(Notes) FAR Summary (NICE) PDF

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Financial Accounting: Refresher Notes TABLE OF CONTENTS Review of the Accounting Cycle Balance sheet and Notes to FS Income Statement Statement of Cash Flows Cash Receivables Inventory & Cost of Goods Sold Property, Plant, and Equipment: Initial Acquisition Property, Plant, and Equipment: Depreciation Intangible Assets Borrowing Costs Mineral Resources Debt Financing Equity Financing Investments in Debt & Equity Securities Earnings per Share Derivatives Contingencies Segment Reporting Interim Reporting Accounting Changes & Error Correction FS Analysis

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STUDY TIPS FOR PROFESSIONALS 1. Self Appraisal Take stock of yourself, your academic preparation, as well as your work habits and other strengths and weaknesses. You can use the iCPA Study Plan to determine how familiar you are with each topic listed, keeping in mind the percentage indicator of relative emphasis given to each topic.

2. Decide what kind of review program to undertake Your options range from self-designed NICE Online Review

self-study to a formal review course. Selecting the right option is a matter of making an honest self-appraisal and deciding which approach is most likely to produce the desired result. You must consider how up-to-date your knowledge is, how much new learning will be necessary, how much you know about the CPA exam itself, how much time you have to devote to review, how inclined you are to procrastinate, and how well you can study on your own. The chief concern at this stage is to decide on the best possible game plan for you. Success will depend on the choice you make and how well you stick to it. 3. Arrange your life to accommodate the necessities of review You must plan on setting aside a minimum of two or three hours per day for either classroom attendance or selfstudy. This represents a sizeable chunk of your life. That, in turn, may adversely affect friends and family. Since their cooperation and support can make your task much more manageable, and since your ties to them should endure long after you become a CPA, you should seek their understanding and share with them the sense of purpose you feel. If they are made to feel a part of your hopes and plans, they will forgive your irritability and unsociability during the review period. At the office, your supervisors and coworkers are not likely to be as sympathetic. Your efforts to become a CPA are viewed as a worthy endeavor by your employer, but not one that should affect your availability for overtime, business travel, or other job requirements. In other words, there will be little Page 1

opportunity for you to find much flexibility in your job responsibilities to accommodate your review program. You are expected to show that you can become a CPA even while you are giving your full effort to job performance. The arrangements necessary to allow for the hours that must be set aside are usually made by forging participation in all nonessential personal and social activities during the review period. In many ways, your life off the job during the review period may come to resemble that of a recluse. If, however, you keep your focus on the long-term benefits of whatever temporary sacrifices you have to endure, the inevitable tedium will seem more bearable. The worst part of failing the CPA exam has to gear up for and go through the review process all over again. It should be done right the first time. 4. Take the plunge Procrastination is the thief of time, and time is the reviewee’s scarcest resource. Usually, the hardest part of any life project is getting started. Some people procrastinate by busying themselves with preparatory details, telling themselves that everything must be arranged and in place before they can begin. Other people simply postpone. The point to remember is that things in your life will never be exactly as you would like them to be; once a decision is made, action should follow. Natural inertia must be overcome.

a long time. As one encounters setbacks or obstacles, it is easy to become discouraged. Self-doubt is a natural human reaction. Expect it and deal with it. But recognize it as nothing more than a passing mood. If you have the selfdiscipline and motivation that characterizes successful candidates, you will not lose the momentum of effort that you have established. There are certain things a candidate can do during the review period that will help maintain momentum: a. Set daily goals b. Maintain a progress record of your study c. Monitor the performance of questions answered. d. Keep fit. You will need such exercise during the review period as well since some physical counterbalance will be necessary for the periods during which you must remain relatively immobile while in class or studying at home. Beyond that, it is well established that physical fitness and mental alertness are connected. To reduce mental fatigue, it helps to “walk away from it” periodically when you feel, during study sessions, that your brain has become overloaded with information. A brief rest will usually help to clear the neurological circuitry.

5. Maintain momentum As you might expect, it is not easy to sustain an intense and tedious effort over NICE Online Review

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REVIEW OF THE ACCOUNTING CYCLE 1. The accounting system generates a variety of reports for use by various decision-makers. Among the most common are generalpurpose financial statements, management reports, tax returns, and other reports prepared for government agencies such as the SEC. 2. A manual and an automated accounting system are similar in that both are designed to serve the same information-gathering and processing functions. Both systems also use the same underlying accounting concepts and principles. The differences between a manual and an automated accounting system involve some mechanical aspects, time requirements, and the appearance of records and reports. Due to advanced technology and reduced prices, today, almost all successful businesses of any size use computers to assist in the various accounting functions.

4. The accounting process includes the following steps: (1) Business documents provide detailed information concerning each transaction and establish support for the data recorded in the books of original entry. (2) . Transactions are analyzed in terms of their effects on the various asset, liability, owners’ equity, revenue, and expense accounts of the business unit. (3) . The ledger accounts classify and summarize the full effect of all transactions recorded in the journals and can be used in the preparation of financial statements. (4) A

3. The accounting process involves specific procedures used by businesses to produce financial statement data. The recording phase of the accounting process consists of those procedures used in the continuing activity of analyzing, recording, and classifying business transactions in the various books of record (journals and ledgers) during the fiscal period. The reporting phase of the accounting process consists of those procedures used at the end of the fiscal period to update and summarize data collected during the recording phase. Financial statements are prepared from the updated and summarized data.

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. The trial balance provides a summary of the information as classified and summarized in the ledgers as well as a verification of the accuracy of recording and posting. (5) . Adjustments are necessary to record all accounting information that has not yet been recorded and to recognize all revenues and expenses on an accrual basis properly. If a worksheet is used (an optional step in the cycle), adjustments may be journalized and posted any time before closing. If statements are prepared directly from ledger balances, however, changes must be recorded at this point.

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(6)

are designed to facilitate the recording of some particular type of frequently occurring transaction, such as

. Financial statements report the results of operations and cash flows for a while and show the financial condition of the business unit as of a specific date.

(7) Balances in nominal accounts are closed into Retained Earnings. Operating results, as determined in the summary accounts, are finally transferred to Retained Earnings.

c. The carries summaries of all accounts appearing on the financial statements. afford additional detail in support of individual general ledger balances. Thus, accounts payable appear in total in the public accounting, but own reports with each creditor are provided in the accounts payable subsidiary ledger.

(8) A A post-closing trial balance is prepared to check the equality of the debits and credits after posting the adjusting and closing entries.

7. a.

The steps in the accounting process are necessary to transform transaction data into useful information, as summarized in the financial statements and other accounting reports. Some levels are optional, such as preparing a trial balance and preparing a post-closing trial balance. These steps help verify or facilitate the accounting process but are not essential.

Frequently, adjusting entries are first made on a worksheet and then are recorded in the general journal from which they are posted to the ledger accounts. b.

5. Under double-entry accounting, assets, expenses, and dividends are increased by debits and decreased by credits. Liabilities, owners’ equity accounts, and revenues are increased by credits and decreased by debits. 6. a.

s are balance sheet accounts not closed to a zero balance in the closing process. are income statements or temporary owners’ equity accounts closed out in the process of arriving at the net increase or decrease in owners’ equity for a period.

b. A is the most flexible book of original entry. It may be used to record all business transactions or merely those that cannot be recorded in one of the individual journals.

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are made at the end of an accounting period to update balance sheet accounts and to record accrued expenses and accrued revenues.

are made after the adjusting entries have been posted. They transfer all nominal account balances to Retained Earnings.

8. The company accountant is disregarding the periodic summary process and jeopardizing the company’s audit trail by not entering the adjusting entries in the general journal. Adjusting entries are made at the end of the period to bring accounts up to date. These entries must be entered first in the general journal and then posted directly to the public ledger. If the adjusting entries are not entered first in the general journal, the journals will be incomplete and will not provide the support necessary for an adequate accounting system.

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9. Examples of include Allowance for Bad Debts, Accumulated Depreciation, Discount on Notes Receivable, Discount on Notes Payable, and Discount on Bonds Payable. Contra accounts are subtracted from related accounts. Hence, they are sometimes referred to as offset accounts. Contra accounts are used to adjust accounts when the original balance needs to be preserved. For example, adequate disclosure in financial reports requires disclosure of both the original cost and the depreciated cost of assets. A contra account, Accumulated Depreciation, is used for this purpose. 11. A worksheet is a multicolumn form designed to facilitate the summarization and organization of accounting data needed to prepare the financial statements. The number of columns and the headings used may vary, depending on the needs of a particular business. While the worksheet is an optional step in the accounting process, it is a valuable aid in completing the trial balance and adjustment procedures.

14. Accrual accounting recognizes revenues and expenses when they are earned and incurred, not necessarily when cash is received or paid. Cash-basis accounting recognizes revenues and expenses as cash is received or disbursed, regardless of the earnings process or the matching concept. Generally accepted accounting principles require the use of accrual accounting. 15. The use of double-entry accrual accounting is more accurate than a cash-basis accounting system primarily because (a) The likelihood of errors and omissions is significantly increased in the absence Of double-entry analysis and a trial balance to test the accuracy of the analysis and recording process. (b) Recording events under an accrual system as they occur more accurately reflects the effects and timing of an event than does a system that records the events when cash is received or paid, regardless of the earnings process and the matching concept.

12. When a worksheet is used as a basis for statement preparation, the adjustments can be formally recorded in the journals and posted to the ledger accounts at any time before closing the books. However, if a worksheet is not used, financial statements must be prepared directly from the reports; thus, the adjustments must be recorded and posted before statement preparation. 13. Only the following accounts closed, generally with the debit/credit entries: Rent Expense ................. Depreciation Expense ..... Sales .............................. Interest Revenue ............. Advertising Expense....... Dividends .......................

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would be following Credit Credit Debit Debit Credit Credit

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BALANCE SHEET & NOTES TO FS 1. Three elements are contained in a balance sheet: assets, liabilities, and equity. These elements measure the worth of an enterprise at a given point in time. The balance sheet thus reports what resources an enterprise has and who has a claim against those resources. Two other elements, investments by owners and distribution to owners, are related to the equity element. Information concerning the change in equity is often contained in a separate statement that supplements the balance sheet. 2. To meet the definition of an asset, an item need not be associated with certain future benefits. To acknowledge the uncertainty inherent in the business, the definition of an asset stipulates that the future benefit needs be only probable. 3. Some liabilities, such as accounts payable and long-term debt, are denominated in precise monetary terms. However, the amounts of many liabilities must be estimated based on expectations about future events. 4. The difference between current assets and current liabilities, referred to as working capital, is a commonly used measure of the liquidity of an enterprise. It helps to determine whether the company will be able to meet its current debt with available assets and continue normal operations. 5. a. Assets are classified as current if (1) the asset will be realized in cash during the normal operating cycle of the business or one year, whichever is longer, or (2) the asset will be sold or consumed within a normal operating cycle or one year, whichever is longer.

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b. Liabilities are classified as current if liquidation of the liability is expected to require (1) the use of current assets or (2) the creation of other current liabilities. 6. a. Cash is classified as noncurrent when it is a part of a fund that will be used to discharge noncurrent obligations. Such funds include bond retirement funds, pension funds, and preferred stock redemption funds. Cash to be used for the acquisition of land, buildings, and equipment or cash received on long-term deposits from customers would also be reported as noncurrent. b. Receivables not reportable as current assets include those arising from unusual transactions, such as the sale of land, buildings, and equipment or advances to affiliates or employees that would not be collectible within 12 months. 7. If a short-term loan is expected to be refinanced or paid back with the proceeds of a replacement loan, the existing short-term loan is not classified as current. This is true as long as the intent of the company is to refinance the loan on a long-term basis, and the company’s plan is evidenced by an actual refinancing after the balance sheet date or by the existence of an explicit refinancing agreement. 8. a. A subjective acceleration clause is a provision in a debt instrument that specifies some general conditions permitting a lender to accelerate the due date unilaterally. b. An objective acceleration clause is a provision in a debt instrument that specifies conditions that can cause the debt to be immediately callable, for example, failure to earn a positive return on the assets or to make an interest Page 6

payment. c. If a noncurrent debt instrument contains a subjective acceleration clause and the invoking of the clause is deemed probable, the liability should be classified as current. If invoking of the clause is considered to be reasonably possible but not likely, the obligation should continue to be reported as a noncurrent liability with a note to describe the contingency. If a debt instrument contains an objective acceleration clause and the conditions that trigger the call have occurred, the debt should be classified as current. Exceptions are that (1) the creditor has waived the right to demand payment for a period that extends beyond the debtor’s normal operating cycle or (2) the debtor has cured the deficiency after the balance sheet date, but before the statements are issued, and the debt is not callable for a period that extends beyond the debtor’s normal operating cycle. 9. Contingent liabilities could or could not give rise to actual obligations; estimated liabilities are known to exist, but the amount is not known. A company could, for example, win or lose a lawsuit, but it is liable for income tax. The exact amount of the income tax is unknown until the final tax return is completed. The tax liability could have to be estimated at the time financial statements are prepared. 10. With a proprietorship, the owner’s equity is reported with a single capital account. In a partnership, separate capital accounts are established for each partner. In a corporation, a distinction is made between contributed capital and retained earnings.

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11. The three major categories in a corporation's equity section are (a) Contributed capital, including both capital stock at par and additional paid-in capital (b) Retained earnings (c) Other equity, such as treasury stock, unrealized gains and losses on Available-for-sale securities, foreign currency translation adjustments, and unrealized gains and losses on derivatives. 12. Offset balances are used to adjust the gross amount of balance sheet items to arrive at proper valuations. For example, allowance for bad debts is correctly offset against the gross amount of accounts receivable to show the net amount estimated collectible. It is generally not proper to offset an asset account against a liability or owners’ equity account because such an offset would not be to value either account correctly but rather to condense financial data at the expense of adequate disclosure. 13. Assets are usually presented in the order of their liquidity, with the most liquid items listed first. 14. Financial ratios are mathematical relationships between financial statement amounts. For example, return on equity is net income divided by owners' equity. 15. The asset turnover ratio (total sales divided by total assets) is a measure of the number of dollars of sales generated by each dollar of assets. The higher the asset turnover ratio, the more efficient the company is in using its assets to generate sales. 16. Return on equity is an indicator of the overall performance of a company. Return on equity measures the percentage return on the stockholders' investment and is computed as net income divided by total equity. Page 7

17. There are at least four types of notes used by management to support the financial statement...