The Complete CPA Reference E-Book

Nick A. Dauber

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 1002

Veröffentlichungsjahr: 2013

Beschreibung

The newly updated fast-reference problem solver The Complete CPA Desk Reference--the convenient, comprehensive reference professionals have relied on for nearly fifteen years--is now updated in a new Fifth Edition to give today's busy executives and accountants the helpful information they need in a quick-reference format. Packed with practical techniques and rules of thumb for solving day-to-day accounting issues, the new edition helps you quickly pinpoint what to look for, what to watch out for, what to do, and how to do it. In an easy-to-use Q & A format, it covers such useful topics as IFRS standards, internal control over financial reporting financial measures, ratios, and procedures. * Includes complete coverage of the Risk Assessment Auditing Standards and Standards of the PCAOB * Incorporates Accounting Standards Codification (ASC) throughout the book * Adds new chapters on professional ethics and quality controls for CPA firms * Features a new section on International Financial Reporting Standards (IFRS) Packed with checklists, samples, and worked-out solutions to a variety of accounting problems, this reliable reference tool is a powerful companion for the complex, ever-changing world of accounting.

Leseprobe

Contents

Cover

Title Page

Copyright

Dedication

About the Authors

Acknowledgments

Introduction

Part I: Commonly Used Generally Accepted Accounting Principles

CHAPTER 1: Financial Statement Reporting: The Income Statement

Income Statement Format

Comprehensive Income

Extraordinary Items

Nonrecurring Items

Discontinued Operations

Revenue Recognition

Other Revenue Considerations

Multiple Deliverables

Software Revenue Recognition

Research and Development Costs

Advertising Costs

Restructuring Charges

Other Expense Considerations

Earnings per Share

CHAPTER 2: Financial Statement Reporting: The Balance Sheet

Assets

Liabilities

Fair Value Measurements

Fair Value Option for Financial Assets and Financial Liabilities

Stockholders’ Equity

CHAPTER 3: Financial Statement Reporting: Statement of Cash Flows and Other Disclosures

Statement of Cash Flows

Personal Financial Statements

Incorporation of a Business

Partnerships

CHAPTER 4: Accounting and Disclosures

Hierarchy of GAAP

FASB Accounting Standards Codification

Accounting Changes

Prior-Period Adjustments

Disclosure of Accounting Policies

Development-Stage Companies

Troubled Debt Restructuring

Segmental Reporting

Imputing Interest on Notes

Accounting for Futures Contracts

Oil- and Gas-Producing Companies

CHAPTER 5: Key Financial Accounting Areas

Consolidations

Business Combinations

Investments in Securities

Equity Method

Leases

Pension Plans

Other Postretirement Benefits

Income Tax Accounting

Foreign Currency Translation and Transactions

Insurance Contracts

U.S. GAAP versus IFRS

Part II: Analyzing Financial Statements

Chapter 6: Financial Statement Analysis

Introduction

Horizontal and Vertical Analysis

Balance Sheet Analysis

Income Statement Analysis

Bankruptcy Prediction

Liquidation Value

Part III: Managerial Accounting Applications

Chapter 7: Appraising Segmental Performance

The What and Why of Responsibility Accounting

Cost Center Performance and Standard Costs

Flexible Budgets and Performance Reports

Profit Centers and Segmented Reporting

Profit Variance Analysis

How to Measure the Performance of Investment Centers

More on Economic Value Added

Corporate Balanced Scorecard

How to Price Goods and Services Transferred

Alternative Transfer Pricing Schemes

Budgeting and Financial Planning

Chapter 8: Analysis of Projects, Proposals, and Special Situations

Cost–Volume–Profit and Breakeven Analysis

Short-Term, Nonroutine Decisions

Theory of Constraints

Life-Cycle Costs and Target Costing

Activity-Based Costing

Just-in-Time and Total Quality Management

Taguchi Method of Quality Control

Backflush Costing

Environmental Costs and Ecoefficiency

Time Value Fundamentals

Capital Budgeting

MACRS Rule

Chapter 9: Quantitative Applications and Modeling in Accounting

Statistical Analysis and Evaluation

Regression Analysis

Trend Analysis

Regression Statistics

Quantitative Methods for Accounting

Decision Making

Linear Programming and Shadow Prices

Goal Programming and Multiple Goals

Learning Curve

Inventory Planning and Control

Program Evaluation and Review Technique

Project Budgeting and Control Using Earned Value Analysis

Part IV: Auditing, Compiling, and Reviewing Financial Statements

Chapter 10: Auditing Procedures

Risk Assessment Procedures

The Entity and Its Environment

Internal Control

Substantive Procedures

Audit Reports

CHAPTER 11: Compilation, Review, and Other Reporting Services

Compilation of Financial Statements

Review of Financial Statements

Accountant's Consideration of Obtaining an Updating Representation Letter from Management

Documentation in a Review Engagement

Restricting the Use of an Accountant's Compilation or Review Report

Consideration of an Entity's Ability to Continue as a Going Concern

Subsequent Events

Subsequent Discovery of Facts Existing at the Date of the Report

Change in Engagement from Audit or Review to Compilation

Reporting on Prescribed Forms

Communication between Successor and Predecessor Accountants

Compilation of Specified Elements, Accounts, or Items of a Financial Statement

Compilation of Pro Forma Financial Information

Communicating to Management and Others in a Compilation or Review Engagement

Reports on Prospective Financial Statements

Attest Engagements

Examination of an Entity's Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements (SSAE 15)

Integration with the Financial Statement Audit

Reporting on Controls at a Service Organization

Compliance Attestation

Management's Discussion and Analysis

Personal Financial Statements Included in Written Personal Financial Plans

Reporting on Comparative Statements

Special Reports

CHAPTER 12: Auditing Standards

SAS 1—Codification of Auditing Standards and Procedures

SAS 2—Reports on Audited Financial Statements

SAS 3—The Effects of EDP on the Auditor's Study and Evaluation of Internal Control

SAS 4—Quality Control Considerations for a Firm of Independent Auditors

SAS 5—The Meaning of “Present Fairly in Conformity with Generally Accepted Accounting Principles” in the Independent Auditor's Report

SAS 6—Related Party Transactions

SAS 7—Communication between Predecessor and Successor Auditor

SAS 8—Other Information in Documents Containing Audited Financial Statements

SAS 9—The Effect of an Internal Audit Function on the Scope of the Independent Auditor's Examination

SAS 10—Limited Review of Interim Financial Information

SAS 11—Using the Work of a Specialist

SAS 12—Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments

SAS 13—Reports on a Limited Review of Interim Financial Information

SAS 14—Special Reports

SAS 15—Reports on Comparative Financial Statements

SAS 16—The Independent Auditor's Responsibility for the Detection of Errors or Irregularities

SAS 17—Illegal Acts by Clients

SAS 18—Unaudited Replacement Cost Information

SAS 19—Client Representations

SAS 20—Required Communication of Material Weaknesses in Internal Accounting Control

SAS 21—Segment Information

SAS 22—Planning and Supervision

SAS 23—Analytical Review Procedures

SAS 24—Review of Interim Financial Information

SAS 25—The Relationship of Generally Accepted Auditing Standards to Quality Control Standards

SAS 26—Association with Financial Statements

SAS 27—Supplementary Information Required by the Financial Accounting Standards Board

SAS 28—Supplementary Information on the Effects of Changing Prices

SAS 29—Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents

SAS 30—Reporting on Internal Accounting Control

SAS 31—Evidential Matter

SAS 32—Adequacy of Disclosure in Financial Statements

SAS 33—Supplementary Oil and Gas Reserve Information

SAS 34—The Auditor's Considerations When a Question Arises about an Entity's Continued Existence

SAS 35—Special Reports: Applying Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement

SAS 36—Review of Interim Financial Information

SAS 37—Filings under Federal Securities Statutes

SAS 38—Letters for Underwriters

SAS 39—Audit Sampling

SAS 40—Supplementary Mineral Reserve Information

SAS 41—Working Papers

SAS 42—Reporting on Condensed Financial Statements and Selected Financial Data

SAS 43—Omnibus Statement on Auditing Standards

SAS 44—Special-Purpose Reports on Internal Accounting Control at Service Organizations

SAS 45—Omnibus Statement on Auditing Standards—1983

SAS 46—Consideration of Omitted Procedures after the Report Date

SAS 47—Audit Risk and Materiality in Conducting an Audit

SAS 48—The Effects of Computer Processing on the Audit of Financial Statements

SAS 49—Letters for Underwriters

SAS 50—Reports on the Application of Accounting Principles

SAS 51—Reporting on Financial Statements Prepared for Use in Other Countries

SAS 52—Omnibus Statement on Auditing Standards—1987

SAS 53—The Auditor's Responsibility to Detect and Report Errors and Irregularities

SAS 54—Illegal Acts by Clients

SAS 55—Consideration of Internal Control in a Financial Statement Audit

SAS 56—Analytical Procedures

SAS 57—Auditing Accounting Estimates

SAS 58—Reports on Audited Financial Statements

SAS 59—The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern

SAS 60—Communication of Internal Control Related Matters Noted in an Audit

SAS 61—Communication with Audit Committees

SAS 62—Special Reports

SAS 63—Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance

SAS 64—Omnibus Statement on Auditing Standards

SAS 65—The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements

SAS 66—Communication of Matters about Interim Financial Information Filed or to Be Filed with Specified Regulatory Agencies

SAS 67—The Confirmation Process

SAS 68—Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance

SAS 69—The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles in the Independent Auditor's Report

SAS 70—Service Organizations

SAS 71—Interim Financial Information

SAS 72—Letters for Underwriters and Certain Other Requesting Parties

SAS 73—Using the Work of a Specialist

SAS 74—Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance

SAS 75—Engagements to Apply Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement

SAS 76—Amendments to Statement on Auditing Standards No. 72, Letters for Underwriters and Certain Other Requesting Parties

SAS 77—Amendments to Statements on Auditing Standards No. 22, Planning and Supervision; No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern; and No. 62, Special Reports

SAS 78—Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS 55

SAS 79—Amendment to Statement on Auditing Standards No. 58, Reports on Audited Financial Statements

SAS 80—Amendment to Statement on Auditing Standards No. 31, Evidential Matter

SAS 81—Auditing Investments

SAS 82—Consideration of Fraud in a Financial Statement Audit

SAS 83—Establishing an Understanding with the Client

SAS 84—Communications between Predecessor and Successor Accountants

SAS 85—Management Representations

SAS 86—Amendment to Statement on Auditing Standards No. 72, Letters for Underwriters and Certain Other Requesting Parties

SAS 87—Restricting the Use of an Auditor's Report

SAS 88—Service Organizations and Reporting on Consistency

SAS 89—Audit Adjustments

SAS 90—Audit Committee Communications

SAS 91—Federal GAAP Hierarchy

SAS 92—Auditing Derivative Instruments, Hedging Activities, and Investments in Securities

SAS 93—Omnibus Statement on Auditing Standards—2000

SAS 94—The Effect of Information Technology on the Auditor's Consideration of Internal Control in a Financial Statement Audit

SAS 95—Generally Accepted Auditing Standards

SAS 96—Audit Documentation

SAS 97—Amendment to Statement on Auditing Standards No. 50, Reports on the Application of Accounting Principles

SAS 98—Omnibus Statement on Auditing Standards—2002

SAS 99—Consideration of Fraud in a Financial Statement Audit

SAS 100—Interim Financial Information

SAS 101—Auditing Fair Value Measurements and Disclosures

SAS 102—Defining Professional Requirements in Statements on Auditing Standards

SAS 103—Audit Documentation

SAS 104—Amendment to SAS 1, Codification of Auditing Standards and Procedures (“Due Professional Care in the Performance of Work”)

SAS 105—Amendment to SAS 95—Generally Accepted Auditing Standards

SAS 106—Audit Evidence

SAS 107—Audit Risk and Materiality in Conducting an Audit

SAS 108—Planning and Supervision

SAS 109—Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

SAS 110—Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained

SAS 111—Amendment to Statement on Auditing Standards No. 39, Audit Sampling

SAS 112—Communication of Internal Control–Related Matters Identified in an Audit

SAS 113—Omnibus 2006

SAS 114—The Auditor's Communication with Those Charged with Governance

SAS 115—Communicating Internal Control Related Matters Identified in an Audit

SAS 116—Interim Financial Information

SAS 117—Compliance Audits

SAS 118—Other Information in Documents Containing Audited Financial Statements

SAS 119—Supplementary Information in Relation to the Financial Statements as a Whole

SAS 120—Required Supplementary Information

SAS 121—Revised Applicability of Statement on Auditing Standards No. 100, Interim Financial Information

AS 1—References in Auditor's Reports to the Standards of the Public Company Accounting Oversight Board

AS 2—An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements

AS 3—Audit Documentation

AS 4—Reporting on Whether a Previously Reported Material Weakness Continues to Exist

AS 5—An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements

AS 6—Evaluating Consistency of Financial Statements

AS 7—Engagement Quality Review

AS 8—Audit Risk

AS 9—Audit Planning

AS 10—Supervision of the Audit Engagement

AS 11—Consideration of Materiality in Planning and Performing an Audit

AS 12—Identifying and Assessing Risks of Material Misstatements

AS 13—The Auditor's Responses to the Risks of Material Misstatement

AS 14—Evaluating Audit Results

AS 15—Audit Evidence

Chapter 13: Sarbanes-Oxley Act of 2002

Auditor Independence

Partner Rotation

Public Company Accounting Oversight Board

Part V: Taxation

Chapter 14: Tax Research

Sources of Tax Law

The Court System

Part VI: Other Professional Standards

Chapter 15: Consulting Services

Chapter 16: Quality Control

Chapter 17: Code of Professional Conduct

Rule 101—Independence

Rule 102—Integrity and Objectivity

Rule 201—General Standards

Rule 202—Compliance with Standards

Rule 203—Accounting Principles

Rule 301—Confidential Client Information

Rule 302—Contingent Fees

Rule 501—Acts Discreditable

Rule 502—Advertising and Other Forms of Solicitations

Rule 503—Commissions and Referral Fees

Rule 505—Form of Organization and Name

Index

Copyright © 2012 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Fourth edition (The Vest Pocket CPA) published in 2008 by John Wiley & Sons, Inc. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Dauber, Nick A.

The complete CPA reference / Nick A. Dauber, Jae K. Shim, Joel G. Siegel.

p. cm.

Includes bibliographical references and index.

ISBN 978-1-118-11588-6 (cloth); ISBN 978-1-118-22440-3 (ebk);

ISBN 978-1-118-23761-8 (ebk); ISBN 978-1-118-26252-8 (ebk)

1. Accounting--Handbooks, manuals, etc.I. Shim, Jae K.II. Siegel, Joel G.III. Title.

HF5636.D377 2012

657--dc23

2011041537

To Karen J. Dauber Loving wife and dear friend Katie and Michael Dauber Precious children Margie, Marc, and Susan Dauber Loving and wonderful mother, father, and sister and Roberta Siegel Loving wife and colleague Philip E. Levine Dear and precious friend and Chung Shim Dedicated wife

About the Authors

NICK A. DAUBER, MS, CPA, is an accounting practitioner specializing in auditing and taxation. Prior to starting his practice more than 25 years ago, he was an audit and tax manager at a CPA firm.

Mr. Dauber is also an instructor of auditing and taxation at Queens College of the City University of New York. He was the president of Person-Wolinsky CPA Review Courses and has instructed over 100,000 CPA Exam candidates during the past 31 years. Mr. Dauber was the writer of the review course's auditing and taxation material and served as the editor of the law and financial accounting material.

In 1992, Mr. Dauber was named Professor of the Year at Queens College of the City University of New York and was recipient of the Golden Apple Award bestowed by the Golden Key National Honor Society. He has also served as an award-winning lecturer in auditing and taxation for the Foundation for Accounting Education at the New York State Society of CPAs as well as for the American Institute of Certified Public Accountants.

Mr. Dauber has served as a book reviewer for major book publishers and has published articles in many professional accounting journals, including the CPA Journal (New York), Massachusetts CPA, Virginia Accountant Quarterly, and National Public Accountant.

Books by Mr. Dauber include The Complete Guide to Auditing Standards and Other Professional Standards for Accountants, Corporate Controller's Handbook of Financial Management, and Barron's How to Prepare for the CPA Exam. He has also been a contributor to professional books in accounting and auditing.

JAE K. SHIM, PhD, is one of the most prolific accounting and finance experts in the world. He is a professor of accounting and finance at California State University, Long Beach, and CEO of Delta Consulting Company, a financial consulting and training firm. Dr. Shim received his MBA and PhD degrees from the University of California at Berkeley (Haas School of Business). He has been a consultant to commercial and nonprofit organizations for over 30 years.

Dr. Shim has over 50 college and professional books to his credit, including Barron's Accounting Handbook, Barron's Dictionary of Accounting Terms, 2012 GAAP: Handbook of Policies and Procedures, Budgeting Basics and Beyond, 2011–2012 Corporate Controller's Handbook of Financial Management, US Master Finance Guide, Uses and Analysis of Financial Statements, Investment Sourcebook, Dictionary of Real Estate, Dictionary of International Investment Terms, Dictionary of Business Terms, The Vest-Pocket CPA, The Vest-Pocket CFO, and the best-selling Vest-Pocket MBA.

Thirty of his publications have been translated into foreign languages such as Chinese, Spanish, Russian, Polish, Croatian, Italian, Japanese, and Korean. Professor Shim's books have been published by Commerce Clearing House, Barron’s, John Wiley & Sons, McGraw-Hill, Prentice Hall, Penguin Portfolio, Thomson Reuters, Global Publishing, American Management Association (Amacom), and the American Institute of Certified Public Accountants (AICPA).

Dr. Shim has also published numerous articles in professional and academic journals. He was the recipient of the Financial Management Association International's 1982 Credit Research Foundation Award for his article on cash flow forecasting and financial modeling.

Dr. Shim has been frequently quoted by such media as the Los Angeles Times, the Orange County Register, Business Start-Ups, Personal Finance, and Money Radio.

JOEL G. SIEGEL, PhD, CPA, is professor of accounting and finance at Queens College of the City University of New York. He is also an accounting practitioner to various clients.

Dr. Siegel was previously a member of the audit staff of Coopers & Lybrand, CPAs, and a faculty resident with Arthur Andersen, CPAs. He has acted as a consultant in accounting issues to many organizations, including International Telephone & Telegraph, United Technologies, Person-Wolinsky CPA Review Courses, and Citicorp.

Dr. Siegel is the author of 67 books and approximately 300 articles on accounting topics. His books have been published by Prentice Hall, McGraw-Hill, John Wiley & Sons, Barron’s, Richard Irwin, Probus, Macmillan, HarperCollins, International Publishing, Southwestern, Commerce Clearing House, the American Management Association, and the American Institute of Certified Public Accountants.

His work has been published in numerous accounting and financial journals, including Massachusetts CPA, Ohio CPA, Michigan CPA, Virginia Accountant Quarterly, Delaware CPA, the CPA Journal, National Public Accountant, Financial Executive, and the Financial Analysts Journal.

In 1972, he was the recipient of the Outstanding Educator of America Award. He is listed in Who's Who Among Writers and Who's Who in the World. He is the former chairperson of the National Oversight Board.

Acknowledgments

Permission to quote from the Audit and Accounting Manual, Professional Standards, Statements on Auditing Standards, Statements on Standards for Accounting and Review Services, Statements on Standards for Attestation Engagements, and the May 1983 Auditing CPA Exam (Question 5) was received from the American Institute of Certified Public Accountants (AICPA). Copyright by the American Institute of Certified Public Accountants, 1211 Avenue of the Americas, New York, New York 10036.

Permission to reprint Example 1 of Appendix C (pages 44–51) of FASB Statement 95, Statement of Cash Flows, and the example on page 32 of FASB Statement 96, Accounting for Income Taxes, was received from the Financial Accounting Standards Board. Copyright by the Financial Accounting Standards Board, High Ridge Park, Stamford, CT 06905. Reprinted with permission. Copies of the complete document are available from the Financial Accounting Standards Board.

Introduction

The Complete CPA Reference is a useful reference and problem solver for today's busy certified public accountant (CPA). Organized in a handy question-and-answer format, it will help you quickly pinpoint:

What to look forWhat to watch out forWhat to doHow to do it

This valuable book will guide you through the complex, ever-changing world of accounting. You'll find financial measures, ratios, procedures, techniques, and rules of thumb to help you analyze, evaluate, and solve most accounting-related problems as they come up. Throughout, you'll find this book practical, quick, comprehensive, and useful. Carry it with you for constant reference wherever you go—on a business trip, visiting a client's office, meeting corporate executives, and at your office. The content of the book applies to public and private accountants whether employed by large, medium-size, or small firms. The uses for this book are as varied as the topics presented.

This practical reference contains the latest information on proven approaches and techniques for understanding and solving problems of:

Financial accountingFinancial statement analysisFinancial planningManagerial accountingQuantitative analysis and modelingAuditingTaxation

Part I takes you through accounting principles, financial reporting requirements, disclosures, and specialized accounting topics, to keep you up to date with generally accepted accounting principles (GAAP). It points out differences between U.S. GAAP and International Financial Reporting Standards (IFRS) where applicable. FASB Accounting Standards Codification is referenced throughout this part.

Part II examines the financial health and operating performance of a business entity. You'll learn about:

Analytical tools used in appraising a company as a basis for determining the extent of audit testing, financial reliance on testing, and going-concern problemsThe viability of a targeted company for a mergerAchievement of optimal investment return while controlling riskInvestment analysis techniques

Part III presents internal accounting applications to help you:

Evaluate your own company's performance, profitability, effectiveness, efficiency, marketing, and budgeting processes.Highlight problem areas with variance analysis.Move your company toward greater profits through breakeven analysis.Apply quantitative decision modeling.

Guidelines are presented for evaluating proposals, whether they are short-term or long-term, for profit potential and risk-return comparison. Operations research, quantitative, and modeling techniques are clearly presented so that the accountant can use up-to-date approaches in solving business problems.

Part IV relates to audit planning, procedures, and reporting. The chapters address means of gathering audit evidence, evaluating internal control, appraising financial statement items, and preparing audit work papers, and discuss review and compilation services. The practitioner is provided with a handy guide for designing audit plans. There are checklists to assist the auditor in developing work programs for any client environment. Chapter guides the practitioner through the many Statements on Auditing Standards (SASs) and Auditing Standards (ASs) of the Public Company Accounting Oversight Board and exposes him or her to the many types of reports pertinent to various engagements. Given a standard report, the practitioner can prepare modifications with a minimum of effort. The pronouncements relevant to the various reporting situations have been streamlined for easier application. Chapter  discusses the major provisions of the Sarbanes-Oxley Act from the practitioner's point of view.

Part V applies to conducting income tax research.

Part VI addresses other professional standards. Specifically, the practitioner is provided guidance in connection with consulting services, quality control, and the AICPA Code of Professional Conduct.

The Complete CPA Reference provides instant answers to any accounting or finance question you may have.

The content of the book is clear, concise, and current. It is a valuable reference tool with guidelines, checklists, illustrations, step-by-step instructions, practical applications, and how-to's for you, the up-to-date, knowledgeable accountant. Keep this book handy for easy reference and daily use.

PART I

Commonly Used Generally Accepted Accounting Principles

CHAPTER 1

Financial Statement Reporting: The Income Statement

The reporting requirements of the income statement, balance sheet, statement of changes in cash flows, and interim reporting guidelines must be carefully examined. Individuals preparing personal financial statements have to follow certain unique reporting requirements, as do those who are accounting for a partnership. Points to note are:

Income statement preparation involves proper revenue and expense recognition. The income statement format is highlighted in this chapter along with the earnings per share computation.Balance sheet reporting covers accounting requirements for the various types of assets, liabilities, and stockholders’ equity.The statement of cash flows presents cash receipts and cash payments classified according to investing, financing, and operating activities. Disclosure is also provided for certain noncash investment and financial transactions. A reconciliation is provided between reported earnings and cash flow from operations.Interim financial reporting allows for some departures from annual reporting, such as the gross profit method to estimate inventory. The tax provision is based on the effective tax rate expected for the year.Personal financial statements show the worth of the individual. Assets and liabilities are reflected at current value in the order of maturity.

This chapter deals with the reporting requirements on the income statement. Chapter 2 deals with the balance sheet, and Chapter 3 covers the remaining statements.

IFRS Connection

The elements of financial statements are assets, liabilities, equity, income, and expenses.

Presentation of comparative financial statements is mandatory. Accordingly, the first statements must include at least one year of comparative information.

Personal financial statements are not specifically addressed by the International Financial Reporting Standards (IFRS).

Income Statement Format

With respect to the income statement, the certified public accountant (CPA)'s attention is addressed to:

Income statement formatComprehensive incomeExtraordinary itemsNonrecurring itemsDiscontinued operationsRevenue recognition methodsAccounting for research and development costsPresentation of earnings per share

How are items on the income statement arranged?

In the preparation of the income statement, continuing operations are presented before discontinued operations.

Starting with income from continuing operations, the format of the income statement is: