For Year End Mar. 31 2008 2009 2010 Acc.

Benefit obligation 180,000 660,000 1,168,000 Projected benefit ob. 240,000 800,000 1,296,000 Actual gain on plan asset 0 20,000 134,000 Unexpected G/L at FYE 0 313,600 0 PSC from plan amd. (4/1/2009) 0 763,000 0 Contributions (made FYE) 200,000 1,240,000 820,000 Settlement Rate 13% 11% 8% Exp. Return on plan Assets 10% 10% 10% Service Costs 240,000 340,000 476,000 Benefits paid (at FYE) 0 120,000 74,000 Avg. remaining SC per empl. 18 18 18 N. I. (A. taxes, bef. pen) 1,400,000 5,600,000 12,300,000 Assets(bef. Pension) 17,800,000 Liabilities (bef. pension) 8,300,000 Owner s Equity (bef. Pen. 8,100,000

Items Pen Exp. Cash PSC G/L Pen A/L PBO PA Bal. April 1, 2009 313,600 540,000 (800,000) 1,340,000 Adj. to Bal 763,000 (763,000) Adj. Bal April 1, 2009 763,000 313,600 540,000 ( 1,563,000) 1,340,000 Serv. Cost 476,000 (476,000) Int. Cost 125,040 <- ( 1,563,000 x 8%) ( 125,040) Act. Return (134,000) 134,000 Unexp. G/L Amt. of PSC 42,389 (42,389) <- 763,000/18 Contribution (820,000) 820,000 Benefits Paid 74,000 (74,000) Liability Inc. Amt. of Loss 26,106 26,106 <- (313,600 (1,,563,000x 10%) ) / 18 Liab. Loss ___________________________________ J.E. 3/31/2010 535,534 (820,000) 720,611 (26,106) (410,040) Bal 3/31/2010 ________720,611 287,494 129,960 (2,090,040) 2,220,000 Balance Sheet 3/31/2008 3/31/2009 Beginning Assets 17,800,000 17,600,000 Less: Cash for Pen. Exp (200,000) (1,240,000) Plus Pension Assets 540,000 Net Income Adjustment 5,600,000 Ending Assets 17,600,000 22,500,000 Beginning Liabilities Pension Liabilities Ending Liabilities 8,300,000 40,000 8,340,000 8,340,000 (40,000) 8,300,000 3/31/2010 22,500,000 (820,000) (410,040) 12,300,000 33,569.960 8,300,000 0 8,300,000

Operating Leases PV of annuity Due 1 + ((1- ( 1 / (1-r)^(n-1))) LESSEE LESSOR PV of ordinary Annuity (1- (((1+r)^(-n))/r)) ) Rental Payment Rental Receipt Periodic Adj. PV of single sum (1 / (1+r)^n) Rent Exp. XX Cash XX Dep Exp. XX Cash XX Rent Rev. XX Accm. Dep. XX Capitalization Criteria Capital (Lessee) (Lessee) 1. Lease transfers ownership to lessee 1 . An increase in debt (ST and LT) 1. Interest Revenue 2. Lease -bargain purchase option 2. Increase in assets (log lived assets) 2. Tax Incentives 3. Lower income early in the life of the lease 3. High Residual 3. Term of lease >75% useful life Value 4. PV of all payments > 90% FMV Depreciation Exp. *(PV = Lump sum interest) 1 Economic Life Lease Vocabulary 2- Economic Life Residual value est. FMV of leased asset @ the end of the term 3. - Lease Term Guaranteed RV - Amount assets promised to be worth @ end of lease 4. - Lease Term Executory cost insurance, maintenance, taxes, (cost during life of lease) Implicit Int. Rate(Lessor) Rate set by the lessor that they want as their return Incremental borrowing rate borrowed funds to buy assets charged to lessee LESSEE Lessor: Use the required return (lessor) rate to discount and find Operating either PV or Pmts of the lease Capital Lease - LeaseEquipUnderCapLease (=PVofLease) Direct (finance) LeaseLiability Sales type lease(manufacturer) Entry: Criteria for Direct or sales (BOTH): Lease Liability (PMT amount) 1 .Minimum lease pmts is reasonably predictable ExecutoryCosts(if applicable) 2. No uncertainties in amt received InterestPayable **Use lowest incremental rate Cash Lease Period: 5 years, beginning 1/1/07 Noncancelable. Rental Amt: $65,000/ yr ; includeds $5,000 to cover property tax. incremental borrowing rate/ implicit rate = 10%. Est. economic life =5 . NO RV. ; Dep. Straight line 1/1/07 (Lessee) Lessor 1/1/07 Leased equip 250,192 Lease Rec. 250,192 Date PMT INTEXP Red. L L. Liab. Equipment 250, 192 Lease Liab. 250,192 1/1/07 250,192 Lease Liab. 60,000 Cash 65,000 1/1/07 60,000 60,000 190,192 Prop tax exp 5,000 Lease rec. 60,000 1/1/08 60,000 19,019 40,981 149,211 Cash 65,000 Prop tax. 5,000 1/1/09 60,000 14,921 45,079 104,132 12/31/07 12/31/07 1/1/10 60,000 10,413 49,587 54,545 Int. exp 19,019 Int. Rec. 19,019 1/1/11 60,000 5,455 54,545 int. pay 19,019 int. rev 19,019 Total 300,000 49,808 250,192 Prop tax exp. 5,000 Prop tax pay. 5,000 Prop tax pay. 5,000 cash 5,000 Dep. Exp Cap Lease 50,038 If returned: Date PMT INTEXP Red. L L. Liab. Accm. Dep. Cap Lea 50,038 Equipment (FMV) 1/1/07 250,192 If Returned: GAIN (FMV) 1/1/07 48,832 48,832 201,360 250,192 Purchased for $50,000 A/D 1/1/08 48,832 20,136 28,696 172,664 Leased Asset 250,192 Cash 50,000 1/1/09 48,832 17,266 31,566 141,098 Gain on sale 50,000 Purchased for $50,000 1/1/10 48,832 14,110 34,722 106,376 Equip. 300,192 1/1/11 48,832 10,638 38,194 68,182 Lessor Guar $75,000 A/D cap lease 250,192 12/31/11 75,000 6818 68,182 Equipment - $75,000 A/D 250,192 Total 319160 68,968 250,192 Int. Rev 6,818 Lease Asset 250,192 Lease Rec. 68,182 50,000 Lessee Guar RV $75,000 (DON T include if unguar) Lessor FMV $60,000 Cash Unguaranteed Guaranteed FMV of Asset - $75,000 Assume FMV- 60,000 Equipment 60,000 Equipment 60,000 Lease liab 68,182 Loss on Cap Lease 15,000 15,000 Loss on sale 15,000 Int. exp 6,818 Cash 15,000 Cash Int. Rev. 6,818 Int. Rev. 6,810 A/D 175,192 Same J.E. lease rec. 68,182 lease rec. 68,182 Lease Liab 250,192

Items Pen Exp. Cash PSC G/L Pen A/L PBO PA Bal. April 1, 2007 0 0 Adj. to Bal Adj. Bal, April 1, 2007 0 0 Serv. Cost 240,000 (240,000) Int. Cost Act. Return Unexp. G/L Amt. of PSC Contribution (200,000) 200,000 Benefits Paid Liability Inc. Amt. of Loss Liab. Loss ___________________________ J.E. (3/31/2008 240,000 (200,000)______(40,000)______________ Bal (Mar. 31, 2008) ______________(40,000) (240,000) 200,000

Items Pen Exp. Cash PSC G/L Pen A/L PBO PA Bal. April 1, 2008 (40,000) (240,000) 200,000 Ending Liab. & Equity 17,600,000 22,500,000 33,569,960 Adj. to Bal Adj. Bal April 1, 2008 (40,000) (240,000) 200,000 Net Income Serv. Cost 340,000 (340,000) Int. Cost 26,400 (240,000 x 11% ) ( 26,400) Beginning Net Inc. 1,400,000 5,600,000 12,300,000 Act. Return (20,000) 20,000 Less: Pension Exp. 240,000 346,400 535,534 Unexp. G/L 313,600 (313,600) 1,160,000 5,253,600 11,764,466 Ending Net Inc. Amt. of PSC (313,600) 26,106 Contribution (1,240,000) 1,240,000 Other Com. Inc (G/L) 0 (720,611) Benefits Paid 120,000 (120,000) Other comp. Inc. (PSC) Ending Other Com. Inc 1,160,000 4,940,000 11,069,960 Liability Inc. Amt. of Loss Actual Return = (Planned Assets End Bal Plan Assets Beg. Bal) Liab. Loss ___________________________________ ( Contributions - Benefits Paid) J.E. 3/31/2009 346,400 (1,240,000 ) - 313,600 580,000 _________________ Fair Value of Plan Assets at end $5,000,000 Bal 3/31/2009 ______________313,600 540,000 (800,000) 1,340,000 Deduct: Fair value of plan at beg 4,200,000 2008 2010 Increase in fair value of plan assets : 800,000 Pension Exp. 240,000 Pension Exp 535,534 Deduct: Contributions to plan during period $500,000 Cash 200,000 Other Comprehensive (PSC) 720,611 Less benefits paid during period 300,000 200,000 Pension Liability 40,000 Cash 820,000 Actual Return 600,000 2009 Other Comprehensive (G/L) 26,106 Pension Exp. 346,400 Pension Asset Actual Return - Expected Return = Unexpected Gain or Loss 410,040 Other Comp. Income (G/L ) 313,600 (B-of Y) Accm. OCI (G/L) - Corridor) / Avg. Remaining Serv. Life = Amortized Net (G/L ) Pension Asset 580, 000 Unexpected G/L +/- Amortized Net (G/L) = Current Year (G/L) Cash 1,240,000 * Corridor 10% of the greater of the Project Benefit obligation or Plan assets

Beginning Equity 8,100,000 Retained Earnings 1,160,000 Other Comp. Inc. (G/L) 0 Other Comp. Inc. (PSC) 0 Ending Equity 9,260,000

9,260,000 14,200,000 5,253,600 11,764,466 (313,600) 26,106 0 (720,611) 14,200,000 25,269,960

Completed 2008 EBIT $400,000 Tax(40%) 160,000 NI 240,000

2009 2010 160,000 190,000 64,000 76,000 96,000 114,000

Percentage of completion 2008 2009 EBIT $600,000 180,000 Tax(40%) 240,000 72,000 NI 360,000 108,000

2010 200,000 80,000 120,000

Rev

EXP

Pretax Income Difference in Income(net of tax) Year P-of- C Completed Difference Tax Effect Income Effect Before 2009 600,000 400,000 200,000 80,000 120,000 In 2009 180,000 160,000 20,000 8,000 12,000 Total at B.2010 780,000 560,000 220,000 88,000 132,000 Total 2010 200,000 190,000 10,000 4,000 6,000 Construction in Process 220,000 Deferred Tax Liability 88,000 Retained Earnings 132,000

NI

RE Dr Cr Dr Cr

If R/E is overstated: Credit R/E If R/E is understated: Debit R/E

Changes in Accounting Principle - employ the retrospective approach by : 1. changing the financial statements of all prior periods presented 2, disclose in the year of the change the effect on net income and earnings per share for all prior periods; 3) report an adjustment at the beginning retained earnings balance in the statement of retained earnings in the earlier year presented If impracticable to determine the prior period effect: (e.g. change to LIFO) : 1) do not change prior years income; 2) use opening inventory in the year the method is adopted as the base year inventory for all subsequent LIFO computations; 3) disclose the effect of the change on the current year Changes in accounting estimate: employ the current and prospective approach by: report current and future F.S. on the new basis; 2) present prior period F.S. as previously reported; 3) making no adjustments to current-period opening balance for the effects in prior periods Change in reporting Entity (retrospective)Changing the financial statements of all prior periods presented Correction of errors (restatement Approach) 1) correct all prior period statements; restate the beginning balance of retained earnings for the first period presented when the error effects occur in a period prior to the first period presented IF the company has closed the books in the current year: 1 . If the error already counterbalanced, no entry is needed 2 . If the error is not yet counterbalanced, make an entry to adjust the present balance of R/E If the company has not closed the books in the current year: 1 . If the error is already counterbalanced, make an entry to correct the errors in the current period and to adjust the beginning balance of R.E. 2 . If the error is not yet counterbalanced, make an entry to adjust the beginning of R/E * Restatement is necessary even if a correcting J.E. is not required 2 . December 31, 2009 Understated $16,000 (all inventory) 3. Equipment cost $100,000 December 31, 2010 Understated $19,000 1 . Failed to accrue sales commission payable Depreciation before 2011 (36,000) December 31, 2011 Overstated $ 6,700 (already fixed) December 31, 2010 Book value $64,000 $3,500 3 . Change from double-decline to straight line method Less: Salvage Value (13,000) December 31, 2011 $2,500 Original cost $100,000 40 tax rate $51,000 Purchase date 1/1/2009 2011 books is not closed 1. Retained Earnings 3,500 Sales Commissions Payable 2,500 Original No salvage; 10 year life Depreciation to be taken $6,375 Sales Commissions Expense 1,000 New- useful life -8 salvage - $13,000 ($51,000/8) Dep. Exp. 2011-double decline balance was $36,000 Depreciation recorded 12,800 Already recorded $12,800 under the 2011 DD 2. Cost of Goods Sold 25,700 Difference 6,425 Change from completed to percentage complete ($19,000 + $6,700) 2011- Income (P-of- C) Retained Earnings 19,000 Acc Depreciation Equipment $6,425 The completed method is still used for tax purpose Inventory 6,700 Depreciation Expense 6,425 Pretax using the completed method Income Overstated (Understated) 4. Construction in Process $45,000 Prior to 2011 105,000 2008 2009 2010 Deferred Tax Liability 18,000* 2011 20,000 Beginning inventory $16,000 $19,000 Retained Earnings 27,000 Pretax using (P-of-C) Ending inventory $(16,000) (19,000) 6,700 Prior to 2011 150,000 (16,000) (3,000) $25,700 *(150,000-105,000) x 40% 2011 - 60,000

Operating (income statement) Cash inflows From sales of good or services from returns on loans (interest) and on equity securities( dividend) Cash outflows - suppliers for inventory To employs for services To government for taxes To lenders for interest To others for expenses Investing (LT assets) Cash inflows from sale of PPE sale of debt or equity securities from collection of principal on loans to other entities Cash outflows To purchase property, plant, and equipment To purchase debt or equity securities of other entities To make loans to other entities Financing (LT liability and Equity Items) Cash Inflows from sale of equity securities from issuance of debt (bonds and notes) Cash outflows To stockholders as dividends To redeems LT debt or reaquire capital stock

Direct (Statement of Cash Flows) Cash flows from Operating Activities Cash Received from customers $765,000 Cash Payments: To Supplier $550,000 For Operating Exp 148,000 For Income taxes 48,000 746,000 Net Cash provided by operating Activities $19,000 * NO (allowance of doubtful accounts) Reconciliation ( MUST be provided with Direct) Net Income 112,000 Adjustments to reconcile NI to net cash By operating activities Depreciation exp 10,000 Increase in A/R (15,000) Increase in Inventory (160,000) Increase in prepaid expenses (8,000) Increase in accounts payable 60,000 Increase in accrued exp. Pay 20,000 (93,000) Net Cash provided by operating activities 19,000 Significant NON cash items 1 . Acquisition of assets by assuming liabilities or issuing equity securities 2 . Exchanges of nonmonetary assets 3 . Refinancing of LT debt 4 . Conversion of debt or P.S. to C.S. 5. Issuance of Equity securities to retire debt *put at bottom of statements

Direct (income statement Method) Net cash provided by operating activities = cash basis net income Net cash used by operating activities = cash basis net loss Direct Method Cash Receipts from Customers Revenues from sales Deduct: increase in A/R Add: decrease in A/R Cash receipts from customers Cash Payments to Suppliers Cost of Good sold Add: increase in inventory Deduct: decrease in inventory Purchases Deduct: increase in A/P Add: decrease in A/P Cash payments to Supplier Operating Exp. Add: increase in prepaid exp. Deduct: dec. in prepaid exp. Add: decrease in accrued expenses pay Deduct: inc. in accrued exp. Payable Cash payment for operating expenses

Direct Cash Receipts from Customers Revenues from sales Deduct: increase in A/R Add: decrease in A/R Cash receipts from customers Cash Payments to Suppliers Cost of Good sold Add: increase in inventory Deduct: decrease in inventory Purchases Purchases Deduct: increase in A/P Add: decrease in A/P Cash payments to Supplier Operating Exp. Add: increase in prepaid exp. Deduct: dec. in prepaid exp. Add: decrease in accrued expenses pay Deduct: inc. in accrued exp. Payable Cash payment for operating expenses

- Cash Paid To Tax Total Op Exp. + ^DTA - ^Tax Payable - ^DTL - Cash Paid For Interest BB + Interest Ext. EB Indirect Format Cash flows from Operating activities Indirect (reconciliation method) Net income 125,000 - the indirect method adjust NI for items that affected Adjustment to reconcile NI to Net cash reported net income but did not affect cash net cash provided by operating act: (+) A (-) A (A/R, Prepaid, Inv) (insert the one that apply) ______(add or subtract)__ Net cash (provided/used) by operating act . (+) L (-) L (A/P, Salary, Tax) Cash flows from investing activities Sale of land sale of equipment purchase of equipment __________________ Net cash (used/provided) by investing activities Cash flows from financing activities Redemption of bonds Sale of common stock payment of dividends __________________ Net cash provided by financing activities ______ Net (Increase or decrease) in cash XXXXX Cash, Beginning of the year _______ Cash, End of the year ________

Net Income Add: (+) A (+) L + Depr. Exp/ Amort disc./ Bad Debt Exp. + Loss on sale of asset Less: (-) A (-) L - Gain on sale - amort. Prem - decrease in DTL Cash Flow From Operations