Comprehensive Accounting Concepts: A Chapter-by-Chapter Guide

Posted on Jul 24, 2024 in Economy

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

  1. Identify Account
  2. Determine Debit or Credit (DEAD CLIC)
  3. Journal Entry & Post to T-account
  4. Unadjusted Trial Balance
  5. Adjustments
  6. Adjusted Trial Balance
  7. Financial Statements
  8. Closing Entries
  9. 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

  1. Summary of Significant Accounting Policies: Disclose policies, procedures, management judgment (not following GAAP)
  2. 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
  3. Fair Value Hierarchy:
    • Less judgment: Level 1: Identical asset/liability
    • Level 2: similar to asset/liability
    • Level 3: Unobservable Outputs. More Judgment
  4. Related Party Transactions: Pre-existing relationship between parties (being influenced by another)
  5. Subsequent Events (Must Disclose)
  6. 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

  1. Identify Contracts: Commercial substance, Approved, Define rights and payment terms, Collection Probable
  2. Identify Performance Obligations: should be distinct & material
  3. 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
  4. Selling Price – Consideration (credits/discounts/rebates) = TP
  5. Allocate TP to Performance Obligations
  6. 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