© 2017 Leonard Prather. All rights reserved.

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Published by AuthorHouse  09/12/2017

ISBN: 978-1-5462-0528-9 (sc)

ISBN: 978-1-5462-0527-2 (e)

Library of Congress Control Number: 2017912916

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CONTENTS

1     Abbreviations And Acronyms

2     Accounting Basics

3     Accounting For Changing Prices

4     Accounting For Income Taxes

5     Bonds

6     Business Combinations

7     Cash Flow Statement

8     Changes In Accounting Principles

9     Contingency

10   Correction Of An Error

11   Debt Restructure

12   Depreciation

13   Derivative Instruments

14   Developmental Stage Enterprise

15   Dividends

16   Earnings Per Share

17   Financial Ratios

18   Financial Statements

19   Foreign Currency Transaction

20   Foreign Currency Translation

21   Government Accounting

22   Intangible Assets

23   Inventory

24   Investments—Cash Surrender Value Life Insurance

25   Investments—Cost And Equity Method

26   Investments—Securities

27   Lease Accounting

28   Long-Lived Assets

29   Nonmonetary Exchange

30   Nonprofit Accounting And Reporting

31   Notes Payable

32   Other Comprehensive Income

33   Pensions

34   Property

35   Research And Development

36   Sales Recognition—Completed Contracts

37   Sales Recognition—Installment Sale

38   Sales Recognition—Percentage Of Completion

39   Segment Reporting

40   Stock Plans

41   Stock Transactions

Sources Of Information

Study guide notes are supplemental materials used as a reference to help your understanding of key concepts. The notes are not meant to cover the topic in its entirety or serve as a substitute or replacement of the full accounting text.

ABBREVIATIONS AND ACRONYMS

Here are some common abbreviations used throughout the text.

AJE - adjusting journal entry

AP - accounts payable

AR - accounts receivable

BD - bad debt

BS - balance sheet

CF - cash flow

DL - direct labor

Exp - expense

FA - fixed assets

FS - financial statement

FV - fair value

GAAP - generally accepted accounting principles

GAAPro - generally accepted auditing procedures

GAAS - generally accepted auditing standards

IRS - internal revenue service

IS - income statement

JE - journal entry

NBV - net book value

NI - net income

NP - notes payable

OH - overhead

o/s - outstanding

PV - present value

RE - retained earnings

RM - raw material

SFAC - statement of financial accounting concepts

SFAS - statement of financial accounting standards

SOP - statement of position

TB - trial balance

w/o - write off

WP - work papers

WS - work sheet

AICPA - American Institute of Certified Public Accountants

ASC - Accounting Standards Codification

APB - Accounting Principle Board

APBO - Accounting Principle Board Opinion

ARB - Accounting Research Bulletin

EITF - Emerging Issues Task Force

FASB - Financial Accounting Standards Board

ACCOUNTING BASICS

Subsequent Event

• After balance-sheet date and

• Before financial statements are issued.

Record Short-Term Debt as Long-Term Debt

• When a financial agreement has been accepted;

• For the purpose of refinancing;

• Short-term debt on a long-term basis—for example, debt or equity securities issued on a long-term basis.

Accounting Equation

Assets = Liabilities + Capital

Current assets

- Current liabilities

Working capital

Accounting Cycle

Daily transactions are posted to journals (double entry); debits and credits are recorded.

Adjusting entries are entered and posted.

Closing entries (closing of nominal accounts) are entered and posted. This is a year-end or period function.

Trial balance is generated.

Financial statements (income statement, balance sheet, cash flow, change in stockholders’ equity) are prepared.

Cycle repeats.

Cash to Accrual Basis

Prepaid Expense

Overstates expense.

Understates net income.

Understates assets.

Nominal (temporary) accounts relate to income statement accounts and are closed at year end to income summary.

Real (permanent) accounts relate to balance-sheet accounts and are not closed at year end. These balances are cumulative.

Posting Journals

• Sales journal (records sales activity)

• Cash receipt journal (records cash transactions)

• Accounts payable journal (records vendor activity)

• Purchase journal (records purchases)

• General journal includes transactions not related to any of the above journals.

Closing entries are posted at year end to close nominal accounts.

Adjusting entries are posted regularly throughout the accounting cycle.

• Accruals

• Prepaid

• Estimates

• Reversing entries, which reverse in a subsequent period.

Accruals are earned or incurred transactions.

• Accrued revenue—example: rent revenue

• Accrued asset— example: rent receivable

• Accrued expense—example: salaries expense

• Accrued liability— example: salaries payable

Prepaid

• Prepaid expense is an expense paid in advance (e.g., insurance)

o It is classified as an asset on the balance sheet. (It is represented as a current and/or noncurrent asset on the balance sheet.)

o The expense is recorded when incurred.

• Prepaid revenue is income paid in advance (e.g., rental income)

o It is classified as a liability on the balance sheet. (It is represented as a current and/or noncurrent liability on the balance sheet.)

o The revenue is recorded when earned.

Understanding Account Interaction

This is useful when solving for an unknown value.

Bond Payable—Beginning

Bond issue

- Bond redemption

Bond payable - Ending

Determine the Cost or Proceeds of an Asset Sale

Proceeds

– Net book value

Gain/loss on disposal

1. Proceeds = Net book value + Gain

2. Proceeds = Net book value – Loss

3. Cost = Proceeds – Gain

4. Cost = Proceeds + Loss

ACCOUNTING FOR CHANGING PRICES

Monetary

• Assets and liabilities are fixed dollar amounts.

• They do not change with changes in dollar value (purchasing power).

• Unrealized gains/losses are holding purchasing-power gains and losses.

• Items include

• Receivables

• Payables

• Cash and cash equivalents

• Nonconvertible preferred stock

Example:

A holder of a $10,000 promissory note entered into ten years ago and due today will receive $10,000 even though the value of $10,000 today is less than its value ten years ago. This change in dollar value is referred to as unrealized purchasing-power gain or loss.

Nonmonetary

• Assets and liabilities dollar amounts are not fixed.

• They fluctuate with changes in specific price levels.

• They fluctuate with changes in general purchasing power (CPI).

• Price changes are due to

• Fair market value (FMV)—specific price-level changes

• Appreciation

• Depreciation

• Consumer Price Index (CPI)—general price-level changes

• Inflation

• Deflation

• Examples:

• Inventory

• Property, plant, and equipment

• Land

• Common stock

• Deferred assets and liabilities

• Investment in subsidiary

• Advance receipts

Example:

A purchaser of 10,000 shares of Company XYZ ten years ago.

Ten years ago, he was subject to

• Changes in purchasing power (Consumer Price Index—CPI)

• Rise or fall in fair market value

Today, if the change in purchasing power (Consumer Price Index—CPI) was offset by equivalent change in fair market value, then the price of the shares is the same as it was ten year ago.

Monetary - During inflation, price index increases and dollar value decreases.

For example, $1 is now worth 90 cents

• Asset: If you are owed $1 when the value of the dollar is worth 90 cents, you will have a 10-cent loss.

• Liability: If you have to pay $1 when the value of the dollar is 90 cents, you will have a 10-cent gain.

Nonmonetary - During Inflation, price index increases and dollar value decreases.

For example,. $1 is now worth .90 cents

o Asset: A product sold for a $1.00 now sells for $1.10. The same product, if resold, will yield you a 10-cent gain.

o Liability: If you owed $1, you will now pay $1.10. The payment will yield you a 10-cent loss.

Financial Reporting and Changing Prices

ASC 255 (SFAS 89)

Applies to foreign entities in countries with hyperinflationary economies that prepare financial statements for businesses preparing US GAAP (generally accepted accounting practices) financial statements.

Note: Hyperinflationary economy is the consumption of goods and services in a geographical location with accelerating rates of inflation that cause the currency to lose value.

Codification is not required, but voluntary disclosure is encouraged as supplemental information.

The effects of changing prices relating to GAAP prepared financial statements require the use of CPI-U (Consumer Price Index of Urban Consumer).

Inflation results in a loss of currency purchasing power or value.

Purchasing power is the purchasing value of a dollar—in other words, the worth of a dollar.

Purchasing power gain or loss is the effect of changes in dollar value on monetary assets and liabilities.

Price Level Changes

Fluctuations effect

• General Price Changes: The Consumer Price Index (CPI) is the overall measure of goods and services representing economic changes in consumer prices.

• Specific Price Changes

• Internal influences

• External influences: Third-party price increases affect your business.

• Direct Pricing of Goods/Services

• Current cost

• Vendor prices

• Manufacturing cost

Consumer Price Index (CPI) for Urban Consumer (CPI-U)

• Urban price index is used.

• Purchasing power is the value of a dollar adjusted for inflation.

Inflation is the increase in cost of consumer products; as the cost of products increase, the purchasing value of a dollar decreases.

The consumer price index

• Is an economic factor;

• Measures overall goods and services;

• Reflects the purchasing power of a dollar.

Current year—CPI-U = Consumer Price Index (CPI-U)

Base year CPI-U

Types of Pricing

• Historical cost is the actual cost.

• Current cost is fair value (FV).

• Consumer price index (CPI) is actual (historical) cost adjusted for CPI.

• Nominal is historical cost that has not been adjusted for FV or CPI.

Historical Cost (Nominal Dollar)

• Actual purchase cost

• Original purchase or sale price

• No adjustment for general or specific prices changes

Nominal Dollar

• Historical cost

• Actual purchase price

• Not adjusted for changes in dollar value (no fair-value or CPI adjustments)

Current Cost

• Current purchase price;

• Includes specific price changes, stated at the lower of one of the following:

• Current cost (fair value)

• Replacement (recoverable) cost.

• Gains and losses (G/L) are recognized.

Current cost

– Historical cost

Unrealized holding gain or loss (G/L) recognized.

Constant Dollar

• Includes general price changes.

• Historic (nominal) or current cost is adjusted for inflation.

• Monetary assets and liabilities (A&L) are not restated for general price changes (changes in dollar value). Purchasing power—unrealized G/L are recognized.

• Examples:

• Cash

• Accounts receivable

• Notes receivable

• Accounts payable

• Notes payable

• Bonds payable

• Nonmonetary asset and liabilities (A&L)

• Restate for general price changes (changes in dollar value).

• Purchasing Power—unrealized G/L are not recognized.

• examples:

• Inventory

• Property

• Plant and equipment

• Deferred revenue

Constant dollar

– Historical cost

Inflation factor

Pricing Measurements

1. Historical cost/nominal dollar

2. Historical cost/constant dollar

3. Current cost/nominal dollar

4. Current cost/constant dollar

Historical Cost/Nominal Dollar

• Includes no specific or general price changes;

• Is not adjusted to

• Current cost or

• Constant dollar.

No purchasing-power gains or losses are recognized.

Example:

Historic building that cost $10,000 is reported as $10,000.

Historical Cost/Constant Dollar

• Includes general price level changes.

• Adjusted for general price-level changes.

• Monetary assets and liabilities are not restated.

• Unrealized gains and losses recognized.

• Nonmonetary assets and liabilities are restated.

• Unrealized gains and losses not recognized.

Disclosure example:

• Historic: building that cost $10,000 is reported as $10,000.

• Constant dollar: building cost is $11,000 (10,000 * 1.10 CPI)

• Gains/losses recognized: none

• Inflationary factor: $1,000

Constant dollar $ 11,000

– Historical cost 10,000

Inflation factor $ 1,000

Current Cost/Nominal Dollar

• Includes specific price level changes.

• Historic cost stated at whichever is lower:

• Current (fair value)

• Replacement cost

• General price changes are not applicable.

• Current cost is not adjusted for general price level changes.

Example:

• Historic Cost: building that cost $10,000 is reported as $10,000.

• Specific dollar: building cost is $15,000 (FV) on balance sheet disclosure.

• Factors increase