Business Consultation: Talking GAAP – Group 1

Names: Tyler Brinkmann, Connor Gay, Joseph Graham, Thales Lumertz

1. Issue: Negative cash flows and positive net income “where is the cash?”
GAAP treatment: The matching principle of accrual accounting requires firms to match their
expenses with their revenue recognitions, recording both simultaneously. The revenue
recognition also demands that revenues be recognized even if no cash is received, so net
income may increase while a decrease in the cash account is being shown. So no, most likely
no one is pocketing the cash.

2. Issue: Why can’t we find the investments done by her father on the reports?
GAAP treatment: The economic entity principle indicates that the business is a separate
entity, meaning investments done individually by her father in his name (business owner)
should not appear on the company’s reports.

3. Issue: Land is appraised at higher value than shown on reports.

GAAP treatment: The historical cost principle indicates that an item on financial reports
should have its price indicated at the dollar at which it was purchased, and not its appraised
value or current market value. That is why the land is at $50k and not 500K.

4. Issue: What is depreciation expense?

GAAP treatment: GAAP allows for different methods of depreciation, and this expense
account is used to better allocate the actual value of certain accounts as their value goes
down in time. It is a non-cash account, and a contra asset account. It does not require any
payments, what it does is simply decrease the value of certain items based on a chosen
method to do so. No check authorization or payment is required to do so.

5. Issue: What about our mortgage account? Shouldn’t it account for what we still owe?
GAAP treatment: The balance sheet provides a snapshot of the company’s finances at a
certain date (Dec 31st, 2017, 2018) and Liabilities get divided between current and non-
current (long term). The portion not mentioned in the long-term debt is included in current
portion of long-term debt (current = less than a year).