Comprehensive Accounting Concepts: A Chapter-by-Chapter Guide
Chapter 1: Financial Reporting
External Users
- Qualitative Characteristics:
- Relevance: Predictive, Confirmatory, Materiality
- Faithful Representation: Completeness, Neutrality, Free from Error
- Enhancing Characteristics: Comparability, Verifiability, Timeliness, Understandability
- Assumptions:
- Economic Entity
- Going Concern
- Monetary Unit
- Periodicity
- Principles:
- Measurement
- Revenue Recognition
- Expense Recognition
- Full Disclosure (notes/supplementary schedules)
Chapter 2: Accounting Cycle
- Identify Account
- Determine Debit or Credit (DEAD CLIC)
- Journal Entry & Post to T-account
- Unadjusted Trial Balance
- Adjustments
- Adjusted Trial Balance
- Financial Statements
- Closing Entries
- Post-closing Trial Balance
Chapter 3: Discontinued Operations
Impairment Loss
- Impairment Loss = Book Value > Fair Value
- Net Tax: 75%
Discontinued Operations (During)
- Income from Continuing Operations $
- Discontinued Operations:
- Results from Discontinued Operations $
- Gain/Loss on Disposal $
Discontinued Operations (After)
- Income from Continuing Operations $
- Discontinued Operations:
- Results from Discontinued Operations $
- Impairment Loss $
Changes in Accounting Principles
- Estimate: Prospective: Change in useful life, bad debt %
- Principle: Retrospectively: Change in Inventory Method (LIFO/FIFO)
- Error Correction: Restate Financial Statements (Material Error Corrected by Auditors)
Chapter 4: Financial Statement Analysis
Current vs. Long-Term Assets and Liabilities
- Current Assets: 1 year
- Current Liabilities: 1 year
- Working Capital = Current Assets – Current Liabilities
Note Disclosures
- Summary of Significant Accounting Policies: Disclose policies, procedures, management judgment (not following GAAP)
- Fair Value Measurement:
- Fair Value (price to sell/transfer in current market) Market: price of transaction in similar market
- Income: Future amount to current discounted amount
- Cost: Amount to replace asset
- Fair Value Hierarchy:
- Less judgment: Level 1: Identical asset/liability
- Level 2: similar to asset/liability
- Level 3: Unobservable Outputs. More Judgment
- Related Party Transactions: Pre-existing relationship between parties (being influenced by another)
- Subsequent Events (Must Disclose)
- Errors (unintentional), fraud, illegal acts (intentional)
Segment Reporting
- Segment Revenue > 10% total revenue
- Segment Asset > 10% total asset
- Absolute Value of Profit/Loss > 10% total profit/loss
- Combined Segment Revenue > 75% total revenue
SEC Filings
- S-X: Content/format requirement
- S-K: Disclosure Requirement
- 10-K: Annual Financial Statements (Audited)
- 10-Q: Quarterly Financial Statements (Unaudited)
- 8-k: Significant Event
Auditors Report
- Opinions on Financial Statements
Management Report
- Responsible for information on Financial Statements
Chapter 5: Statement of Cash Flows
Operating Activities
- Net Income + Depreciation and Amortization
- + Increase in Current Liabilities, – Increase in Current Assets
- + Decrease in Current Assets, – Decrease in Current Liabilities
Investing Activities
- Long-Term Assets
Financing Activities
- Long-Term Liabilities & Equity
- Net Change in Cash
- Non-cash activities summarized at the bottom
- Net Income +- CASH FLOW = Change in Cash + Beginning Balance of Cash = Ending Balance of Cash
Financial Statement Analysis
- Horizontal Analysis: Analysis Across time: % change between 2 periods
- Vertical Analysis: Analyze Financial Statements relative to Base:
- Income Statement = Total Revenue
- Balance Sheet = Total Assets
Chapter 7: Revenue Recognition
- Identify Contracts: Commercial substance, Approved, Define rights and payment terms, Collection Probable
- Identify Performance Obligations: should be distinct & material
- Determine Transaction Price:
- Fixed Consideration: TP is stated, easily determined
- Variable Consideration: price depends on future event (estimated)
- Expected Value Method: (multiple outcomes) possible amount x % probability
- Most Likely Method: single most likely amount
- Selling Price – Consideration (credits/discounts/rebates) = TP
- Allocate TP to Performance Obligations
- Recognize Revenue: point in Time vs. Period of time:
- customer continuously received benefit
- work enhance asset in customer control
- asset has no alternative use
Percentage of Completion Method
- % complete rate = total cost to date / estimated total project cost
- Revenue = % complete rate x total contract revenue
Principal vs. Agent
- Principle provides goods/service
- Agent arranges for the sales and earns commission on each sale
Consideration Payable
= reduces TP & inc L . SP – C. Pay = TP |
CH 8: Cash: currency, money orders, cashier’s check | Cash Equivalent: convert into cash w/in 3 months > less: ST Treasury Bill, Certificates of Deposit, NO marketable securities. | Bank Reconciliation: Bank Balance: +DIT – Outstanding Checks +- Bank Errors = Adj Cash | Book Balance: +Notes Collected +Interest Received -service charges -NSFs -EFTs +-Book Errors = Adj Cash. |
CH 9: Inventory Valuation: Goods In Transit (FOB), Good on Consignment, Freight In. Shipping Point. Destination. 1. Seller or Customer? 2. Destination or Shipping Point? 3. Look at dates. | Perpetual: ongoing allocation of COGS | Periodic COGS only at the end of period | Specific Identification Method: Find cost of each unit | Average Cost Method: Avg cost per unit x Units sold |
CH 10: Lower of Cost or NVR (FIFO OR LIFO) NRV= SP – Cost of Disposal | NRV > COST = NO ENTRY . NRV COST = no entry , MKT determined
CH 11: Capitalize: anything increase useful life/production, improvement, additions, (purchased, demolished, (- sell scrap), title, fees, property taxes, commission.)
CH 12: Impairment Loss: 1. Determine if asset is impaired —- if recoverable cost