FAR Cheat Sheet Taitel PDF

FAR Cheat Sheet Taitel F1: Financial Reporting Full Set of Financial Statements...

FAR Cheat Sheet Taitel F1: Financial Reporting Full Set of Financial Statements Liquidity and Solvency Basic Earnings Per Share (EPS) 1) Statement of Financial Position (Balance Sheet) Current Assets Income Available to Common Shareholders Liquidity = Basic EPS = 2) Statement of Earnings (Income Statement) Current Liabilities Weighted Average Number of Common Shares Outstanding 3) Statement of Comprehensive Income Debt Income Available to Common Shareholders = Net Income - Preferred Dividends Solvency = 4)Statement of Cash Flows Equity Preferred Dividends: Cumulative # of Pref Shares * Par Value * Rate 5)Statement of Owner's Equity Noncumulative Declared Items in Comprehensive Income Stock dividends and Splits are Retroactively Adjusted Individual Foreign Transactions P - Pension Adjustment Shares sold/reacquired are based on a time-weighted basis Direct Method: domestic price of another currency $/€ U - Unrealized G/Ls on AFS Indirect Method: foreign price of domestic currency €/$ F - Foreign Currency Items Diluted Earnings Per Share (EPS) Assets Denominated in Foreign Currency I - Instrument Specific Credit Risk Income Available + Interest on Dilutive Securities Diluted EPS = Foreign Currency ↑, Asset ↑ Gain Net Income WAOCS (with all securities converted to common stock) Foreign Currency ↓, Asset ↓ Loss + Other Comprehensive Income Treasury Stock Method - for Options and Warrants Average Price > Strike Price Liabilities Denominated in Foreign Currency Comprehensive Income # of Shares * Exercise Price Additional Shares = # of Shares - Foreign Currency ↑, Liabilities ↑ Loss Average Market Price Foreign Currency ↓, Liabilities ↓ Gain Items in Comprehensive Income If Converted Method - for Convertible Bonds Sequence from: Authorized - amt that may be issued 1) add interest expense (net of tax) to the numerator Most Dilutive Form 10-K Filing Deadlines Issued - stock that's been issued 2) add # of common stock associated to the denominator ↓ 60 days for large accelerated filers $700M Market Value Outstanding = Issued - Treasury 3) if issued, assume stock is issued for WACSO Least Dilutive 75 days for accelerated filers $75-$700 MV If Converted Method - for Convertible Preferred Stock Options and Warrants +$100M Revenue Book Value Per Common Share 1) adjust numerator; add back pref dividend are first 90 days for all others Less than 100M Rev Common Shareholders Equity 2) add # of common stock associated to the denominator Form 10-Q Filing Deadlines Common Shares Outstanding 40 days for large accelerated filers and accelerated filers Common Shareholder Equity Preferred Stock - Equity with Options 45 days for all others Assets - Liabilities - Pref Equity - Dividends Cumulative pref dividends not paid accumulates (as dividends in Arrears) in arrears Non Cumulative Dividends not paid do not accumulate Stock Issuance Common Shares Outstanding Participating share with common shareholders in excess of a specific amount Stock Issued Above Par Fully Particpating participates in excess dividends without limit Shares issued - Shares Repurchased DR: Cash Shares * Purchase Price Partially Particpating participates in excess dividends to a percentage limit CR: Common Stock Shares*Par Value Non-Participating Pref Shareholders are limited to. dividend provided by preference CR: APIC - C/S Plug Retained Earnings Preference Upon Liquidation must be disclosed if larger than par Stock Issued At Par Net Income/Loss Convertible May be exchanged by stockholders at a specified amount DR: Cash Shares*Par Value (Dividends Declared) Callable/Redeemable May be called (repurchased) at a price by the issuing corporation CR: Common Stock Shares*Par Value ± Prior Period Adjustments Stock Issued Below Par ± Accounting Changes Retrospective Treasury Stock - Cost Method (used 95% of the time) DR: Cash Shares * Purchase Price Retained Earnings Treasury shares are recorded and carried at their reacquisition cost DR: APIC Plug Gains/Loss is determined when it is reissued/retired | G/L = Reissue Price - Repurchase Cost CR: Common Stock Shares*Par Value Stock Subscription Default Losses: Paid-in Capital Treasury Stock ↓; Excess Retained Earning↓ 1) issue stock in proportion to amt paid Gains: Paid-in Capital Treasury Stock ↑ Stock Subscriptions 2) refund the partial payment Original Issue Buy back Above Issue Price Record Subscriptions Receivable 3) retain the partial payments with APIC DR: Cash Shares * Purchase Price DR: Treasury Stock Shares *Repurchase DR: Subscription Receivable Shares * Purchase Price CR: Common Stock Shares*Par Value CR: Cash Price CR: Common Stock Subscribed Shares*Par Value Retirement of Treasury Stock CR: APIC - C/S Plug Reissuing Below Cost CR: APIC - C/S Plug Retirement of Treasury (Cost Method) Reissuing Above Cost DR: Cash Shares * Purchase Price Collection of Subscriptions | All payments are included DR: Common Stock Shares * Par DR: Cash Shares * Resale Price DR: APIC - T/S Shares*Par Value DR: Cash DR: APIC - C/S OG Price - Per*Share CR: Treasury Stock Total Repurchase Price DR: Retained Earnings Plug CR: Subscription Receivable DR: Retained Earning Plug CR: APIC - T/S Plug CR: Treasury Stock Plug Issuance of Subscriptions | Only includes fully paid CR: Treasury Stock Repurchase P* Shares DR: Common Stock Subscribed At Par Retirement of Treasury (Par Method) Treasury Stock - Par/Stated Value Method (used 5% of the time) CR: Common Stock Issued At Par DR: Common Stock Calculate Gains and Losses immediately upon repurchase CR: Treasury Stock Shares * Par Value 1) Calculate Gains/Loss = Original Selling Price - Repurchase Price Dividend Terms 2) Reverse Original entry for Shares Repurchased; Debit Treasury Stock at Par Date of Declaration - BOD formally approves a dividend Use Fair Market Value on all Property (In 3) Credit Cash Paid DR: Retained Earnings Kind Dividends) Original Issue Buy back Above Issue Price LOSS CR: Dividend Payable DR: Cash Shares * Purchase Price DR: Treasury Stock Shares * Par Value Date of Record - specifies the time names are determined Scrip Dividends are used when there's a CR: Common Stock Shares*Par Value DR: APIC - C/S Plug Date of Payment - when it is dispersed by the corp cash shortage, Used Notes Payable CR: APIC - C/S Plug DR: Retained Earnings OG Selling P - Repurch Buy back Below Issue Price GAIN CR: Cash Repurchase Stock Dividends DR: Treasury Stock Shares * Par Value Reissue Shares Small Stock Dividends (20-25%) CR: Cash Repurchase CR: APIC - C/S Plug Retained Earnings ↓ by Par Value FAR Cheat Sheet Taitel F2: Financial Reporting/Disclosure Five Step Approach for Revenue Recognition (I am a STAR) Criteria for Identifying Contracts Change in Accounting Estimates (prospective) 1) Identify the contract with the customer all parties approved the contact 1) It is not an error Prospective Approach 2) Separate Performance Obligations rights of each party are identified 2) do not Restate prior Years use new information in current/future years 3) Transaction Price Determination payment terms are identified 3) Follow Prospective Approach no effect on prior Retained Earnings 4) Allocate the Transaction Price to each PO contract has commercial substance Includes To LIFO and Depreciation Method 5) Recognize Revenue probable collection of consideration Criteria isn't met but consideration is paid: Change in Accounting Principle (retrospective) Recognizing Revenue Timing Recognize Rev if the consideration is Change in Accounting Principle - change from one acceptable accounting method to another one Satisfied Over Time if any of the following is met: nonrefundable and no more POs Rule of Preferability - cannot change principles without justification 1) creates or enhances an asset that the customer controls Retrospective Approach - adjust beginning retained earnings, net of tax 2) customer simultaneously receives and consumes the benefit Contract Modification is a new contract IF: Noncomparative F/S Comparative F/S 3) Does not create an asset with alternative use a) The Scope Increase 1) use new method in year presented 1) Use new method in all years Output Method - based on the value to customers b) the Price increases 2) find earnings if method was always used 2) calculate the cumulative effect Input Method - based on the entity's efforts to the satisfaction of PO 3) adjust beginning R/Es net of tax 3) present effect net of tax to beginning R/Es Satisfied at a Point in Time: recognize when customer obtains control District POs must be: General Rule Exemptions: Changes to LIFO | Change to Depreciation Method a) customer has accepted the asset 1. are separately identifiable adjust retained earnings for the cumulative effect net of tax at the beginning or earliest period b) entity has right to payment and customer has obligation to pay 2. customer can benefit independently use the new accounting principle for all periods presented c) transferred physical possession of the asset A transfer is separately identifiable if: d) customer has legal title to the asset a) does not integrate with others Change in Accounting Entity (retrospective) e) customer has significant rewards and risks b) does not customize or modify Restate all previous F/Ss presented in comparative F/S along with the Full Disclosure to be made c) does not depend on or relate to others current year to reflect the information for the new reporting entity with changes in income Fair Value Not Separately Identifiable POs Fair Value -the price that would be received to sell an asset or transfer a liab are highly interrelated or interdependent Error Correction (Prior Period Adjustment) market based approach Does not Include transaction price provides a sig service of integrating Corrections of errors in recognition, measurement, presentation or disclosure resulting from Non Financial Assets are measured using the Highest and Best Use mathematical mistakes, misapplication of US GAAP, or oversight of facts Principal Market - market with the greatest volume or activity level FV Valuation Techniques MIC Changes from a non-GAAP to GAAP method of accounting price in that market is the FV measurement, even if there's MVP Market Approach- use price from market Comparative Financial Statements Presented: Most Advantageous Market - transaction involving comparable financial statements for the year with the error are presented best price for the asset/liab after considering transaction costs Income Approach- Discounted Cash Flow correct the error in those prior financial statements transaction costs are ignored in FV after the market is determined Model financial statements for the year with the error are NOT presented adjust (net of tax) the opening retaining earnings of the earliest period presented Cost Approach- Current Replace Cost Liquidity Ratios No Comparative Financial Statements Presented ability to meet short Current Assets reported as an adjustment to the opening balance of retained earnings (net of tax) term obligations Current Ratio Current Liabilities Hierarchy of Fair Value Inputs Cash + ST MS + AR (Net) Level 1 - Observable, Active, and Identical Profitability Ratios Quick Ratio Current Liabilities Level 2 - Observable, Quoted Sales (Net) - COGS Net Income Gross Profit Margin Profit Margin success of collecting Sales (net) Level 3 - Unobservable and assumption based Sales (Net) Sales (Net) outstanding A/Rs A/R Turnover Average A/R (net) Net Income Net Income Return On Sales Return On Equity average # of days to Ending A/R Solvency Ratio Average Total Assets Average Total Equity collect A/R Days Sales in A/R Sales (net) / 365 Total Liabilities Dupont Return on Debt-to-Equity = How quickly inventory COGS Total Equity Asset Profit Margin x Asset Turnover is sold. HIgher is better Inventory Turnover Average Inventory Total Liabilities Operating Cash Flow CFs from Operations Total Debt Ratio = average # of days to Ending Inventory Total Assets Ratio Current Liabilities sell inventory Days in Inventory COGS / 365 Total Assets # of times trade Equity Multiplier = COGS Total Equity Performance Metrics payable turnover A/P Turnover during a period Average A/P Times Interest EBIT Sales Net Income average # of days to Days in Payable Ending A/R Earned = Interest Expense Top Down EBITDA - COGS Bottom Up EBITDA + Income Tax/ Interest Expense collect A/R Outstandings Sales (net) / 365 - Operating Expense +D/A Expenses Days Sales in A/R+ Days in Inventory - Days in Beginning + End Price Per Share Cash Dividends Cash Conversion Cycle Average ______ Price to Earnings Ratio Dividend Payout Payable Outstandings 2 Basic EPS Net Income Sales (net) Asset Turnover Summary of Significant Accounting Policies Remaining Notes to the F/S Average Total Assets - description of all significant policies included in F/S - contains all other info relevant First Footnote: general description Examples of Notes Cash Basis of Accounting Second Footnote: significant accounting policies - material info regarding assets/liab Revenue = When Cash is received Expense = when cash is paid Disclosure includes - nature of change in SE Cash Basis Financial Statements 2) Statement of Cash Receipts + Disbursements a) measurment based used in prepping the F/S - require marketable securities 1) Statement of Cash and Equity Receipts (rev received) Disbursements (expense paid) b) specific accounting prinicpals and methods - FV estimates - cash is only asset; cash = equity + Debt Proceeds -debt/dividend repayment - contingency G/L - no liabilities are recorded + Asset Sale proceeds - asset purchase payment Disclosure of Rights and Uncertainty - Pension Plan Description Modified Cash Basis of Accounting - requires the disclosure of risk/uncertainty that can be relevant - segment disclosure Common Modifications Financial Statements for Modified Cash footnote describes - change in accounting principals - capitalizing and depreciating fixed assets - Statement of Assets and Liab (Modified Cash Basis) a) risk and uncertainties around major operations - accural of income taxes - Statement of A&L arising from cash transactions b) relative importance of each busniess OCBOA Guidelines - recording liabs and related interest - Statement of revs, exps, & R/E (Modified Cash Basis) c) use of accounting estimates in prep the F/S Other Comprehensive Basis of Accounting - capitalizing invetory - Statement of revs collected and expenses paid concentration should be disclosed if all 1) different titles for F/S - reporting investments at FV a) consentration exists at F/S date 2) required equivalent of B/S and I/S Income Tax Basis - prepared using method/principles used to prepare tax returns b) consentration makes entity vulenerable to near term impact 3) F/S should explain changes in equity Financial Statements for Modified Cash c) at least reasonably possible that the event will happen 4) statement of CFs is not required - Statement of Assets, Liabs, + Equity (Income Tax Basis) 5) disclosures should be similar to GAAP - Balance Sheet (Income Tax Basis) Cash to Accrual Detailed View - Statement of revs, exps, & R/E (Income Tax Basis) Revenue Purchases to COGS Operating Expenses Cash to Accrual Basis - Statement of income (income tax basis) Cash Basis Revenue Cash paid for purchase Cash paid for OpEx 1) Add increases in current assets + Ending A/R + Ending A/P + Ending accrued liab 2) Subtract decreases in current assets Subsequent Event - event that happens after B/S date but before available for issued - Beginning A/R - Beginning A/P - Begin accrued liab 3) Add decreases in current liabilities Type 1 (recognized): provides additional information about condition that existed at B/S date - Ending unearned rev - Ending Inventory - Ending prepaid exp 4) Subtract increases in current liabilities Type 2 (not recognized): conditions that did not exist at balance sheet date + Begin unearned rev + Begin Inventory + Begin prepaid exp Public Firms → evaluate events until F/S are issued (when widely distributed to users) Accrual Basis Revenue COGS Accrual OpEx Private Firms → evaluate events until F/S are available (after prepared and finalized) FAR Cheat Sheet Taitel F3: Assets Simple Bank Reconciliation Cash Equivalents Valuation of Inventory DO Bank Reconciliation - short-term, highly liquid investments Lower of Cost and Net Realizable Value Lower of Cost and Market + Deposit In Transit - funds sent to the bank and not recorded 1) readily convertible to cash Used for FIFO or Weighted Average Used for LIFO or retail inventory method - Outstanding Checks - checks written that have not been presented 2) original maturity of less than 90 days 1) Calculate the NRV = Selling Price - Cost to Sell Find Market Middle Value Book Reconciliation in BINS 2) Cost of Inventory = Lower of Cost or NRV 1) Market Ceiling = NRV + Bank Collection - collection without the knowledge of depositors Inventory Basics Substantial and unusual losses from subsequent 2) Market Floor = NRV - Normal Profit + Interest Expense - already added by the bank Inventory has legal title or physical possession normal measurement of inventory should be disclosed in 3) Replacement Cost = Cost to purchase the item - Non-Sufficient Funds - charge for dishonored checks FOB Destination - title passes when received by buyer the F/S 4) Lower of Cost or Middle Market Value - Service Charges - deducted by the bank already FOB Shipping Point - when given to common carrier Consigned Goods - remains in sellers inventory til sale Periodic Inventory System - Physical count of ending inventory is required Accounts Receivable T-Account Non-Conforming Goods - reverts to seller -debit purchases NOT inventory Beginning Inventory If Ending Inv is Overstated Beginning Balance - Cash Collected Sales with Buyback - reverts to seller -quantity of inventory is determined by a count + Purchases -COGS is understated + Credit Sales - Write Offs Installment Sales Selling Inventory Buying Inventory = COG Available for Sale -Profits are overstated - Conversion to a Note if debts cannot be estimated → include in sellers DR: Cash or A/R DR: Purchases - Ending Inventory -R/E are overstated Ending Balance if debts cat be estimated → include in buyers CR: Sales CR: Cash or A/P = COGS -Equity is overstated Sales Discount Inventory Valuation Method Basics Perpetual Inventory System - Record for each item is updated after the sale occurs 2/10 Pay 98% in 10 days Specific Identification - unique goods Buying Inventory Selling Inventory Modified Perpetual System n/30 Pay 100% in 30 days FIFO - sell old, ending inventory is new DR: Inventory DR: Cash or A/R DR: Cost of Goods Sold keeps an updated count of Gross Method - ignore upfront discount on the sale Weighted Average - periodic system CR: Cash or A/P CR: Sales CR: Inventory the cost only Net Method - assume upfront discount is offered on the sale Moving Average - perpetual system LIFO - sell new, ending inventory is old PP&E Cost Dollar Value LIFO - need a price index Land includes all cost incurred up until excavation Plant Cost include - Purchase Price - Purchase Price Specific Identification Method - Broker's Commissions - Deferred Maintenance -cost of each item is unique to each item - Title, Recording, and Legal Fees - Architects Fees -used for large or high value items - Draining of swamps and clearing trees - Digging a hole for foundation FIFO (First in First Out) - Site Development - construction period interest ending inventory and COGS are the same - Existing obligations (Mortgage/back taxes) Equipment costs include all expenditures related to Weighted Average Method (Periodic) - Cost of removing buildings acquisitions or construction -used for homogeneous products (Subtract) proceeds from existing resources Weighted Average Cost Total Inventory Costs Ava PP&E Equipment Capitalization (AIR must be capitalized) per Unit Total # of units available Addition - increases the quantity of fixed assets Moving Average Method (Perpetual) Improvement - improve the quality of fixed assets Factoring - Sale of A/R -computes weighted average after each purchase Replacement - subs of new, similar asset for an old one Without Recourse - True sale, all risk is on the collector Moving Average Cost per Total Inventory Costs if old asset's CV is know → write off old asset and record new asset DR: Cash →What they pay now Unit Total # of units if old asset's CV is NOT know → debit A/D for the cost of the new asset and credit cash DR: Due from Factor → What they pay later LIFO (Last in First out) DR: Loss on sale of A/R → Loss incurred ending inventory and COGS are different Basic Depreciation Methods CR: A/R → Write off orginal A/R In Rising Prices with LIFO → lowest ending inventory Straight-Line Depreciation With Recourse: factor has option to resell A/R back to seller → highest COGS - an equivalent amount of depreciation expense is recorded each period To be considered for a sale, must meet the following: → lowest net income Cost - Salvage Value - service potential declines over time Depreciation Expense = 1) obligation can be reasonably estimated Estimated Useful Life 2) transferor surrenders control of A/R to buyer Capitalizing Interest Sum-of-the-Years' Digits Depreciation 3) transferor cannot be required to repurchase the A/R Rule 1: Only capitalize interest on money actually - provides higher expenses in early years and lower expenses in later years Sum of the years Digits = spent, NOT on total amount borrowed Remaining Life Useful Life x (Useful Life + 1) Depreciation Expense = (Cost - Salvage Value) x Discounting - Sale of Notes Receivable Rule 2: amount of capitalized interest is lower of: Sum of the years digit 2 -writing is called promissory note and measured @ fair value a) actual interest cost incurred Units-of-Production Depreciation Present Value = Face Value - Unearned Interest b) computed capitalized interest - service production declines with use With Recourse: holder remains contingently liable for the ultimate payout Required Conditions for cap of interest Cost - Salvage Value Depreciation Expense = # of units produced x Without Recourse - True sale, all risk is on the buyer of the note a) expenditures for the asset have been made Estimated Total Units Steps to Discounting: b) activities need to get asset ready are IP Double Declining Depreciation 1) Maturity Value of the Note = Interest + Face Amount of Note c) interest cost is incurred - used when asset has rapid obsolescence Max A/D = Cost - Salvage Value 2) Bank Discount at Maturity = Discount * Maturity Value Ordinary Delay - will not impact cap period 2 Depreciation Expense = (Cost - A/D) x 3) Amount paid by the Bank = Maturity Value - Bank Discount Intentional Delay - will cause period to stop Useful Life 4) Interest Income (Expense) = Amount paid - Face Value Disposal of Assets Depletion Writing off Uncollectible A/R Sale of an Asset for a Gain Cost Depletion → allowed by GAAP Percentage Depletion → NOT allowed by GAAP Allowance Method - estimates % of A/R that are expected to be uncollect DR: Cash received from sale 1) Depletion Base = Total Cost (Cost of Land + Development Costs + Restoration) - Redisual Value DR: Bad Debt Expense DR: A/D 2) Unit Depletion Rate = Depletion Base / Estimated Recoverable Units CR: Allowance for Doubtful Accounts CR: Gain on Sale 3) Yearly Depletion = Unit Depletion x units extracted Subsequent Collection of Uncollectible AR CR: Asset @ cost 4) Yearly Depletion in COGS = Unit Depletion x units sold 1) Restore Account Written Off 2) Record Collections on Account Sale of an Asset for a Loss DR: A/R DR: Cash DR: Cash received from sale Impairment CR: ADA CR: A/R DR: A/D Step 1: Test for Recoverability = Undiscounted Future Net Cash Flows - Net Carrying Value DR: Loss on Sale if positive → No Impairment Loss if negative → Impairment Loss and Step 2 Composite Depreciation - averaging of economic lives CR: Asset @ cost Step 2: Calculation of Impairment = Discounted Future Net Cash Flows - Net Carrying Value Step 1: Find Individual Depreciable Base = Cost - A/D Assets held for Use Assets held for Disposal include cost of disposal Step 2: Find Annual Depreciation = Depreciable Base / Useful Life Intangible Assets 1) write asset down 1) write asset down Step 3: Avg composite life = Total Depreciable Base / Total Annual Depre patents are amortized over shorter: 2) Depreciate new cost 2) No depreciation taken Sale of Assets → no gain or loss a) estimated useful life 3) Restoration is not premitted 3) Restoration is premitted DR: Cash Received Cash Received b) remaining legal life DR: Accumulated Depreciation Plug CR: Cost of Machine X Book value of asset Cloud Computing Arrangements Phase 1: Preliminary Project - determining system Accumulated Depreciation T-Account requirements for software expensed when incurred - Disposals Beginning Balance Phase 2: Application Development - work - Write offs + Current year depreciation expense performed to customize or change configurations Ending Balance Capitalize → implementation costs Expense → training, maintenance, support Start-up costs are expensed as incurred Phase 3: Post Implementation - once software is placed in service expensed when incurred Franchisee Accounting initial costs → capitalize and amortize over life ongoing costs → expensed as incurred FAR Cheat Sheet Taitel F4: Liabilities Employee Related Liabilities Trade Accounts Payable Asset Retirement Obligations (AROs) - used in cases with known closure costs or removal costs Payroll Taxes → Expense for Employer - used for inventory or raw materials Initial Measurement is Recorded @ Fair Value of Amount paid in the future Payroll Deductions → Not an expense for Employer Gross Method - wait to record discount until DR: Asset Retirement Cost (Asset) → Amt capitalized that increases the carrying amount of the asset Accrued Vacation are recorded in the year earned if meets all of: it's actually taken CR: Asset Retirement Obligation (Liabilitiy) → associated with retirement of long-lived asset S - Services have already been rendered by employees Subsequent Measurement Undiscounted Future Payments = both total expenses Net Method Method - record net of discount O - Obligation related to rights that accumulate Depreciation Expense - decreases the ARC asset reported on the B/S; should be zero at end of accretion C - Payment of Compensation is probable If only the first 3, Trade Notes Payable DR: Depreciation Expense Annual Depreciation Asset Retirement Cost R - The amount can be reasonably disclose in the notes - Notes, debts, bonds, and debentures CR: Accumulated Depreciation Expense = Useful Life of Asset -ALL interest bearing with written promises Accretion Expense - increases the ARO liability due to the passage of time using the appropriate rate Exit or Disposal Activities Sales Taxes Payable DR: Accretion Expense → beginning value of ARO * Discount Rate a liability must be recognized for costs associated with an exit - company will have a payable and no expense CR: Asset Retirement Obligation (Liabilitiy) Costs associated with exit/disposal activities include - Involuntary employee termination benefits (severance) Gain Contingencies Premiums - offers to customers for the purpose of stimulating sales - Breach of Contracts Record no journal entries for GC until certain Step 1) Total Estimated Coupon Redemption = Coupons x Redemption Rate - consolidating facilities If Remote → Do not disclose in the notes Step 2) Coupons to be Redeemed = Total Coupon Redemptions - Coupons redeemed - relocating employees If Not Remote → Only Disclose in the notes Step 3) Outstanding Premium Claims = Coupons to be redeemed / amount per premium - moving PPE Step 4) Estimated Liability for Premium Claims = Outstanding Premium Claims x Pre-premium cost Criteria for Liability Recognition (All Must) Loss Contingencies DR: Premium Expense a) obligating event has occured Probable → Accrue and record JEs CR: Premium Liability b) event result in present obligation to transfer assets in the future Range is the highest prob of occurring c) obligating event has occured If all the same, use lowest Notes Payable - contractual rights to pay money at a fixed rate Exit Disclosures should be made during Reasonably Possible → Only Disclose Gross Notes Payable = Payment x number of payments a) the period the exit was initaited Remote → DO NOT Disclose or Accrue PV of Notes Step 1: Interest Expense = Beginning Carrying Value x effective market rate b) all subsequent periods until activity is complete Disclosures for DOG guaranteed remote: Discount Step 2: Principle Reduction of Note = Periodic Payment - Interest Expense Include in the Disclosure: D : Debt of Others Guaranteed 1) description of exit/disposal activity O: Obligations of commercial banks Bonds 2) each major cost both the amount and reconcile liability balances G : Guarantees of repurchase A/R sold Bond Indenture: document describing bonds Discounts → Losses Premiums → Gains Bonds Issued Between Interest Dates Annuity Sells lower than face value Sells more than face value - regardless of period, issuer pays a 6 month payment on date Annuity Due → Beginning of each period Market Rate > Coupon Rate Market Rate < Coupon Rate accrued interest = Coupon x (months since payment/6) Ordinary Annuity → End of each period Interest Expense > Coupon Paid Interest Expense < Coupon Paid accrued interest is added to the price of the bond Coupon Payment = Face Value x Coupon Rate Interest Expense = Begin CV x Market Rate Troubled Debt Restructuring Basics Bond Issuance Troubled Debt Restructuring -Creditor allows concessions to improve Issued @ Par Selling Price = Face Value || Coupon Rate = Market Rate Transfer of Assets - have FV of assets less than CV of liabilities likelihood of collection with goal of max Price = PV of future principal payment + PV of future periodic interest payments use Market Rate for PV DR: Accounts Payable → book value recovery of assets Issued @ Par for Borrower Issued @ Par for Investor DR: A/D 1) Transfer of Assets DR: Cash Risk Raises, D/E DR: Investments in Bonds CR: PPE → Book Value 2) Transfer of Equity Interest CR: Bonds Payable CR: Cash No Change in total assets CR: Gain on PPE → FV of Assets - BV of Assets 3) Modification of Terms Issued @ Discount Selling Price < Face Value || Coupon Rate < Market Rate CR: Gain on extinguishment of debt → CV of A/P - FV of Assets 4) Combination of the three Issued @ Discount for Borrower treated as a LOSS Transfer of Equity Interest - FMV of stock is less than CV of liabilities DR: Cash → @ PV of Principal with market rate Issued @ Discount for Investor -difference between A/P and FMV of equity is a gain Carrying Value of Debt DR: Discount on B/P → @ discount DR: Investment in Bonds → @ PV with market rate Both Transfer of Assets and Equity Interest extinguish debt Face Value of Debt CR: Bond Payable → @ Face Value CR: Cash Modification of Terms: restrictions in rate/time; does not exist debt + unamortized premium Issued @ Premium Selling Price > Face Value || Coupon Rate > Market Rate - unamortized discount Issued @ Premium for Borrower treated as a GAIN Loan Impairment - issue costs DR: Cash → @ Selling Price with Market Rate Issued @ Premium for Investor Loan is impaired if it's probable that creditors will be unable to collect Carrying Value of Debt CR: Premium on B/P → @ Premium as gain DR: Investment in Bonds → @ PV with market rate CR: Bond Payable → @ Face Value CR: Cash Lease Criteria Lease Commencement Date Bond Amortization 1) contract must depend on an identifiable asset in which the lessor Date at which the underlying asset is ready Income Statement → Net Carrying Value x Effective Interest Rate = Interest Expense does not have a substantive substitution right for use Balance Sheet → Bond Face x Coupon Rate = Interest Payment 2) contract must convey the right to control the use of the asset of Lease Options Premium: Interest Expense < Coupon Paid ||| Discount: Interest Expense > Coupon Paid the lease term to extend → only if reasonably certain to terminate → only if reasonably certain Operating Leases → No OWNES Finance Lease Criteria if control of lessor → up to the lessor -results in a ROU asset and lease liability O - Ownership of asset transfers to lessee by end of term Initial Entry in Leases Subsequent Entries W - Lessee has written option to buy asset with reasonably certain DR: ROU Asset DR: Lease Expense → one expense on the I/S, same each period N - NPV of all lease payments + residual value exceeds 90% of FV CR: Lease liability CR: Cash/Lease Liability E - term of lease represents 75% of the economic life remaining DR: Lease Liability → reducing liability by effective interest rate S - asset is specialized so there is not expected alternative use CR: Accumulated amortization - ROU Asset Finance Leases → OWNES Lease Payment includes: -liability will equal PV of lease payments including commision, legal, consulting R - Required contractual fixed payments Initial Entry in Leases Subsequent Entries E - Exercise option is reasonably assured DR: ROU Asset DR: Interest Expense P - Purchase price at end of lease CR: Lease liability DR: Lease Liability O - Only indexed or rate variable payments CR: Cash/Lease Payable R - Residual guarantees likely to be owned DR: Amortization Expense T - Termination penalties reasonably assured CR: Accumulated amortization - ROU Asset Lease Payments may or may not include N - Non-lease components Lease Payments may not include G - guarantees of lessor debt by lessee O - Other variable lease payments FAR Cheat Sheet Taitel F5: Investments, CFs, and Taxes Reclassification of Debt Categories Investment Basics Valuation of Debt Securities From To Unrealized Holding Gain/Loss Debt Classification Reported At Unrealized G/L Cash Flows Trading Any Other no adjustment needed Trading Security → FV through income statement Trading Fair Value Net Income Operating/Investing Any Other Trading recognized in current earnings Available-for-Sale → FV through OCI AFS Fair Value OCI Investing HTM AFS record in OCI Held-to-Maturity → amortize costs HTM Amortized Cost None Investing AFS HTS amortize g/l from OCI with dis/prem Common Equity Purchase/Sale of Current Assets → operating cash flows Owns book value AFS → unrealized G/L is difference between Selling Price and original cost of the security Unrealized Gains - must reverse any unrealized G/Ls DR: Valuation Account (FV adjustment) Exact Method → Purchase price = book value CR: Unrealized gain on secuity - there is no goodwill/bonus Equity Method → with significant influence (20-50%) Expected Credit Loss - old capital account dollars stay the same 1) dividends on common stock are NOT Income 2) Do no Mark to Market DR: Credit Loss Investment are originally recorded @price paid to acquire CR: Allowance for credit losses Bonus Method → Purchase price < book value DR: Investment in X 1) determine total capital + interest to new partner CR: Cash Consolidation → owns 50% or has control 2) if interest < contribute → bonus to old Investment are adjusted for share of Net Income Key 1) 100% of net assets are recorded @ fair value DR: Cash DR: Investment in X Key 2) subs entire equity is eliminated CR: Old Partner Cap 1 CR: Investee Income Key 3) parent's basis is the acquisition price CR: Old Partner Cap 2 Distribution of Dividends reduce investment account fair value = acquisition price = investment in subsidary CR: New Partner Cap DR: Cash Consolidation Adjustments 3) if interest > contribute → bonus to new CR: Investment in X C - Common Stock are eliminated DR: Cash A - APIC are eliminated DR: Old Partner Cap 1 Eliminating Intercompany Transactions → when consolidating 100% of intercompany; eliminate these R - Retained Earnings are eliminated DR: Old Partner Cap 2 Sales/COGS (Intercompany Inventory) - total amount of COGS/Sales should be eliminated I - Investment in sub is eliminated CR: New Partner Cap DR: Intercompany Sales N - Non Controlling Interest is created DR: Retained Earnings → take the profit out of R/E B - Balance Sheet of sub is adjusted to FV Goodwill Method → Purchase price > book value CR: Intercompany COGS I - Identifiable Intangibles are recorded at FV - compute new "new assets before GW" CR: COGS → when the inventories are sold to outsiders G - Goodwill is required as a plug/ Gain if not there Goodwill = implied valuation - BV of cap accounts CR: Ending Invetory → when invtory is still on hand - GW is allocated on old capital structures Interest (Bonds) - debt is considered retired; eliminate amortization and interest Statement of Cash Flows - gain/loss is difference between price to reacquire debt and book value of debt Operating CFs - from current assets and non interest bearing obligations Partnership Profit and Loss are split based on DR: Bond Payable Investing CFs - CFs non-current assets agreement split. Split evenly if there is no agreement DR: Premium Financing CFs - CFs from debt and equity CR: Investment in Bonds Indirect Method Withdrawal of a Partner CR: Gain on extingishment of bonds Net Income Bonus - bonus is allocated among remaining capital Intercompany Sale of Land - gain/loss needs to be undone done every year after but with R/E + Noncash Expenses/Losses → depreciation, bad debt, discount amort accounts based on P/L ratios DR: Intercompany Gain on Sale of Land -Noncash Income/Gain Goodwill - goodwill is allocated to each capital CR: Land Add: increase in liabs ||| decrease in assets account, then the capital accounts are sold Intercompany Fixed Assets - must eliminate G/L + establish old A/D Subtract: increase in Assets ||| decrease in liabs Liquidation of a Partnership Temporary Tax Differences → will reverse with deferred tax differences Permanent Tax Differences - do not reverse, for current year, no DTL/DTA 1) disposal all assets and collect all cash 1) Book Income First, Tax Income Later → DTL (tax income later) Examples are a) nontaxable b) nondeductible c) special tax allowances 2) pay off all liabilities to creditors - installment sales, contractors accounting, equity method - tax exempt interest income (municipal/state) 3) distribute the remainder based on P/L 2) Tax Income First, Book Income Later → DTA (tax income first) - life insurance proceeds on officers key man policy - prepaids rent, interest, and royalties - life insurance premiums when corp is beneficiary PPE T-Chart (used for cash flows) 3) Book Expense First, Tax Expense Later → DTA (tax deduction later) - certain penalties, fines, bribes, and kickbacks Beginning Balance Depreciation Expense - bad debt, liability/warranty expense, FIFO(tax)/LIFO(book) in falling pricing - nondeductible portion of meal/entertainment expense Acquisitions PPE Sold 4) Tax Expense First, Book Expense Later → DTL (tax deduction first) - dividends-received deduction for corporation Ending Balance - depreciation, prepaid expenses, FIFO(tax)/LIFO(book) in rising pricing -excess percentage depletion over cost depletion Intraperiod Tax Allocation Deferred Tax Items are always reported as non-current Uncertain Tax Position Include in tax allocation: Step 1: Recognition of Tax Benefit I - Income from continuing operations - must have a more than 50% chance of expected outcome of found issue D - Discontinued operations if it fails the 50% test → DR: Tax Expense A - Accounting principle change (retrospective) CR: Other Liabilities Step 2: Measurement of tax benefit Changes in Tax Status - recognize the largest amount of benefit that is greater than 50% Non-Tax to Taxable: recognize any DTs from temps Taxable to non-tax: write off any DTAs and DTLs Investee's Undistributed Earnings (permanent) Owns 0-19% → 50% exclusion Owns 20-80% → 65% exclusion Owns +80% → 100% exclusion FAR Cheat Sheet Taitel F6: Gov and NFP Objectives of Gov Accounting Governmental Accounting Standards Board (GASB) Characteristics of Info in Gov F/S - designed to demonstrate the accountability of each organization - establishes accounting/reporting standards for govs Understandability → could be understood by individuals without a knowledge of accounting principles - used to demonstrate fiscal accountability in their external reporting GASB 76 GAAP Hierarchy Reliability → verifiable, free from bias, represent subject matter any organization with funding or organized with the gov uses it 1) GASB Accounting Standards Board Statements Relevance → reported info will make a difference GASB Concepetual Framework 2) GASB Bulletins, guides, and AICPA cleared info Timeliness → Must be issued in time to have effect on decisions - outlined in GASB Concept statements 1-6 Consistency → accounting principals should not change year over year -establishes objectives of public accountability Modified Accrual Entity-to-Entity Comps → reports should be comparable Accountability - provide financial info to citizen to justify raising resources Revenue is recognized when available (collectible in Interperiod Equity - keep burden on current tax payers period or in 60 days Governmental Funds - current financial resources & Modified Accrual expenditures are recorded when liability is incurred General Fund - account for ordinary operations of a gov unit financed by taxes and other general resources Fund Accounting Basics no long term assets/loans Special Revenue Fund - revenues from specific taxes or earmarks; are restricted or committed measurement focus accounting basis Debt Service Funds - account for. accumulation of resources; are restricted, committed, or assigned Governmental current financial resources Modified Accrual Characteristics of NFPs Capital Project Fund - used for construction of major capital assets; are restricted, committed, or assigned Proprietary economic resources Full Accrual - revenues come from contributions Permanent Fund - resources that are legally restricted to extent that income and not principal is used Fiduciary economic resources Full Accrual - operating purposes does not include profit Gov Fund F/S - ownership interest are unlike business enterprises 1) Balance Sheet Needs of NFP Users NFP Basics 2) Statement of Revenues, Expenditures, and changes in fund balances 1) amount and nature of an organization assets, liabs, and net assets Basis of Accounting: Full Accrual 2) effects of events that change the amount/nature of net assets Standards set by: FASB Proprietary Funds - economic resources & Full Accrual 3) amount/kinds of inflows/outflows of economic resources Internal Service Funds - business accounting with customer who are internal (cost-reimbursement basis) 4) relationship between the inflows and outflows NFP's F/S Enterprise Funds - customers are external; at least 50% are self supported 5) how an organization obtains and spends cash 1) Statement of Financial Position Enterprise Funds are required if any are met: 6) the service efforts of an organization 2) Statement of Activities 1) debt servaced by pledge of fee revenue 3) Statement of CFs 2) law requires fees adequate to recover costs Statement of Cash Flows (NFP) 3) pricing policies are estiablished to produce fees to recover them Operating Activities Statement of Financial Position (NFP) Proprietary Fund F/S - receipts/payments for settlements of lawsuits 1) Assets 1) Statement of Net Position - proceeds from insurance settlements 2) Liabilities 2) Statement of Revenues, Expenses, and changes in net position - refunds from suppliers or to customers 3) Net Assets (Equity) - charitable contributions and disbursements a) Net Assets with Donor Restrictions Fiduciary Funds - economic resources & Full Accrual - reported activity by major class of gross receipts b) Net Assets without Donor Restrictions Custodial Funds - temporary custody and is catch all for most fiduciary funds - receipts of unrestricted resources designated Investment Trust Funds - account for external investment pools - proceeds from sale of financial assets (not for long term purposes) Statement of Activities (NFP) Private Purpose Trust Funds - assets are legally protected that are not investments or pensions - cash payments for suppliers, employees, interest or agency 1) Change in total net assets Pension (+Other Employee Benefit) Funds - resources of employee benefit plan' Investing Activities 2) Change in net assets with donor restrictions Fiduciary Fund F/S - Investments in PPE 3) Change in net assets without donor restrictions 1) Statement of Fiduicary Net Position - Proceeds from sale of works of art 2) Statement ofChanges in Fiduciary Net Position -proceeds from sale of assets that were received restricted to new PPE Contributions Basics Financing Activities - unconditional NFP Revenue Recognition - proceeds from borrowing and repayment of it - must be a transfer of asset Cash Contributions Unconditional Promises (Pledges) - receipts from contributions restricted for PPE - title must pass - recognized as revenues/gains in period received pledge receivable and contribution are recorded at FV - contributions restricted for growing endowment fund - must be voluntary - measured at FV at date of gift when received - must be nonreciprocal Multi-Year Pledge Conditional Promises (Pledges) Recipient Accounting pledge receivable and contribution are recorded at no recognition of pledge receivable or contribution Not Financial Interrelate/Without Variance Power Conditional Contributions net present value when received until condition is met in the future DR: Asset at FV - are not recognized until realized and has Donated Services Record Conditional Promises Advance CR: Refundable Advance Liability a) barriers - generally not recorded unless: (creates an asset) DR: Cash Not Financial Interrelate/With Variance Power b) right of return S - Specialized skills are required CR: Refundable Advance DR: Asset at FV Specific barriers O - otherwise needed by the organization Donated Collected Items (must do it for all or none) CR: Contribution Revenue 1) specified levels of service M - measurable Don't Have to record if all: Financial Interrelated 2) specific outcomes or outputs are required E - easily at Fair Value a) part of collection in: DR: Asset at FV 3) matchings provisions are attached to the gift Donated Materials *only if significant public viewing, exhibition, education or research CR: Contribution Revenue 4) outside events must occur or be resolved DR: Asset/Expense b) collection is cared for, perserved, protected by org Beneficiary Accounting CR: Contribution Revenue c) policy requires proceeds to re-invest or help Not Financial Interrelate/Without Variance Power DR: Receivable CR: Contribution Revenue Not Financial Interrelate/Beneficial Relationship DR: Beneficial Interest CR: Contribution Revenue Financial Interrelated DR: Interest in recipient net assets CR: Change ininterest in reciepents net assets