, less administrative charges, to the recipient unit
● Sales tax
● Payroll withholding
● Real estate tax
● Clearance funds
■ Used to accumulate a variety of revenues from different sources and apportion them to
various operating funds in accordance with a statutory formula or procedure
● Cash conduit arrangements with no monitoring or admin involvement
● Special assessments
■ If liable
● Use capital projects & debt service
■ If not liable
● Use custodial
● Financial statements
● Statement of fiduciary net position = BS
● Statement of changes in fiduciary net position = IS
Investment Trust funds
● Revenue (addition) sources
● Contributions
● Net appreciation
■ Including realized and unrealized gains and losses
● Premiums/discounts on debt securities
■ Not amortized
● Expense (deduction) types
● Payments to beneficiaries
● Administrative expenses
● Unique accounting issues
● Reported transactions
■ Investment trust FS only report the investment assets of those entities using the investment trust’s services
that are external to the sponsoring government
● Asset valuation
■ FV
● Financial statements
● Statement of fiduciary net position = BS
● Statement of changes in fiduciary net position = IS

Private purpose trust

● Overview
○ NOT general public use
■ Principal and income are for benefit of individuals, private organizations, or other governments
● Revenue (addition) sources
● JE to record obligation to a private individual
■ DR: Deduction XXX
● CR: Accounts payable XXX
● JE to record payment
■ DR: Accounts payable XXX
● CR: Cash XXX
● Expense (deduction) types
● Expenses (deductions)
■ Related to specific purpose of trust
■ May relate to benefits or administrative changes
● Capital gains (losses)
■ Recorded as adjustments to income/expense
● Unique accounting issues
● Escheat property
■ Escheat property is property that reverts to a governmental entity in the absence of legal
claimants or heirs at the time the estate is settled
● GR - report as asset in governmental or proprietary fund
● Escheat property held for individuals, private organizations, or other governments
should be reported in a private purpose trust fund
● Revenue is reduced and a fund liability is reported to the extent that property will
probably be reclaimed
● PASS KEY:
Fund Use Spending
Special revenue Public Interest and principal (expendable)
Permanent fund Public Interest only (non-expendable) -----—> must NOT spend principal
Private purpose Private Interest and/or principal (expendable)
Pension (and Other Employee Benefit) Trust
● Revenue (addition) sources
● Employer and employee contributions
■ JE to record receipt of money from other fund
○ DR: Cash XXX $ into pension
■ CR: Additions: employer contribution - restricted XXX
● Other fund contributing money to pension fund
■ Modified accrual - JE of “GRaSPP” fund
○ DR: Expenditures XXX
■ CR: Cash XXX
■ Full accrual - JE of “SE-CIPPOE” fund
○ DR: Expenses XXX
■ CR: Cash XXX
● Income from investments
■ Record as addition
● Expense (deduction) types
● Benefit payments
● Refunds
● Administrative expense
● Financial statements
● Statement of fiduciary net position = BS
■ Asset valuation
● FV
■ Liabilities and net position determination
● Reported as net position restricted for pension
■ PASS KEY
● Net pension liability and change
● Statement of changes in fiduciary net position = IS
■ Additions
● Contributions received
● Net appreciation
● Realized and unrealized gains and losses
● Premiums & discounts on debt securities
○ Not amortized
■ Deductions
● Benefit payments
● Administrative expenses
● Statement of Cash Flows: NONE for fiduciary funds
■ Only Proprietary funds = required SCF

Notes from MCQs

● A government’s own investments, invested in its own investment trust fund, would treat the trust fund as if it were
an outside trustee
○ As a result, the government’s own investments would be treated as assets of the investing fund itself
 F10: Governmental Accounting - Part 3

F10: Module 1- Form and Content of the Comprehensive Annual Financial Report

Governmental Financial Reporting Requirements of GASB 34

● Overview
● Governmental reporting standards
■ GASB 34
● Accountability
■ Operational accountability
● Focus of government-wide FS is to report the extent to which the government has met operating
objectives efficiently and effectively, using all resources available for that purpose
■ Fiscal accountability
● Focus of fund FS is to demonstrate that the government entity’s actions in the current period have
complied with public decisions concerning the raising and spending of public funds in the short-term
● Integrated approach
■ Requires reconciliation of fund FS to government-wide FS to link the accountability objectives
of the 2 levels of reporting

●
● Required reporting for general purpose governmental units
● MD&A
■ Before FS
■ Required supplementary information - narrative analysis
● Government-wide FS
■ Fund FS: major funds shown individually; no major funds shown in total
● Governmental funds: GRaSPP
● Balance sheet
● Statement of revenues, expenditures, and changes in fund balances
● Proprietary funds: SE
● Statement of net position
● Statement of revenues, expenses, and changes in fund net position
● Statement of cash flows
● Fiduciary funds: CIPPOE
● Statement of fiduciary net position
● Statement of changes in fiduciary position
■ Notes to FS
■ Required supplementary info (RSI) other than MD&A
● After FS
● Pension
● Budget
● Infrastructure
● Comparison of budgets to actual activity
■ Other supplementary info
● Optional
○ Budget variances
○ Details of non-major fund FS
 ● Comprehensive annual financial report
● Introductory section (unaudited)
■ Letter of transmittal
■ Organizational chart
■ List of principal officers
● Basic FS and required supplementary info (audited)
■ MD&A
■ Government-wide FS
■ Fund FS
■ Notes to FS
■ Required supplementary information
● Statistical section (unaudited) NOT part of basic FS
■ Includes 10 years of both financial and non-financial data relevant to FS users

The Financial Reporting Entity

● General purpose governmental units
● States, counties, towns, municipalities, and villages
■ Primary government entities include:
● State governments
● Local governments (city or county)
● Special purposes local governments
○ Primary government if meet all of the following, otherwise component unit (“SELF”)
■ SE - Separately Elected governing body
■ L - Legally separate
■ F - Fiscally independent of other state and local governments
● Special purpose governmental units
● Financially accountable to a primary government
● Component unit
● An organization for which elected the officials of the primary government are financially accountable
■ Blended presentation
● Use when one of the following circumstances is present
■ Substantially the same as primary government
■ Serves the primary government exclusively
■ Not a separate legal entity
● Discrete presentation
■ The default method
■ If no conditions of blended are met, use discrete method
● Reporting NFP entities as component unit
● NFPs that provide ongoing support to the primary government or component unit of the primary
government may also be a component unit of the primary government
■ Example transactions include:
● Private foundations of state universities
● Private foundations of public healthcare facilities
■ Criteria for discrete presentation
○ All must be met
● Resources held by tax-exempt organization are for the near-exclusive
benefit of the primary government (benefit standard)
● Primary government has access to a majority of the resources (access standard)
● Resources held by the NFP are significant to primary government (significance standard)
■ Criteria for other component unit presentation
○ Legally separate tax-exempt organizations meeting the criteria of financially
integrated entity should be classified as a component unit of the primary
government if their to that government if relationship is so significant that FS would
be misleading without component unit treatment
 F10: Module 2- Government-wide FS

Overview
● NO cash flow
● Basic FS
● Economic resources measurement focus
● Full accrual accounting
● Fiduciary funds are excluded (no CIPPOE)
● Component units are included

Statement of Net Position (a Consolidated Statement)

● Net position format
■ Calculation of net position
● Assets and deferred outflows of resources
● - Liabilities and deferred inflows of resources
● = Net position
○ “RUN”
■ R - Restricted
■ U - Unrestricted
■ N - Net investment in capital assets
○ Net investment in capital assets
■ All capital assets, net of accumulated depreciation, reduced by the outstanding balances of
bonds, mortgages, and notes
■ Includes deferred inflows and outflows that are attributable to these transactions
○ Restricted
■ Externally imposed
■ Restricted assets reduced by liabilities and deferred inflows
○ Unrestricted
■ Everything else
● Treatment of interfund receivables and payables
○ Elimination of interfund activities within major activity categories
● Internal service funds
○ GRaSPP + S
○ Reported in the governmental activities column
● Business-type
○ E

Capital Assets: Capitalization and Depreciation (Full Accrual)

● Capitalization of assets
● Valuation
■ Capitalized at the lower of cost or market value
● Cost includes all ancillary charges necessary to place the asset into its intended
location and condition of intended use
● Construction period interest
■ Interest cost incurred before the end of construction period is NOT included in historical cost of capital asset
■ Reported as interest expense on government-wide FS
■ Interest expense on FS of funds using economic resources measurement focus (SE-CIPPOE)
■ Interest expenditure on FS using current financial resources measurement focus (GRaSPP)
● Infrastructure
■ Refers to streets, bridges, gutters
■ Recorded as general capital assets
■ Only reported on government-wide FS
 ● Required approach
○ Recorded and depreciated
■ Depreciation expense that can be specifically identified with a functional category should be
included in the direct expenses of that function
● Modified approach
○ Infrastructure expenditures are reported as expenses except for outlays that result in additions or improvements,
which would be capitalized
○ Infrastructure assets are NOT required to be depreciated if two requirements are met
(disclose in supplementary information)
■ The asset management system meets certain conditions (disclose in supplementary information)
■ Government maintains an up-to-date inventory
■ Summarized condition assessment of eligible infrastructure assets is performed
■ Each year, an estimate is made of the amount to maintain and preserve the assets
■ Documentation included data on asset preservation (disclose in supplementary information)
■ Complete condition assessment must be performed consistently at least every 3 years
■ Reasonable assurance that results support assertions
● Must present as required supplementary information (RSI)
■ Schedule reporting condition of government infrastructure, AND
■ Comparison schedule of needed and actual expenditure to maintain government infrastructure
● Accounting changes
■ Required approach -----> modified
● Change in estimate (prospectively)
■ Modified -----> required
● Change in estimate (prospectively)
● Impairment
● Insurance recoveries are netted against the loss
● Artwork and historical treasures
● Capitalize at historical value or FV - same rules as NFP
● May elect to NOT capitalize when 3 conditions are met
■ Held for public exhibition, education, or research
■ Collection is protected, kept encumbered, cared for, and preserved
■ Subject to organizational policy that requires proceeds from sales of collection items be used to
acquire other items for collections

Statement of Activities = IS (Full accrual)

● Program approach
● Use a net program cost format that is not consistent with commercial accounting
● Functions/programs
● The net expense or revenue for each function or program is classified into one of these categories:
■ Primary government governmental activities = GRaSPP + S
■ Primary government business-type activities = E (not CIPPOE)
■ Discretely-presented component units = rescue squad & board of education
● Expenses
● Reported by function on the full accrual basis
● Program revenue
● Reported by function on the full accrual basis
■ Exchange revenue
● Recognized when goods or services are transferred
○ AR with allowance
■ Non-exchange revenue
● Transactions in which a government gives (or receives) value without directly
receiving (or giving) equal value in exchange
● Program revenue category types
● “SOC”
■ S - Charges for services
■ To customers who directly benefit from goods or services
■ For services to other governments
■ Fines and forfeitures
■ O - Operating grants and contributions
● Restricted for use in a particular program
■ C - Capital grants and contributions
● Restricted for use in a particular program
● Net (expense) revenue and changes in net position
● The net expense or revenue is presented in 3 categories and a total column:
■ Primary government governmental activities = GRaSPP + S
■ Primary government business-type activities = E (not CIPPOE)
■ Total (1 & 2)
■ Discrete component unit = Rescue squad and board of education
● General revenues
● Presented separately
■ Taxes, interest earnings, other revenues not specifically associated with a functional expense
● Special items
● Reported separately
■ Unusual or infrequent (but not both) and are within the control of management
● Change in net position
● General revenues - net (expenses) revenues
● Eliminations
● Internal transaction that artificially “double up” on activity should be eliminated
■ Interfund services, such as water and other utilities, should not be eliminated
■ Internal activity associated with blended component units should be reclassified as interfund activity
■ Internal activity associated with discretely presented component units should be reported as
external transactions
● Internal service funds
● GRaSPP + S
■ Should be reported in the governmental activities column

●
 F10: Module 3- Fund FS

Fund FS
● Major fund rules
● A major fund must meet BOTH 10% and 5% tests
■ 10% test: (like segment reporting) within its category
■ All governmental funds
OR: The “separate” columns > 10%
■ All enterprise funds

● 5% test: within both categories

■ All governmental funds
AND: The “total” column > 5%
■ All enterprise funds

● PASS KEY
■ When determining whether a fund is a major fund:
■ Aggregate fund balance/equity is NOT considered
■ General fund will ALWAYS be a major fund
■ Internal service funds will NOT be considered in evaluation of major and non-major funds
● Proprietary funds
● Statement of cash flows
● 7 differences to commercial
■ Direct method is required
■ Reconciliation of operating income (not net income) to net cash proceed by operations is required
■ There are 4 categories (instead of 3)
● Operating activities
● Capital and related financing activities
● Non-capital financing activities
● Investing activities
■ Order of financing and investing categories are reversed
● Governmental = financing before investing
● Commercial = investing before financing
■ Interest income/cash receipts = investing activities (not operating)
■ Interest expense/cash pmts = capital and related financing OR non-capital financing (not operating)
■ Capital asset purchases are reported as financing activities (not investing)
● Operating activities
■ Cash inflows from sales of goods and services - what they do all day everyday
■ Cash outflows to suppliers or employers
■ Cash inflows from interfund reimbursements and exchanges
■ Cash outflows in lieu of taxes
■ Non-capital financing activities
■ Cash flows from issuing debt for noncapital purposes
■ Cash receipts from grants or subsidies - to decrease operating deficits/subsidize operations
■ Cash received from property taxes
■ Operating transfers
● Capital and related financing activities
■ Cash flows from issuing debt associated with capital assets
■ Cash inflows from capital grants
■ Cash inflows from contribution activity associated with capital assets
■ Cash activity related special assessments associated with capital assets
■ Investing activities
■ Cash inflows and outflows associated with loans to others
■ Cash inflows and outflows associated with equity transactions
Notes from MCQs
● Governmental funds
○ Statement of financial position
■ Assets & deferred outflows of resources = liabilities & deferred inflows - fund balance
● Fiduciary fund
○ Statement of financial position
■ Assets & deferred outflows of resources – liabilities & deferred inflows = net position
● Non-operating items (revolving debt financing and gains on the sale of assets) are EXCLUDED from the
reconciliation to operating income
● Transfers must be deducted from income (loss) before contributions and transfers to compute the change in net position
 F10: Module 4- Deriving Government-wide FS and Reconciliation Requirements

“CAN CPAS RIDE or SIT”

Reconciliation of Governmental Fund FS to Government-wide FS

● Reconciliation requirement
● Measurement focus differences
■ Adjustment of capital asset and long-term debt accounts
● Basis of accounting differences
■ Elimination of effect of using modified accrual basis
● Show revenues earned and expenses when incurred (use full accrual)
● Reconciliation of governmental fund BS to government-wide statement of net position
● Adjustments for difference in measurement focus
■ C - add capital (non-current) assets
■ A - subtract related accumulated depreciation
■ N - subtract non-current liabilities = LTD

○
● Adjustments for difference in basis of accounting
■ Eliminate deferred inflows associated with recognized revenues (amount of eliminated deferred inflows added)
■ Subtract accrued liability for interest payable
● Consolidation entries
■ S - add internal service fund net position
■ I - eliminate interfund
■ T - transfers

○
● Reconciliation of governmental fund statement of revenues, expenditures, and changes in fund balance to
government-wide statement of activities (IS)
● Adjustment for difference in measurement focus
■ C - add capital outlay expenditures
■ P - add principal payment on debt
■ A - subtract NBV of capital assets disposed of during the period
■ S - subtract debt proceeds shown as other financing sources

○
● Adjustments for difference in basis of accounting
■ R - add recognized revenues that are measurable but unavailable
■ I - accrue interest expense
■ DE - record depreciation expense

○
● Consolidation entries
■ S - add internal service fund change in net position
■ I - eliminate interfund
■ T - transfers

○
Deriving Government-wide FS
● Converting governmental fund FS to government-wide FS
● Measurement focus differences
■ Capital outlay expenditures
○ Capitalize (not expenditure)
■ Debt service expenditures/proceeds
○ LTD (not other financing sources)
● Basis of accounting differences
■ Recognition of measurable but unavailable revenue
○ Revenue is earned
■ Recognition of unmatured interest payable
○ Accrue interest expense/payable
■ Recognition of depreciation expense
● Excluded funds GRaSPP + S —> now included
■ Addition of internal service net position (BS)
■ Inclusion of profits earned by internal service funds (IS)
● Reconciliation can be performed either on the face of the funds statements or in the footnotes to the government-wide FS
 F10: Module 5- Notes and Supplementary Information

Management’s Discussion and Analysis (MD&A)

● Overview
○ Before FS
○ Required in government financial reporting
● Contains
● Description of FS
■ NO variance analysis and reconciliation of fund FS to government-wide FS (this is done in the basic FS)
■ Compare current year results to prior year with emphasis on current year
● Identity of primary government and discrete component units
● Economic conditions and outlook
● Major initiatives

Notes to the FS
● Overview
● Part of the basic FS, describe the FS
● Focus on on the primary government, specifically:
● Governmental activities
● Business-type activities
● Major funds
● Non-major funds in the aggregate
● Additional info regarding discretely presented component units
● Generic governmental disclosures
● Description of government-wide activities, noting the exclusion of fiduciary funds = CIPPOE
● Policies relating to elimination of internal activity
● Description of modified approach, if used
● Segment information on enterprise funds
● Specific governmental disclosures
● Description of activities for:
■ Major funds
■ Internal service funds
■ Fiduciary funds
● Length of time used to define “available” under modified accrual (GR: 60 days)
● Actions taken to correct material noncompliance

Required Supplementary Information (Other than MD&A)

● Overview
○ After FS
● Budgetary comparison reporting
○ Mandated for the General and Special Revenue Funds with legally adopted budget, NOT all governmental funds
○ Inflows/outflows and balances on the same basis of accounting as used in the budget
■ Must show the original budget, the final amended budget, and actual amounts
● Computation of variances between budget and actual is optional
● Computation of differences between the original and the final amended budget is optional
● Infrastructure information
○ Required to report if using “modified approach”
● Pension information
○ 10 most recent fiscal years

Other Supplementary Info (Optional)

● Detail is optional
○ Combining statements for non-major funds
■ Non-major funds are ones that failed the 10% and 5% tests (see earlier notes)
○ Variance between originally adopted budget and final amended budget
○ Variance between final amended budget and actual