CPA - FAR

Working Capital
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Terms in this set (154)
Working Capital
current assets - current liabilities
Working Capital Turnover
Net sales / Average Working Capital
AR Turnover
Net Sales / Average Net AR
Days Sales In AR
Ending Net AR / (Net Sales / 365)

In other words: this is your ending AR divided by average sales per day
Inventory Turnover
COGS / average Inventory
Days in Inventory
Ending Inventory / (COGS/ 365)

In other words: Ending Inventory divided by the average COGS per day
Accounts Payable Turnover
COGS / Average Accounts Payable
Days of Payables Outstanding
Ending AP / (COGS / 365)

In other words: the ending accounts payable divided by Average COGS Per day
Cash Conversion Cycle
Days sales in AR + Days In Inventory - Days payable outstanding
Operating Cycle
indicates the number of days between acquisition of inventory and realization of cash from selling inventory.

Faster (Shorter) = better
Asset TurnoverNet Sales / average Total assetsProfit MarginNet Income / Net SalesGross Profitnet sales - cost of goods soldGross Profit Margin(Net Sales - COGS) / Net SalesROANet Income / Average Total AssetsDuPont Return on Assets= Profit Margin * Asset Turnover (NI / Net Sales) * (Net Sales / Average Total Assets) Helps explain ROA: Did ROA go up because 1) each sale generated more profit or 2) was it because assets were more effective at generating revenue?ROENI / Average Total EquityReturn on Sales= Income before Interest income/expense and taxes / Net Sales = EBIT / Net SalesOperating Cash Flow (Coverage) RatioCFO / Current LiabilitiesDebt to Equitytotal liabilities/total equityDegree of Financial Leverage (DFL)= 1 + Debt to Equity ratio = Equity multiplierTotal Debt RatioTotal Liabilities / Total AssetsEquity Multiplier= Total Assets / Total Equity = DFLTimes Interest Earned= EBIT / Interest ExpensePrice earnings RatioPrice Per Share / Basic EPSDividend PayoutCash Dividends / Net IncomeRetention Rate= 1 - Dividend Payout ratioFiler TypesLarge Accelerated = $700m + in public equity float Accelerated = $75 - 700m All other filers (small) = Less than $75mForm 11-Kannual report of company's employee benefit plansForm 20-FNon-US 10-KForm 40-FCanadian 10-KForm 6-KSemi-annual Filing by foreign Private issuersForm 8-K"Major Corporate Event" form Ex: corporate asset acquisitions or disposals changes in securities and trading markets changes to accounts or FS changes in corporate governance or managmentForms 3, 4, 5these forms are required to be filed by directors, officers, or beneficial owners of more than 10% of a class of equity securities of a registered companyGAAP Prior Period Presentation RequirementsBS - 2 years IS - 3 SCF - 1IFRS Prior Period Presentation requirementsIFRS requires at least 2 for BS 2 for Statements of comprehensive Income (and NI if using 2 statement approach) 2 for statement of changes in equity 2 for SCFGAAP Commercial Reportable Segment RulesSize Test: A segment must have greater than 10% of the entity's: 1) Combined revenues (including intercompany sales) 2) Reported Profit or loss 3) Total assets (but NOT Liabilities) Reporting sufficiency Test: Reportable segments must constitute at least 75% of the entity's EXTERNAL revenues. If less than 75% of external revenues are presented in the segments deemed reportable by the size test, then add segments until it is over 75% (even if they don't meet the size test) 10701Cost of Landwhen land is purchased for purposes of constructin a building, all costs incurred up to excavation for the new building are considered LAND costs. Include in cost of land: Purchase price brokers fees title and recording fees legal fees draining swamp, clearing trees razing old structures, grading land (reduce by amounts received for selling scrap) 10739Inventory ValuationGAAP requires inventory be stated at COST = price paid to acquire assets including freight in (using FIFO, LIFO, Average cost, etc.)Exceptions to Inventory Cost RulePrecious metals and farm products --> NRV (SP - cost to sell) In the ordinary course of business, when a loss is expected on the sale of goods --> Lower of Cost or Market and Lower of Cost and NRVLower of Cost or NRVIFRS and GAAP (when using FIFO or WA) Present at the lower of Cost or NRV NRV = Net Selling Price - cost to complete and dispose of inventoryLower of Cost or MarketGAAP only (when using LIFO or retail inventory methods) Market value = the middle value of: 1) Replacement Cost = cost to purchase item at valuation date 2) Market Ceiling (NRV) = Net SP - Cost to complete and dispose 3) Market Floor = Market Ceiling - normal profit margin Normal Profit margin = SP * %Intangible ValuationPurchased Intangibles --> capitalize at cost Internally developed --> generally expense as incurred exceptions to expense rule for internally developed intangibles: capitalize: 1) Legal fees and other costs related to the successful defense of the asset 2) Registration costs and consulting fees 3) Design costs (e.g. trademark) 4) Other direct costs to secure the asset If a patent is challenged and defense is UNSUCCESSFUL --> expense entire cost of patent (including what was already capitalized) 10741 IFRS --> capitalize costs after technological feasibility has been establishedAmortization of IntangiblesIntangibles with finite life must be amortized Amortize over the SHORTER of 1) estimated economic life or 2) Remaining legal life Intangibles with indefinite life are not amortized. --Example: trademark, goodwill, and broadcast license.Equity Method InvestmentsAt the time of acquisition (under Equity Method), the difference between the book value of the investees net assets and the price paid is attributable to 2 items: 1) Asset Fair Value differences --> Calculated by taking the Total amount of difference between FV and BV of net assets * % acquired (If assets have a FV of 700,000 and a book value of 600,000, difference = 100,000, multiply this by the % owned) **Amortized over the assets useful life (a direct reduction of income from investee and a reduction of the investment asset) 2) Any remaining difference = Goodwill **NOT separately tested for impairment (but is considered in the total equity method investment impairment) 10111Acquisition GoodwillFull Goodwill (GAAP and maybe IFRS) --> GW = Implied FV of sub - FV of Net assets Implied FV of Sub = (Price Paid / % owned) Partial Goodwill (IFRS) --> GW = Price Paid - (% owned * FV of net assets)Exit and Disposal Costs1. involuntary employee termination benefits (Severance Pay) 2. costs to terminate contract for NON-capital leases 3. other costs associated with exit/disposal activities including consolidating facilities/relocating employees or equipmentCriteria for Recognizing Exit and Disposal Costs as LiabilitiesAn entity's commitment to an exit or disposal plan, by itself, is not enough to record a liability --> footnote only All of the following must be met to recognize: 1) An obligating event has occurred (announced publicly with details included) 2) The event results in a present obligation to transfer assets or to provide services in the future; and 3) the entity has little or no discretion to avoid future transfer of assets or providing services Liability measured at FV (discounted NPV)Asset Retirement Obligation (ARO)An existing legal obligation, whose amount can be reasonably estimated, associated with the retirement of a long-lived asset. Companies should record the ARO at fair value. Dr. ARC (asset) Cr. ARO (liability) Depreciation Expense --> Reduces the CV of the ARC asset every year over the accretion period. At the end of the accretion period, the ARC should be fully depreciated (Dr. Depr Exp // Cr. Accumulated Depr ARC) Accretion (Interest) Expense --> the increase in the ARO liability due to the passage of time = ARO * Accreation rate (Dr. Accretion exp // Cr. ARO) Total ARO expense = Depreciation Expense + Accretion Exp 10228 10714 (see ARO formula)Lease OWNESIf any one of these is met, the lease is a Finance Lease to the lessee and a sales-type lease to the Lessor O - Ownership of underlying asset transfers W - Written option to purchase, reasonably certain N - NPV of all Lease payments and guaranteed residual value (NOT including 3rd party guarantees) >= 90% of underlying assets FV E - Lease term >= 75% of the underlying assets Economic life S - the asset is specialized (no alternative use after lease) Lessee - If none of OWNES is met --> operating lease (still capitalize)Lessor if no OWNESIf BOTH P.C. met --> direct Finance lease to lessor P - PV of sum of lease payments, lessee guaranteed residual AND 3rd party gauranteed residual >= 90% of underlying assets FV C - Collection of these payments is Probable If 1 or neither PC are met --> Operating lease to lessorIFRS Lease Recognition exemptionIFRS allows a lessee to have a recognition and measurement exemption for leases of assets with value less than $5000 GAAP does NOT have this exemption and the OWNES PC criteria is applicable regardless of lease dollar valueGeneral Lease exemption ruleAny lease that is considered short term is NOT recognizedLease PaymentsREPORT N GO R - Required contractual payments minus lease incetives E - Exercise option reasonably certain to be exercised P - Purchase price at the end of the lease when the lessor has the option to require purchase O - Only indexed or rate variable payments (variable payments based on things other than index or rates are NOT included) R - Residual Guarantees T - Termination Penalties reasonably assured N - Nonlease components: amounts allocated to Nonlease components at the option of the lessee Lessee Lease payments will specifically EXCLUDE: "GO" G - Guarantees of lessor debt by lessee O - Other variable lease payments (that are NOT based on rates or indexes)Lease Initial Direct CostsAre included (capitalized) in the valuation of the ROU asset These costs are ONLY incurred as a result of the execution of the lease. Any costs incurred prior to signing the lease are NOT included and they are expensed Ex of expensed costs: lease term negotiations document prep fees credit checksLessee Accounting: Operating1 expense = Lease Expense = Total payments / total periods = same each period * Lease expense = depreciation + interest * Amortization will increase each period because lease liability is decreasing so interest is decreasing * Carrying value of LL and ROU should be the same always (unless there are initial direct costs that are capitalized) Initial JE: Dr. ROU asset Cr. Lease Liability Subsequent JEs: Dr. Lease Expense 18000 Dr. Lease Liability 15221 Cr. Cash 18000 Cr. Acc Amort - ROU asset 15221 *Interest exp = Lease exp 18000 - amortization 15221 = 2779 interest expLessee Accounting: Finance Lease2 expenses = interest and amortization *Amortization expense is constant = ROU asset / Amortization term (see ROU amortization term card for the years you depreciate over) * Interest expense decreases over time as LL goes down Initial JE: Dr. ROU asset Cr. LL Subsequent JEs: Dr. Interest exp 2779 Dr. LL 15221 Cr. Cash 18000 Dr. Amortization exp 16113 Cr. Acc Amortization 16113Lessor Accounting: Sales-TypeOWNES The lessee gains control of the underlying asset, so the Lessor derecognizes the asset *G/L is recognized immediately Initial JE: Dr. Lease Receivable (@ PV of payments) Dr./Cr. Loss/Gain Cr. Asset (remove from BS) Treatment of Initial direct costs: * If Profit/Loss --> expense the direct costs at commencement * No profit/Loss --> defer and recognize (amortize) the direct costs over the lease term G/L = (Residual Asset + Lease receivable) - CV of asset or G/L = Selling price - CV of asset Subsequent JEs: Dr. Cash cr. Interest Income Cr. Lease ReceivableLessor Accounting: Direct Finance LeaseNo OWNES but both PC Lessee does NOT gain control but the Lessor still derecognizes the asset * Any gain is deferred and amortized over the life of the lease. Any Loss is recognized immediately Initial JE: Dr. Lease Receivable Dr. Residual Asset Cr. Fixed asset (taking off books) Initial Direct costs: (same treatment as sales-type) If G/L --> expense at commencement No G/L --> defer and amortize over lease term (capitalize) Interest income = discount rate * (residual asset + lease rec) JE: Dr. Cash Cr. Interest Income cr. Lease ReceivableLessor accounting: Operating LeaseNo OWNES and only 1 or neither PC Lessor Keeps the asset on its own BS and continue to depreciate Lease Income is recognized on a SL basis. NOTE: there is NO interest income in operating leases Initial Direct costs are capitalized and amortized over the lease term Lease Receivable is recorded at UNDISCOUNTED amount Initial JE: Dr. Lease receivable (undiscounted) cr. Unearned lease/rental income Payment JE: Dr. Cash Cr. Rental Income Dr. Unearned lease/rental income Cr. Lease receivableROU asset AmortizationAmortized using SL unless another method is more reflective **Amortization Term: USEFUL life if: OW Ownership transfers or there is a written purchase option that is reasonably certain to be exercised SHORTER of USEFUL life or LEASE TERM if: NES Net PV, Economic life, or specialized asset criteria met USEFUL life if: Bargain Purchase option --> if purchase price is expected to be below the FV of the asset at the exercise date Ex: If I have a 5 year lease worth $120,000 for equipment with an 8 year life and it contains a purchase option to buy at $5000 in 5 years when we expect the asset to be worth $10000. PO > FV at exercise --> amortize over useful life of asset ---> Amortization = (120,000 - 10,000 residual value) / 8 year useful life = $13750 amortization expense (yearly)Amortization of Leasehold ImprovementsAmortize over the SHORTER of lease term of improvement lifeDerivative InstrumentsOFFS --> Options, Forwards, Futures, and Swaps A financial instrument that derives its value from the value of some other instrument and has all of the following characteristics: 1) One or more UNDERLYING and one or more NOTIONAL amount or payment provision (or both) 2) It requires NO INITIAL investment (or one that is smaller than would be required in other types of similar contracts) 3) Its terms require or permit a NET SETTLEMENT or it can be readily settled BY DELIVERY OF THE ASSET (10717)Underlyinga specified price, rate, or other variable (commodity price, index, etc.)notional amountthe amount on which the contract is basedOption Contractgives one party the RIGHT (not obligation) to buy or sell something to the other party at a specified price (strike) The option buyer (holder) must pay a premium to the option seller to enter into the option contract Buy side has an initial cash outflow = premium paid = maximum loss Call Option = right to buy an asset at a set price in the future (you are locked in at a price and are hoping the actual price goes UP, so that you make a profit) Put Option = right to sell someone an asset at a set price (you are locked in to have the option to sell at a certain price, you hope the price goes DOWN so that you make a profit)Futures and Forwardssame thing except that forwards are privately negotiated An agreement between 2 parties to exchange a commodity, currency, or other asset at a specified price on a future date. 1 Party takes long (buy) position --> agrees to buy item in future (profit it price goes UP above strike price) 1 Party takes a short (sell) position --> agrees to sell that item in future (profit if price goes DOWN below strike price) NO INITIAL COST to either partySwap Contracta private agreement between 2 parties to exchange future cash payments common types of swaps are interest rate swaps, currency swaps, equity swaps, and commodity swaps You hope that what you receive in the swap goes UP in value relative to what you are giving upNo Hedge Designation Derivative= Speculating --> G/L go to ISFV HedgeHedging exposure to changes in FV of recognized asset or liability or unrecognized firm commitment(* such as a commitment to purchase equipment) Gains/Losses recognized on IS JE mechanics --> See F6 p. 21 of notesCash Flow HedgeEffective Portion of CF --> OCI Ineffective portion --> IS (See F6 p. 22 for JE mechanics)Functional Currencycurrency of the primary economic environment in which the entity operates Usually the local currency or the reporting currency. For a currency to be functional it must have the following: 1) Use that country's currency 2) Self-contained (do their own banking) 3) Not hyperinflationary (100% in 3 years)foreign Currency translationis the restatement of FS denominated in the funcitonal currency to the reporting currency using the appropriate exchange ratesForeign Currency RemeasurementUse if Sub uses a dysfunctional currency or if the reporting currency is the functional currencyMonetary itemsFixed Assets and liabilities that are fixed or denominated in dollars regardless of changes in specific prices or the general price level Ex: AR, Cash, Other Recievables, AP, Accrued expenses and payablesNonmonetary itemsfluctuate Assets and liabilities that fluctuate in value with inflation and deflation Ex: Inventory, PPE, Marketable securities, intangible assets, deferred revenue and deferred liabilities, common and preferred stockRemeasurement Method1st Step: BS Monetary items @ year-end rate Nonmonetary items @ historical rate 2nd Step: IS Non BS related items @ WA rate BS related items (depr, cogs, amort) @ Historical 2 Plugs (RE and G/L) --> G/L so that NI is at the amount necessary for RE to plug (Look at what RE needs to be in order for BS to balance, the difference between what RE is and what it needs to be is the G/L on remeasurement Currency G/L --> ISTranslation Method1st Step: IS All items @ WA rate 2nd Step: BS Everything accept CS and APIC @ current YE rate Common Stock and APIC @ Historical rate 1 Plug --> Cumulative Translation adjustment --> AOCI (F in Pufier)Foreign Currency Transaction G/LGo on the IS Result from when a company buys from or sells to a foreign company with whom it has no ownership interest and agrees to pay or accept payment in a foreign currency A G/L will result if the exchange rates changes between the time of purchase or sale is contracted and the date the payment is actually made Transactions NOT settled @ BS date are marked to market using the spot rateFC Transaction ExampleOlinto purchased goods on credit for 100,000 pesos on 12/1/1. Olinto paid for the goods on 2/1/2. The exchange rates were as follows (BS date 12/31): 12/1/1 --> $0.10 12/31/1 --> $0.08 2/1/2 --> $0.09 12/1 JE: Dr. Purchases $10,000 (100K pesos *$0.10 rate) Cr. AP 10,000 12/31/1 JE: It now takes .08 to buy 1 peso instead of .10 so we must record the gain on the transaction Dr. AP 2000 (.10 - .08 * 100,000) Cr. FC transaction Gain 2000 (IS) 2/1/2 JE: Exchange rate changed unfavorable - Loss Dr. AP 8000 Dr. FC transaction Loss 1000 Cr. Cash $9000 (.09 * 100,000)Treasury Stock OverviewReduces SE G/L on TS are NEVER recorded on the IS NI will NEVER be Affected by TS RE will NEVER be INCREASED by TS (may be decreased if loss on TS > APIC of TS) Treasury stock shares ARE affected by stock splitsCost Method of Treasury StockG/L is calculated upon Reissue TS is carried at the COST to reacquire. The original issue price and BV do not enter into the accounting APIC-TS is Dr. for losses and Cr. for gains G/L = Reissue price - reacquisition cost Losses on reissue in excess of APIC-TS account are charged as a reduction (Dr.) of REPar or Legal Method of Treasury stockG/L calculated immediately upon repurchase TS is carried at Par Value. At reacquisition, TS is debited for Par. APIC-CS is debited to reverse APIC-CS from original issuance. APIC- TS is dr. (loss) or Cr. (gain) for the plug in the JE If loss on reacquisition exceeds credit balance of APIC-TS, then RE is reduced JE at reacquisition: Dr. TS 2000 (par) Dr. APIC - CS 1000 (shares * original APIC-CS per share) Dr./Cr. APIC -TS (or RE if loss in excess of APIC-TS) plug Cr. Cash (price paid to repurchase shares) 05104 --> reISSUE gains go to APIC-CS, REISSUE losses go to APIC-TS 1st and RE 2ndRetirement of Treasury StockWhen TS is acquired with the "intent" of retiring the stock (regardless of if accomplished), the accounting depends on the reacquisition price. 1) Reacquisition price > par or stated value --> Loss --> charged 1st against APIC-CS from the original issue. If "loss" is in excess of original APIC, then the additional loss is debited to RE 2) Reacquisition price < par or stated value --> gain --> crecit APICLiquidating DividendsOccur when divided to SH > RE Dividends in excess of RE then reduce: 1) APIC (DR.) 2) Common and Preferred Stock (as appropriate) (DR.)Stock DividendsSmall Stock Dividend (<20-25%) --> Reduce RE by FMV (total SE does not change) JE: Dr. RE Cr. CS cr. APIC Large Stock divided (> 20-25%) --> reduce RE by Par (Total SE does not change) Declaration JE: Dr. RE cr. CS distributable (x-E account) Distribution JE: Dr. CS distributable Cr. CSNew Partnership Interest: Exact MethodThese kinds of questions will ask "How much should the new partner contribute in order to have x% interest in the partnership?" and it will not reference goodwill or bonus Exact method --> old partner capital accounts do not change (% may change but generally not asked for) Finger math to calculate contribution required: Need 1/x interes? Take X-1 = denominator. Total of old capital accounts = numerator. Ex: If a partnerhsip already has $100k in the partnerhsip accounts and Andy wants to contribute an amount so that his new interest is 25%, how much must he contribute? Denominator: 25% = 1/4 --> 4-1 = 3 Numerator: $100,000 of old capital accounts Amount to contribute = $100,000 / 3 = $33,333 Check your work: New 33,333 / (Old 100k + New 33,333) = 25%New Partnership Interest: Bonus MethodWhen the purchase price (amount contributed) is more or less than BV of the capital account purchased, bonuses are adjusted between the old and new partner's capital accounts Partnership Assets are NOT affected When new partner pays MORE than the NBV of the capital account --> bonus to existing partners capital accounts When new partner pays LESS than the NBV of the capital account --> Existing partners give up some of their capital and bonus goes to new partner Step 1: Determine total capital = existing capital + new contribution step: 2: Determine New Partners intended capital account = Total capital (1) * intended interest % Step 3: Bonus amount = New Partner Contribution - New partner's capital account (2) 04646New Partnership Interest: Goodwill methodGoodwill is recognized based upon the total value of the partnership IMPLIED by the new partner's contribution step 1: Calculate implied value = New contribution / interest % (i.e. a 35k contribution for a 1/3rd interest implies a value of $105,000) step 2: Calculate Goodwill amount = Implied value - total partner capital accounts (including new partners 35K) (assume old partners A and B had 30k ad 10K respectively and had shared 60/40 P/L) --> GW = 105,000 - (35+30+10) = 30,000 The amount of goodwill implied is recognized along with credits to the OLD partner's capital accounts in accordance with their P/L % JE: Dr. Cash or Contribution 35,000 Dr. Goodwill $30,000 Cr. New Partner Capital $35,000 Cr. A Capital account (60% * 30K) 18,000 Cr. B capital Account ( 40% * 30k) 12,000Partnership DistributionsUnless the partnership agreement provides otherwise, all payments for: Interest on capital accounts (increases capital) Salaries Bonuses Are deducted (added) prior to any distribution in the profit and loss ratio. Such payments are provided in full, even in a loss situation.Withdrawal of a Partner - Bonus MethodIncreases or decreases individual partner's capital accounts based on the bonus amount WITHOUT changing total assets of the partnership Step 1: Revalue the assets to FV Dr. Asset Adjustment Cr. A Cap account Cr. B Cap Account Cr. X Cap account (withdrawing partner) Step 2: Close out withdrawing partner's capital account and assign bonuses to remaining parnters Dr. A Capital account Dr. B Capital Account Dr. X Cap account (zero out) Cr. Cash paid to withdrawing partnerWithdrawal of a Partner - Goodwill MethodIncreases (never decreases) partner's capital accounts AND also changes the total net assets of partnership. Implied goodwill is allocated to ALL partners in accordance with P/L ratios Step 1: Same as Bonus. Revalue assets to reflect FV Dr. Asset Adjustment Cr. A cap account Cr. B cap account Cr. X cap account Step 2: JE to record goodwill to make withdrawing partner's capital account equal payoff Dr. Goodwill Cr. A capital account Cr. B capital account Cr. X cap account ( to get them to exact payout amount) Step 3: record pay off of withdrawing partner Dr. X capital Account Cr. Cashliquidation of a partnershipCreditors are paid first (including partners who are creditors) Partner's capital is paid last Right of offset between partner's loans to an from the partnership and the partner's capital accounts generally exist in liquidationConsideration of Losses upon liquidation of a partnershipAll possible losses must first be accounted for before any distributions to partners are made. General rule is to not distribute any cash until the maximum potential losses have been accounted forLiquidating noncash assetsNoncash assets are converted into cash and used to pay liabilities and the remainder is distributed to partners. Gains and losses may be realized upon liquidation of partnership assets. These gains and losses are charged to the partner's capital accounts based on P/L ratios.Partnership Liquidation - Capital Deficiencywhen one of the partner's has a negative (debit) balance in their capital account. This means that the partnership has a claim against that partner for the amount of the deficiency Right of offset --> if the partner with the deficiency has a loan to the partnership, that loan may offset the deficiency Remaining deficiency --> remaining partners must absorb the deficiency according to their respective (remaining) profit and loss ratios. (So if partner B has a capital deficiency of 3200 and a ratio of 20% and Partner A, C, and D have ratios of 40, 15, 25, then the amount of deficiency allocated to each partner = $3200 * %/80%) Partners with advances that do not have a deficiency are not paid off until the deficiency has been accounted for. SEE TBS-002124Commercial CFOCash from customers Interest received and paid Dividends received cash from sale or purchase of Trading securities Cash paid to suppliers and employees Income taxes paid Other operating cash receipts and paymetsCommercial CFIMaking loans to other entities purchase or sale of TS (if noncurrent), AFS, and HTM securities Purchase or sale of PPE Equity method investment (shown net of cash acquired) 10731Commercial CFF(change in our OWN debt and our OWN equity) payment of dividends Principle payment on debt Purchase or sale of treasury stock Principle payment on capital leases Issuing our own debt or our ow equity 10698NFP AccountingUses Full Accrual Basis of Accounting Note: Some cash outlays will not fall into the program or support services expense categories. Cash outlays for capital assets are capitalized similar to commercial accounting (10471) Ex of capitalized costs: Renovations or upgrades to facilitiesNot-For-Profit Financial Statements1) Statement of Financial Position Assets Liabilities Net Assets (residual interest) Net assets with donor restrictions Net Assets Without Donor restrictions 2) Statement of Activities 3) Statement of cash flows (using either method)PledgesUnconditional Pledges are revenue when pledge is made and recorded as contribution support revenue Conditional pledges are NOT recognized until the conditions are substantially met. Good faith deposits that accompany a conditional pledge are accounted for as a refundable advance (liability) Multiyear pledges --> recorded at the NPV on pledge date. The revenue in the current period is the difference between the previously recorded PV and the current amount(?). Future amounts = donor restricted (time) revenues Allowance for uncollectible pledges --> there is no BDE or equivalent expense, instead, the pledge is recorded net of any estimated uncollectible amount (Dr. rev credit pledge) 10441Donated Services(SOME) = contribution at FV NFP usually do NOT recognize donated services because they are difficult to value but they will record as contribution and expense, the FV of services donated that either: 1) Create or enhance a nonfinancial asset (PPE, Inventory); or 2) the services require Specialized skill that the provider possess and would Otherwise have been purchased by the NFP and which is Measurable Easily (SOME) (I.e. attorny, doctors, accountants, etc.) Services donated that qualify for recognition: Dr. Expense or asset Cr. Contribution without donor restrictionsDonated Itemsrevenue at FV Not recorded if the material merely pass through to an ultimate beneficiary (like clothing at a goodwill) (unless the amounts are substantial) When donated items that were recorded are sold at greater than FV, the "gain" (amount in excess of FV) is considered an additional contribution *No asset or contribution revenue will be recognized if the contributed items are subject to major uncertainties regarding their value and have no alternative use 10220FundraisingWhen a NFP offers premiums (calanders, coffee mugs, bags, etc.) to donors as part of fundraising campaigns, the cost of the premiums are fundraising expenses May see a question asking for the amounts to be recognized as contributions from a fundraising appeal. Contribution revenue = total contributions received - FV of premiums given ***The above sentence may be wrong: MCQ-10470 --> Contribution revenue will be displayed at the gross amount received and the cost of the premiums will be displayed as fundraising expenses (the revenues are NOT net)Specific NFP revenue questionsCompute Gross revenue from tuition and fees: Gross Rev = Assessed tuition and fees - cancelled classes and tuition refunds Scholarships, tuition waivers, and similar reductions are considered expenditures or separate allowances reducing revenueFinancially Interrelated Organizationsorgs related by BOTH of the following characteristics: 1) One org has the ability to influence the operating and financial decisions of the other; and 2) One org has an ongoing economic interest in the otherVariance powerThe unilateral power of an organization to redirect donated assets to a beneficiary different from the third party initially indicated by the donor.Recipient Accounting: Not Financially Interrelated and without variance powerRecipient is merely holding the asset for the beneficiary, has no benefit or power to redirect--> record a liability at FV Dr. asset received Cr. Refundable Advance LiabilityRecipient Accounting: Not Financially Interrelated but WITH variance powerhas no financial benefit but has power to redirect --> recognize a contribution when asset received an an expense when it is distributed to the beneficiary Dr. Asset cr. Contribution revenueRecipient Accounting: Financially InterrelatedRecipient has benefit --> record contribution when received and an expense when distributed (same as not interrelated but with variance power) Dr. Asset Cr. Contribution revenueBeneficiary accounting-specified beneficiaries recognize their rights to assets held by others (recipient) unless recipient is explicitly granted variance power. When a beneficiary recognizes their right to assets they will Dr. Receivable and Cr. one of the following: 1) Contribution Revenue 2) Beneficial Interest 3) Change in interest in the net assets of the recipient 10501Beneficiary accounting: No variance power or financial interrelationThe beneficiary recognizes a receivable and contribution revenue consistent with the treatment of other unconditional promises to give Dr. Receivable cr. Contribution revenueBeneficiary Accounting: No financial interrelation, beneficial interestBeneficiaries will recognize a beneficial interest in an unconditional right to receive specified cash flows from a pool of assets as contribution revenue, or when donations held by the recipient are nonfinancial Revenue at FV dr. Beneficial interest (Asset with donor restrictions) Cr. contribution revenue 10222 - irrevocable trust established for the beneficiaryBeneficiary Accounting: Financially InterrelatedBeneficiaries recognize a change in their interest in the net assets of the recipient when the orgs are financially interrelated. Dr. Interest in recipient net assets cr. Change in interest in recipient net assets (equity account)Governmental Fund: Balance Sheet(Current assets + deferred outflow of resources) = (Current Liabilities + deferred inflows of resources) + fund balanceGovernmental Funds: statement of Revenues, expenditures, and changes in fund balanceRevenues - Expenditures +/- other financing sources and uses = Net Change in fund balanceProprietary Fund: Statement of Net Position(All Assets + Deferred Outflows) - (All liabilities + deferred inflows) = Net Position (*NOT fund balance)Proprietary Fund: Statement of Revenues, Expenses, and Changes in Fund Net PositionOperating Revenue - Operating Expenses +/- nonoperating revenues and expenses = Change in Net positionFiduciary Funds: Statement of Fiduciary Net Position(All Assets + deferred outflows of resources) - (All liabilities + Deferred inflows of resources) = Net PositionFiduciary Funds: Statement of Changes in Fiduciary Net PositionAdditions - Deductions = Change in net positionGovernmental Fund AccountingBAE BAE --> Book Budget, Activity, and Encumbrances Close Book, Activity, and EncumbrancesEncumbrance accountingPurchase orders Dr. Encumbrance Cr Budgetary control Reverse JE when invoice and goods are received (book supplies expenditure and payable separately (Activity)) Any unused purchase order at the end of the period should be accounted for as follows: Dr. Unassigned fund balance cr. Committed or Assigned Fund Balance (restricts cash available for spending) NOT used in Debt Service fund or permanent fund (used in Capital projects, General fund, and special rev?)Sources of Governmental ResourcesRevenues: Taxes - income and sales Taxes - property and real estate Fines and penalties Licenses and permits Other financing sources Debt proceeds Interfund transfersBudgetary AccountingThe difference between estimated revenues and appropriations is plugged to an account called "budgetary control" which is the budgetary "equity" account Note: budgetary entries are posted to the opposite side of the ledger as normal entries BOY Budget Entry: Dr. Estimated Rev control 2,000,000 Cr. Budgetary Control (surplus) 50,000 cr. Appropriations Control 1,950,000 EOY entries to close out budget use the same numbers + or - any budget amendments made throughout the year EOY Entry (assuming no amendments): Dr. Appropriations control 1,950,000 Dr. Budgetary control 50,000 cr. Estimated Revenue Control 2,000,000 *budgetary accounts and actual activity are closed out separately 10468Governmental Revenue RecognitionAll revenues are subject to timing requirements --> can be first recognized in the period in which resources must be used or when use may begin Revenues are recognized when MEASURABLE and AVAILABLE. Revenues are accrued when earned. Revenues must not only be earned but also collected generally within 60 days of year end for recognition in governmental fund FSFund Balance (GRaSPP)Fund balance is "equity" on the BS for governmental funds. Fund balance = (CA + deferred outflows) - (CL + deferred inflows) Presented in order of limitation of use on BS --> NU CAR 1) Nonspendable fund balance --> current assets that cannot be spent (prepaid expenditures and inventories, etc.) 2) Restricted Fund Balance --> resources associated with assets restricted by EXTERNAL authorities (legislation, grantors, creditors, etc.) 3) Committed fund balance --> resolutions by a city commission, encumbered appropriations (government has set aside itself) 4) Assigned --> fund resources associated with assets that the government intends to obligate but has NOT formally committed yet. Assignments are not possible if unassigned fund balance is negative 5) Unassigned fund balance --> fund balance associated with spendable assets that are neither restricted, committed, or assigned. Unassigned fund balance = residual equity of general fund. Only the general fund should have a positive unassigned fund balanceNet Position (SE and Government Wide)There are 3 categories to Net Position (RUN) 1) Net Investment in capital Assets = capital assets reduced by accumulated depreciation and by outstanding debt incurred to acquire, construct, or improve those assets 2) Restricted (externally restricted) --> restricted assets and deferred outflows reduced by related liabilities and deferred inflows. If this is negative, present as zero and net negative amount should reduce unrestricted net position 3) Unrestricted --> the net amount of the assets plus deferred outflows less liabilities plus deferred inflows that are NOT included in the determination of 1) or 2)Pass Key: The rule of thumb for use of the correct fund for grants:Monitoring (administrative involvement) --> special revenue fund Non-monitoring (No administrative involvement)--> custodial funds Capital grants --> Capital projects fundPass key: where to account for public- restricted (for the benefit of the public) resourcesFUND AVAILABLE FOR SPENDING Special Rev fund Principal and interest Permanent fund Interest OnlyPresentation of Items in Proprietary Funds Statement of Revenues, expenses, and change in net positionINCASET Income (operating) Nonoperating income and expense Capital contributions and Additions to endowments Special Items (unusual or Infrequent, mgmt control) Extraordinary Items (Both unusual and infrequent) TransfersAccounting Governed by Municipal Solid Waste Landfill (MSWLF) Closure and Postclosure Care Costs (GASB 18)Costs of equipment expected to be installed that is exclusively used for MSWLF, gas monitoring systems, and costs of final covering should be estimated and disclosed. Purchases of equipment anticipated by the liability accrual reduce the liability and do NOT increase assetsSCF for Enterprise Funds4 Sections 1) CFO 2) Noncapital Financing 3) Capital Financing 4) CFI Reconciliation of Operating Income (loss) to Net cash provided (used) by operating activitiesFiduciary FundsAre used to account for the assets held by a government in a trustee or agency capacity for the benefit of others, whether individuals, private organizations, or other governmental units. These are not used to report assets held for the benefit of a government's own programs or activities.Fiduciary Fund CharacteristicsMust have ALL of the following: 1) Assets are controlled by the government (held and ahs the ability to direct use of the asset) 2) Assets associated with the activity are not derived from revenues that are generated by the government itself (not "own-source" revenue) 3) The government does NOT have administrative involvement (monitoring and determination of eligible expenses) with the assets or direct financial involvement (mathcing) with the assetsCustodial Fundgenerally collects cash to be held temporarily for an authorized recipient to whom it will later be disbursed *If a governmental unit has monitoring or similar adminstrative involvement --> use special revenue fund instead of custodial *Only use custodial fund if the governmental unit is not otherwise obligated for the debt (not primarily or potentially liable). If the government is liabile --> use capital projects or debt service fundsPass Key - to determine the correct fund to account for RESTRICTED fundsFUND USE SPENDABLE Special Rev Public Interest & Principal Permanent Public Interest only Private Purpose Private Interest &/or PrincipalPass Key - What Kind of Finds require SCFProprietary funds onlyRequired Reporting Components for Government Wide1) MD&A 2) Government wide FS Statement of Net position statement of Activities NO SCF 3) Fund FS (major funds shown individually, nonmajor in aggregate) a) GRaSPP BS Statement of rev, expenditures, & change in fund balance b) SE Statement of net position Statement of Rev, exp, and change in net position SCF c) CIPPOE Statement of Fiduciary Net position Statement of changes fiduciary net position 4) Notes To FS 5) Required Supplementary Information Pension disclosures Budget Disclosures Infrastructure disclosures Etc. 6) Other Supplementary Information (optional) Nonmajor fund statments Variance between orignial and amended budgets Variance between final amended and actualCriteria for discrete presentation of NFPLegally separate, tax-exempt orgs should be reproted as discrete (separate column) if all the following are met: 1) resources held by the NFP org are for the near exclusive use of the primary government--> benefit standard 2) the primary gov has access to a majority of the resources held by the tax-exempt org --> access standard 3) Resources held by the tax-exempt org are significant to the primary gov --> significance standardGovernment-Wide Financial StatementsThe statement of net position (with RUN net position) the statement of activities (using net program cost format) Does not include Fiduciary Funds since the government does not have control or responsibility of Internal service funds are generally included in the Governmental categoryGovernment Wide: Capitalization and DepreciationRequired approach --> all assets meeting capitalization requirements should be recorded and depreciated Modified Approach --> provides that for certain infrastructure assets that are a part of a network or subsystem of a network (called eligible infrastructure assets) are NOT required to be depreciated if the meet the following 2 criteria: 1) The government discloses in supplementary information, the up-to-date inventory of eligible infrastructure assets and summarizes a conditions assessment of the assets and estimates costs necessary to maintain and preserve the assets 2) Documentation of the assets is provided and assessments are performed at least every 3 years *These eligible infrastructure expenditures are reported as expense (NOT capitalized) EXCEPT for outlays that result in additions or improvements (these would be capitalized)Government Wide Statement of ActivitiesUses the Net Program Cost format --> total costs by function are compared to program revenue associated with each function to arrive at the net cost that must be defrayed by tax revenues The net expense or revenue for each function or program is classified into 1 of 3 categories: 1) Primary government governmental activities (GRaSPP + S) 2) Primary Government Business-type activities (E only) 3) Component units (rescue squad and board of education (discretely presented NFPs and component units))Program Revenue Category TypeProgram revenue = revenue directly associated with the function program "SOC" Charges for SERVICES (included fines and forfeitures) OPERATING grants and contributions restricted for use in a particular program CAPITAL grants and contributions restricted for use in a particular programGeneral RevenuesGeneral Revenue = nonexchange revenues in support of governmental activities Ex: taxes for improvements to road other taxes levied "for a specific purpose" Interest revenues Proceeds from sale of capital assets (even if they say for a specific function)Eliminations and Component PresentationGenerally, internal transactions that artificially double count activity should be eliminated in Government wide presentation. Note the following general rules: 1) Interfund services should NOT be eliminated (utilities, etc.) 2) Internal activity associated with BLENDED component units should be classified as interfund activity (and therefore eliminated??) 3) Internal activity associated with DISCRETELY presented component units should be reported as external transactions (NOT eliminated??) 10496Governmental Reporting EntityGenerally the financial reporting entity consists of 1) Primary government and 2) Component Units 1) Primary Governments: Include general purpose governmental units and certain special purpose governmental units Special purpose governmental unit --> e.g. hospital authority, school district, landfill and other governmental units that have a single or special purpose that meet the SELF criteria: SE = Separately Elected (governing body) L = Legally separate F = Fiscally independent of other state and local governments Decision tree: 1) Does the enityt meet the SELF test? Yes = Primary Government 2) If 1 is no --> component unit, but must determine how to present. Is the board of the primary gov the same as the board to the component unit? Does the component unit service the primary gov exclusively? Does the organization not qualify as a legal entity? If Yes to any of these questions --> Blended (rare) If No to ally --> discreteMajor Fund RulesFund FS are required to be presented by major fund rather than by fund type. A fund qualifies as major if it Is 10% or more of its fund types 1) total rev 2) expenditures/expenses 3) assets and deferred outflows or 4) liabilities and deferred inflows AND the fund is 5% or more of the same 4 categories as compared to the Governmental AND Enterprise funds *The general fund will ALWAYS be a major fund *Internal service funds will NOT be considered in the evaluation of major and nonmajor fundsProprietary Fund SCF differencesSimilar to commercial SCF except for the following differences: 1) Direct method is REQUIRED 2) Reconciliation of Operating income (not NI) to CFO (*Note that the rec does not reverse gains and losses because gains and losses are Nonoperating and are not included in operating income 3) There are 4 categories instead of 3 4) Order: CFO --> Capital financning --> noncapital financing --> CFI 5) Interest income/cash receipts are reported in investing (instead of operating) 6) Interest expense/ cash payments are either capital or noncapital financing (instead of operating) 7) Capital asset purchases are reported as capital financing instead of investingProprietary Fund SCF classifications1) CFO Cash from sale of goods or services Cash to suppliers and employees Cash inflows from interfund reimbursements and exchanges including payments in lieu of taxes Other cash transactions not meeting other categories 2) Capital and Related Financing Cash flows from issuing debt associated with capital assets (including interest expense) Cash inflows form capitla grants Cash contributions associated with capital assets Cash activity related to special assessments associated with capital assets 3) Noncapital financing activities Cash flows from issuing debt for noncapital purposes (including interest) Cash from operating grants, operating subsidies, and operating transfers Cash received from property taxes (not restricted for capital use) 4) CFI Cash inflows and outflows associated with loans to others (including interest income) Cash inflows and outflows associated with equity transactions) 10724Reconciliation of Governmental Fund FS to Government-wide FS"CAN CPAS RIDE or SIT" CAN SIT --> for statement of Net position reconciliation CPAS RIDE or SIT --> for statement of activities rec Reconciliation of each statement consists of 3 general entries: 1) Adjustments for the difference in measurement focus 2) Adjustment for differences in basis of accounting 3) Consolidation EntriesStatement of Net Position Reconciliation*CAN SIT* Total fund balance in governmental fund BS is reconciled to Net position from governmental activities presented in the Government-wide statement of net position 1) Adjustments for the difference in measurement focus: CAN + CAPITAL (non-current) assets - Related ACCUMULATED Depr. - NON-current Liabilities 2) Adjustments for differences in basis of accounting *Eliminate deferred inflows associated with recognized revenues (amount of eliminated deferred inflows added) (*accrue (ADD) revenue that is MEASURABLE but UNAVAILABLE (>60 days) -Subtract accrued liability for interest payable 3) Consolidation Entries: SIT + internal SERVICE fund net position *Include INTERFUND TRANSFERS 10497 --> the December Revenues would have been measurable but UNAVAILABLE and therefore not accrued under modified accrual accounting. But in the reconciliation to government-wide FS, we apply Full accrual accounting, December Revenue would be Accrued and therefore ADDED to Net PositionReconciliation of Governmental Funds statement of revenues, expenditures, and changes in fund balance to the Government-wide statement of activitiesCPAS RIDE or SIT 1) Adjustments for the difference in measurement focus: CPAS + CAPITAL outlay expenditures (not an expense) + PRINCIPAL payment on debt (not an expense) - net book value of ASSETS disposed uring period - debt proceeds shown as other financing SOURCES 2) Adjustments for the difference in basis of Accounting: RIDE + recognized REVENUES that are measurable but unavailable Accrue INTEREST expense Record DEPRECIATION EXPENSE 3) Consolidation Entries: SIT + Internal SERVICE fund change in net position include INTERFUND TRANSFERS 10498General Notes on ReconciliationNet Position is a Credit balance account (increases with a credit) So when you need to account for capital assets Dr. Capital asset Cr. Net position