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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Quick answers to your GAAP questions The Vest Pocket Guide to GAAP is the handy pocket problem-solver that gives today's busy financial executives the GAAP advice they need in a quick-reference format. Whether in public practice or private industry, professionals will always have this reliable reference tool at their fingertips because it easily goes anywhere-to a client's office, on a business trip, or to an important lunch meeting. * Provides succinct answers to common GAAP questions * Easy-to-use Q & A format offers hundreds of explanations supported by a multitude of examples, tables, charts, and ratios * Other titles by Bragg: Running an Effective Investor Relations Department: A Comprehensive Guide, Accounting Best Practices, Sixth Edition, and Just-in-Time Accounting, Third Edition Convenient and comprehensive, The Vest Pocket Guide to GAAP is the handy reference you'll turn to again and again for quick answers to your GAAP questions.
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Seitenzahl: 535
Veröffentlichungsjahr: 2010
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Copyright © 2011 by John Wiley & Sons. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
ISBN 978-0-470-76782-5; 978-0-470-94630-5 (ebk); 978-0-470-94631-2 (ebk); 978-0-470-94632-6 (ebk)
Contents
Cover
Title Page
Copyright
About the Author
What This Book Will Do for You
Free On-Line Resources by Steve Bragg
Part I The Financial Statements
Chapter 1 Financial Statements Presentation
What is Profit or Loss?
What is Other Comprehensive Income?
What Information is Included in a Complete Set of Financial Statements?
What Line Items Do I Include in the Balance Sheet?
When Do I Present Information as Current or Non-Current?
Can I Offset Information in the Balance Sheet?
What Line Items Do I Include in the Income Statement?
How Do I Account for Extraordinary Items?
What Line Items Do I Include in the Statement of Changes in Equity?
What are the Main Components of the Statement of Cash Flows?
What are the Direct and Indirect Method Layouts for the Statement of Cash Flows?
What Line Items Should I Include in the Statement of Cash Flows?
When Should I Report Discontinued Operations?
What Information Should I Disclose about Discontinued Operations?
What Accounting Policies Should I Disclose with the Financial Statements?
What Information About Risks and Uncertainties Should I Disclose in the Financial Statements?
How Frequently Should I Issue Financial Statements?
How Consistent Should the Financial Statement Presentation Be?
How Do I Aggregate Information in the Financial Statements?
Is the Accrual Basis of Accounting Required?
Can I Offset Assets and Liabilities or Revenues and Expenses?
What are Consolidated Financial Statements?
When Must a Parent Include Another Entity in its Financial Statements?
What is the Process for Consolidating Financial Statements?
As of What Date Do I Include the Revenues and Expenses of an Acquired Subsidiary?
What if the Fiscal Year-End of a Parent is Different from that of a Subsidiary?
What Happens to a Consolidation if You Lose Control of a Subsidiary?
What Information Should I Disclose about Consolidated Financial Statements?
Chapter 2 Operating Segments
What is an Operating Segment?
What Type of Entity Must Report about its Operating Segments?
When Can I Aggregate Operating Segments?
What are the Quantitative Thresholds for Segment Reporting?
Is There a Limit to the Number of Reportable Segments?
What Segment-Specific Information Do I Disclose?
What Additional Information Do I Disclose?
What Reconciling Information Do I Disclose?
When Do I Restate Segment Information?
What Information Do I Disclose about Products and Services?
What Information Do I Disclose about Geographical Areas?
What Information Do I Disclose about Major Customers?
Chapter 3 Earnings per Share
What is Common Stock?
What is a Contingent Issuance?
What is Preferred Stock?
What are Options and Warrants?
Who Must Report Earnings per Share Information?
What is Dilution and Anti-Dilution?
What is Basic Earnings per Share?
How Do I Calculate Basic Earnings per Share?
What is Diluted Earnings per Share?
How Do I Calculate Diluted Earnings per Share?
When Should I Make Retrospective Adjustments to Earnings per Share?
How Do I Disclose Earnings per Share Information for Discontinued Items and Extraordinary Items?
How Do I Disclose Earnings per Share for Less-than-Wholly-Owned Subsidiaries?
How Do I Present Earnings per Share?
What Earnings per Share Information Should I Disclose?
Chapter 4 Interim Financial Reporting
What is an Interim Period?
Who Must Issue Interim Financial Reports?
What is Included in an Interim Financial Report?
What Information Should I Include with the Interim Financial Report?
For Which Periods Must I Present Interim Financial Statements?
How Do I Assess Materiality in Interim Periods?
How Consistently Should I Apply Accounting Policies to Interim Periods?
Do I Retrospectively Adjust Interim Financial Statements?
How Do I Account for an Accounting Change in an Interim Period?
Should I Change Revenue Recognition Methodologies for an Interim Period?
Can I Anticipate or Defer Seasonal or Cyclical Revenues?
How Do I Recognize Expenses in Interim Periods?
How Do I Recognize Extraordinary or Unusual Items in Interim Periods?
What if I Liquidate a Last In First Out Layer in an Interim Period?
How Do I Record Inventory Losses from Market Declines?
How Do I Record Standard Cost Variances in an Interim Period?
Is it Acceptable to Use More Estimates When Preparing Interim Financial Statements?
Chapter 5 Related Party Disclosures
What is a Related Party?
Who is “Immediate Family”?
Who is “Management”?
Who is a “Principal Owner”?
What is a Related Party Transaction?
What Related Party Information Should I Disclose?
Chapter 6 Subsequent Events
What is a Subsequent Event?
When Are Financial Statements Available to be Issued?
How Do I Recognize Subsequent Events That Existed at the Balance Sheet Date?
How Do I Recognize Subsequent Events That Did Not Exist at the Balance Sheet Date?
Do I Include Subsequent Events in Reissued Financial Statements?
How Do I Account for Dividends Declared after the Reporting Period?
What Information about Subsequent Events Should I Disclose?
Part II Assets, Liabilities, and Equity
Chapter 7 Receivables
What Types of Receivables Should I Classify as Current Assets?
How Do I Measure Losses from Uncollectible Receivables?
When Do I Record Receivable Prepayment Penalties?
When Do I Record Receivable Delinquency Fees?
What is a Factoring Arrangement?
How Do I Account for Credit Losses for Loans and Trade Receivables?
When Do I Record Interest Income on a Receivable?
What is the Recorded Value of a Note that I Exchange for Cash?
What is the Recorded Value of a Note that I Exchange for Property?
What is the Recorded Value of a Note Whose Terms Vary from the Market?
How Do I Measure a Loan Impairment?
How Do I Subsequently Measure Loan Impairment?
How Do I Present a Loss Allowance on the Balance Sheet?
What Information Should I Disclose about Loans and Trade Receivables?
How Do I Account for a Payment Under a Troubled Debt Restructuring?
What Troubled Debt Restructuring Information Should I Disclose?
Chapter 8 Investments–Debt and Equity Securities
What is a Debt Security?
What is an Equity Security?
How Do I Classify an Investment?
When Can I Use the Held-to-Maturity Investment Designation?
What Action Requires a Reclassification of Held-to-Maturity Investments?
How Frequently Should I Reassess Investment Classifications?
How Do I Account for an Investment Reclassification Between Categories?
How Do I Measure Restricted Stock?
How Do I Measure an Equity Security Previously Recorded Under the Equity Method?
How Do I Subsequently Account for Trading Securities?
How Do I Subsequently Account for Available-for-Sale Securities?
How Do I Subsequently Account for Held-to-Maturity Securities?
How Do I Account for the Impairment of an Investment?
How Do I Account for an Impairment Recovery?
How Do I Measure an Equity Security that Becomes Marketable?
How Do I Account for the Sale of Trading Securities?
How Do I Account for the Sale of Available-for-Sale Securities?
How Do I Account for Dividends and Interest Income from Investments?
How Do I Present Investment Information in the Financial Statements?
How Do I Disclose Additional Information about Investments?
Chapter 9 Investments–Equity Method and Cost Method
What is the Equity Method of Accounting?
How Frequently Should I Evaluate the Need for Equity Method Accounting?
How Do I Initially Measure an Investment in an Investee's Equity?
How Do I Subsequently Measure an Investment under the Equity Method?
How Do I Account for a Change to the Equity Method?
How Do I Account for a Change from the Equity Method?
How Do I Account for the Investor's Share of an Investee's Losses under the Equity Method?
How Do I Account for an Other than Temporary Decrease in Investment Value?
How Do I Report the Results of an Equity Method Investment?
What Information Should I Disclose about Equity Method Investments?
What is the Cost Method of Accounting?
What Information Should I Disclose about Cost Method Investments?
Chapter 10 Inventory
What is the Definition of Inventory?
What Costs Can I Include in Inventory?
What Costs Can I Include in Service Inventory?
What Methods Are Acceptable for Measuring Inventory?
How Do I Write Down the Value of Inventory?
Should I Write Down Losses on Purchase Commitments?
When Do I Write Down the Value of Inventory?
Can I Reverse an Inventory Write-Down?
When Do I Charge Inventory Costs to Expense?
When Can I State Inventories above Cost?
What Inventory Information Do I Disclose?
Chapter 11 Other Assets and Deferred Costs
What is a Prepaid Expense?
What is a Preproduction Cost?
How Do I Account for Preproduction Costs?
What is Direct-Response Advertising?
When Can I Capitalize Advertising Expenses?
Which Direct-Response Advertising Costs Can I Capitalize?
How Do I Amortize Capitalized Advertising Costs?
Over What Period Should I Amortize Advertising Costs?
Can I Change the Accounting if There is Subsequent Evidence of Advertising Benefits?
How Do I Account for Tangible Assets Used in Multiple Advertising Campaigns?
What Information Should I Disclose About Advertising Assets?
Chapter 12 Property, Plant, and Equipment
What is Property, Plant, and Equipment?
What is an Asset Group?
Can I Accrue for Planned Major Maintenance Activities?
What Costs Do I Include in PP&E?
How Do I Calculate Borrowing Costs to Include in PP&E?
What Costs Do I Not Include in PP&E?
When Do I Stop Accumulating Costs in PP&E?
Over What Time Periods Do I Allocate Depreciation Expense?
What Amount of an Asset Do I Depreciate?
What Depreciation Method Should I Use?
Which Assets Are Not Depreciated?
When is an Asset Classified as Held for Sale?
How Do I Present Assets Classified as Held for Sale?
When Do I Recognize an Impairment Loss on a Fixed Asset?
How Do I Allocate an Impairment Loss to an Asset Group?
How Do I Account for Fixed Assets Held for Sale?
How Do I Account for Fixed Assets that Are to be Abandoned?
When Do I Derecognize an Asset?
What Information Do I Disclose about Property, Plant, and Equipment?
What Information Do I Disclose about Fixed Asset Impairment?
Chapter 13 Intangible Assets
What is Goodwill?
What is a Reporting Unit?
How Do I Assign Goodwill to Reporting Units?
How Frequently Should I Test for Goodwill Impairment?
How Do I Determine Goodwill Impairment?
Should I Test Goodwill Impairment at the Subsidiary Level?
Can I Roll Forward a Fair Value Determination to the Next Year?
Can I Reverse a Goodwill Impairment Loss?
How Do I Account for Goodwill in a Reporting Unit Disposal?
What Goodwill Information Should I Disclose?
What is an Intangible Item?
What is a Class of Intangible Assets?
What is a Defensive Intangible Asset?
How Do I Account for Internally Developed Intangible Assets?
How Do I Initially Measure an Intangible Asset?
How Do I Subsequently Measure an Intangible Asset?
What is the Residual Value of an Intangible Asset?
How Do I Test Intangible Assets for Impairment?
How Do I Account for Acquired Research and Development Intangible Assets?
How Do I Present Intangibles Information in the Financial Statements?
What Information Should I Disclose about Intangible Assets?
What is Internal-Use Software?
What is a Preliminary Project Stage?
How Do I Initially Account for Software Developed or Obtained for Internal Use?
How Do I Amortize Capitalized Internal-Use Software Costs?
Do I Test Capitalized Internal-Use Software for Impairment?
What if I Subsequently Sell Internal-Use Software?
How Do I Account for Software That is Being Replaced?
How Do I Account for Website Development Costs?
Chapter 14 Asset Retirement and Environmental Obligations
What is an Asset Retirement?
What is an Asset Retirement Obligation?
How Do I Initially Account for an Asset Retirement Obligation?
How Do I Subsequently Account for an Asset Retirement Obligation?
How Do I Account for a Conditional Asset Retirement Obligation?
When Do I Account for the Settlement of an Asset Retirement Obligation?
What Information Do I Disclose about Asset Retirement Obligations?
What is a Hazardous Substance?
When Should I Accrue a Liability for an Environmental Remediation Obligation?
Are There Benchmarks When I Should Evaluate Environmental Remediation Obligation Liabilities?
How Do I Initially Account for Environmental Remediation Obligations?
Should I Charge all Environmental Contamination Treatment Costs to Expense?
How Should I Subsequently Account for Environmental Remediation Obligations?
How Do I Account for Recoveries?
How Should I Disclose Environmental Remediation Obligations?
Chapter 15 Contingencies
What is a Contingency?
When Do I Recognize a Loss Contingency?
What Amount Should I Accrue for a Loss Contingency?
Should I Record a Loss Contingency for Uninsured Risks?
Should I Record a Gain Contingency?
When Should I Record a Loss Contingency for Expropriation?
When Should I Record a Loss Contingency for Litigation?
What Information Should I Disclose for a Loss Contingency?
Chapter 16 Debt
What is the Effective Interest Method of Accounting for Debt?
How Should I Classify Debt that Has Covenants?
How Should I Classify Debt that Has Subjective Acceleration Clauses?
How Should I Classify Debt that is Due on Demand?
How Should I Classify Short-Term Debt that is To Be Refinanced with Long-Term Debt?
What Information Should I Disclose about Debt?
What Are Detachable Warrants?
How Do I Account for Detachable Warrants?
What is a Convertible Security?
How Do I Account for a Convertible Security?
Do Issuance Costs Affect the Calculation of Intrinsic Value?
How Do I Account for Contingently Adjustable Conversion Ratios?
How Do I Account for Unamortized Discounts Upon the Conversion of a Convertible Security?
How Do I Account for Interest Forfeited as Part of a Debt Conversion?
How Do I Account for an Inducement Offer?
What is a Product Financing Arrangement?
How Do I Account for Product Financing Arrangements?
How Do I Account for an Early Debt Extinguishment?
How Do I Account for Line of Credit or Revolving Debt Changes?
What is a Troubled Debt Restructuring?
How Do I Account for Troubled Debt Restructurings?
What Information Should I Disclose about a Troubled Debt Restructuring?
Chapter 17 Equity
What is Equity?
What is Additional Paid-In Capital?
What is Stock?
What Are Retained Earnings?
Can I Appropriate Retained Earnings?
What is a Stock Split?
What is a Stock Dividend?
How Do I Account for a Stock Dividend?
What is Treasury Stock?
How Do I Account for Treasury Stock Using the Cost Method?
How Do I Account for Treasury Stock Using the Constructive Retirement Method?
How Do I Account for an Enforced Stock Buyback?
What is a Stock Subscription?
What is a Share-Based Payment?
What Information Should I Disclose About Equity?
Part III Revenue and Expenses
Chapter 18 Revenue Recognition
What is Revenue?
When Can I Recognize Revenue?
When Can I Recognize Service Revenue?
How Do I Recognize Losses on Service Contracts?
What is the Installment Method?
What is the Cost Recovery Method?
How Do I Account for the Repossession of Goods Under an Installment Sale?
Should I Record Revenue at Gross or at Net?
Should I Record an Out-of-Pocket Expense Reimbursement as Revenue?
Should I Record Shipping and Handling Costs as Revenue?
Should I Reduce Revenue for Any Cash Paid to a Customer?
How Do I Account for Construction Projects?
What Types of Construction Contracts Are There?
What is the Percentage of Completion Method?
What is the Cost-to-Cost Method?
What is the Completed Contract Method?
How Do I Account for a Revised Estimate on a Construction Project?
How Do I Account for a Change Order?
How Do I Account for a Claim?
How Do I Recognize a Project Loss?
How Do I Account for a Multiple-Element Arrangement?
How Do I Record Revenue When a Right of Return Exists?
When Can I Record Initiation Fees as Service Revenue?
How Do I Account for Product Warranty and Maintenance Contracts?
How Do I Record Barter Transactions for Advertising Services?
How Do I Record Revenue Collected for a Third Party?
What Revenue Recognition Information Should I Disclose?
Chapter 19 Employee Benefits and Benefit Plans
What Are Vested Employee Benefits?
What Are Short-Term Employee Benefits?
How Do I Account for Short-Term Employee Benefits?
What is a Compensated Absence?
How Do I Account for a Compensated Absence?
What is a Sabbatical Leave?
How Do I Account for Sabbatical Leave?
How Do I Account for Sick Pay Benefits?
What is a Rabbi Trust?
How Do I Account for a Rabbi Trust?
How Do I Account for Deferred Compensation?
How Do I Account for Termination Benefits?
What is a Defined Benefit Pension Plan?
What Terminology is Associated with Defined Benefit Pension Plans?
What Methods Are Available for Attributing Pension Benefits and Costs to Periods of Employee Service?
In General, How Do I Account for a Defined Benefit Pension Plan?
How Do I Attribute Pension Benefits to Employees in a Defined Benefit Plan?
How Do I Amortize Prior Service Costs?
How Do I Amortize Prior Service Credits?
How Do I Account for Gains and Losses on a Pension Plan?
How Do I Account for Pension Costs Related to Future Compensation?
On What Basis Should I Develop Pension Plan Assumptions?
How Should I Measure Plan Assets?
When Should I Measure Plan Assets?
How Do I Account for More than One Plan?
How Do I Account for a Settlement?
How Do I Account for a Benefit Curtailment?
Can I Use Approximations to Calculate Benefits?
What Information Should I Disclose about a Defined Benefit Plan?
What is a Defined Contribution Plan?
How Do I Account for a Defined Contribution Plan?
What Information Should I Disclose about a Defined Contribution Plan?
Chapter 20 Stock Compensation
What Are Share-Based Payment Arrangements and Awards?
What is an Employee?
What is the Grant Date?
What is Vesting?
What Are Non-Vested Shares?
How Do I Account for a Share-Based Award?
How Does the Vesting of a Share-Based Award Impact the Recognition of Services?
What if I Cannot Determine the Fair Value of a Share-Based Award?
Can I Change Valuation Techniques?
How Do I Derive a Private Company's Stock Volatility?
How Do I Account for an Equity Instrument Whose Fair Value is Not Reasonably Estimable?
Can I Reduce the Share Option Expense by the Amount of Expected Forfeitures?
Should I Recognize an Expense for Unvested Forfeited Share-Based Compensation?
What Happens if I Modify the Terms of an Equity Instrument?
What is a Reload Feature?
How Do I Account for a Reload Feature?
How Do I Account for a Cash-Settled Share-Based Payment Transaction?
How Do I Account for a Non-Compete Agreement Linked to a Share-Based Award?
In Which Accounts Do I Record Share-Based Compensation?
What Happens to Vested Equity Instruments that Are Forfeited or Not Exercised?
When Do I Calculate the Cost of a Share-Based Payment?
What if the Service Inception Date is Prior to the Grant Date?
When Do I Account for Payroll Taxes Associated with Share-Based Payments?
How Do I Account for the Repurchase of a Vested Equity Instrument?
How Do I Account for the Cancellation of an Equity Instrument?
What is an Employee Stock Purchase Plan?
How Do I Account for an Employee Stock Purchase Plan?
What Information Should I Disclose about Share-Based Payments?
Chapter 21 Other Expenses
What Are Start-Up Activities?
How Do I Account for Start-Up Costs?
What is a Claims-Made Insurance Contract?
How Do I Account for a Claims-Made Insurance Contract?
How Do I Account for an Incurred But Not Reported Claim?
What Terms Are Associated with Contributions?
How Do I Account for a Contribution?
How Do I Account for Property Taxes?
What Activities Are Included in Advertising?
How Do I Account for Advertising?
What Information Should I Disclose About Advertising?
What is Business and Technology Reengineering?
How Do I Account for Business and Technology Reengineering Costs?
Chapter 22 Research and Development Expenses
What is Research and Development?
How Do I Account for Research and Development Expenditures?
What Information Should I Disclose about Research and Development Costs?
What is a Research and Development Arrangement?
How Do I Account for a Research and Development Arrangement?
What Information Do I Disclose about a Research and Development Arrangement?
Chapter 23 Income Taxes
What is Taxable Profit?
What is Tax Basis?
How Do I Recognize a Tax Liability?
What is a Carryback and a Carryforward?
How Do I Recognize a Carryback Tax Loss?
What Are Deferred Tax Assets and Liabilities?
What is a Temporary Difference?
What is a Taxable Temporary Difference?
Does a Temporary Difference Arise from the Initial Recognition of an Asset or Liability?
How Do I Recognize Taxable Temporary Differences?
What is a Deductible Temporary Difference?
How Do I Initially Recognize Income Tax Expense?
When Should I Use a Valuation Allowance?
How Do I Incorporate Graduated Tax Rates Into Tax Calculations?
Should I Anticipate the Effects of Future Tax Changes in Tax Laws?
How Do I Account for a Change in Tax Laws or Rates?
What is the Alternative Minimum Tax?
What is Tax Planning?
How Do Tax Status Changes Alter Income Tax Recognition?
What is a Tax Position?
When Do I Record a Tax Position?
How Do I Account for a Tax Position?
How Do I Account for the Cessation of Taxable Status?
How Do I Account for Interest and Penalties on Underpaid Income Taxes?
Should I Discount Deferred Tax Assets and Liabilities?
How Should I Present Income Tax Information in the Financial Statements?
How Should I Allocate Income Taxes?
What Situations Result in Tax Asset or Liability Recognition Outside of Profit or Loss?
What is Ordinary Income?
What Tax Rate Should I Use for Recording Income Taxes in Interim Periods?
How Do I Account for the Tax Effect of Losses in Interim Periods?
What Tax Rate Information Should I Disclose for Interim Periods?
What Income Tax Information Should I Disclose?
Part IV Special Transactions
Chapter 24 Accounting Changes and Error Corrections
What is an Accounting Change?
When and How Should I Change an Accounting Principle?
When is a Retrospective Principle Reapplication Considered Impracticable?
What if I Make a Change in Accounting Principle in an Interim Period?
How Do I Disclose a Change in Accounting Principle?
How Does a Change in Accounting Estimate Impact Financial Reporting?
How Do I Disclose a Change in Accounting Estimate?
How Do I Disclose a Change in Accounting Entity?
What is an Error Correction and How Do I Report It?
What if I Correct an Accounting Error in an Interim Period?
When is an Accounting Error Material?
How Do I Disclose an Error Correction?
Chapter 25 Business Combinations
What is a Business Combination?
In a Business Combination, Who is the Acquirer?
What is Goodwill?
How Do I Account for a Business Combination?
Do I Include Expected Costs in Assumed Liabilities?
What is Contingent Consideration?
How Do I Account for Contingent Consideration?
What Are Examples of Intangible Assets?
Can I Record an Intangible Asset for the Assembled Workforce?
How Do I Account for an Asset Acquisition?
What is a Step Acquisition?
How Do I Account for a Step Acquisition?
What is a Reverse Acquisition?
How Do I Account for a Reverse Acquisition?
How Do I Account for Acquisition-Related Costs?
What is the Measurement Period?
What if the Initial Measurement is Not Completed in the Initial Reporting Period?
How Do I Subsequently Account for a Business Combination?
What is Pushdown Accounting?
What Information Should I Disclose about a Business Combination?
Chapter 26 Derivatives
What is a Derivative?
What is an Embedded Derivative?
When Do I Separate An Embedded Derivative from the Host Contract?
What is a Hedging Instrument?
What is Hedging?
When Does a Hedging Relationship Qualify for Hedge Accounting?
How Frequently Should I Verify Hedge Effectiveness?
How Do I Account for a Fair Value Hedge?
What is the Effective Interest Method?
How Do I Account for a Cash Flow Hedge?
How Do I Account for a Net Investment Hedge?
Can I Designate a Portion of a Financial Item as a Hedged Item?
Can I Cluster Similar Assets and Liabilities into Groups of Hedged Items?
How Do I Account for Intra-Entity Hedging Instruments?
What is a Held-to-Maturity Investment?
What is an Available-for-Sale Investment?
How Do I Account for a Derivative Instrument?
What Information Should I Disclose about Derivatives?
What Additional Information Should I Disclose about Fair Value Hedges?
What Additional Information Should I Disclose about Cash Flow Hedges?
Chapter 27 Fair Value
What is Fair Value?
What Types of Markets Are There?
Which Assets and Liabilities Are Measured at Fair Value?
What Assumptions Do I Use to Measure Fair Value?
What Information Do I Use if Bid and Ask Prices Are Available?
What Valuation Techniques Are Available?
Can I Use Multiple Valuation Techniques?
Can I Change Valuation Techniques?
Do Asset and Liability Restrictions Impact Their Fair Values?
When Might a Transaction Price Vary from Its Fair Value?
What Information Do I Disclose about Fair Value?
What is the Fair Value Option?
What Are the Rules for Using the Fair Value Option?
How Do I Subsequently Account for Items Under the Fair Value Option?
What Fair Value Information Do I Disclose on the Balance Sheet?
What Information Do I Disclose about the Fair Value Option?
Chapter 28 Foreign Currency Matters
What is a Foreign Currency?
What is an Exchange Rate?
How Do I Identify a Foreign Entity's Functional Currency?
What Happens if I Change the Functional Currency of a Foreign Entity?
How Do I Initially Account for a Foreign Currency Transaction?
Can I Record Foreign Exchange Rate Changes in Revenues?
How Do I Translate the Financial Statements of a Foreign Subsidiary into the Currency of the Parent?
How Do I Use the Current Rate Method?
How Do I Use the Re-measurement Method?
What Exchange Rate Should I Use to Record Foreign Exchange Transactions?
How Do I Account for the Foreign Exchange Effect of Intercompany Transactions?
What Foreign Exchange Information Should I Disclose?
Chapter 29 Interest
When Should I Capitalize Interest Cost?
Should I Capitalize the Interest Cost for Land?
What Are the Components of an Interest Capitalization Calculation?
How Do I Capitalize Interest Cost?
How Do I Account for Capitalized Interest Related to an Equity Method Investment?
How Do I Account for the Capitalized Interest Component of a Derecognized Asset?
What is an Imputed Interest Rate?
When Should I Not Use an Imputed Interest Rate?
How Do I Impute Interest?
What Information Should I Disclose about Interest Cost?
Chapter 30 Leases
What is a Lease?
When Does an Arrangement Qualify as a Lease?
How Do I Classify a Lease?
What is an Operating Lease?
How Does a Lessee Account for an Operating Lease?
How Does a Lessor Account for an Operating Lease?
How Does a Lessee Account for a Capital Lease?
How Does a Lessor Account for a Sales-Type Lease?
How Does a Lessor Account for a Direct Financing Lease?
What is a Sale-Leaseback Transaction?
How Do I Account for a Sale-Leaseback Transaction?
How Do I Account for a Lease Extension?
How Do I Account for a Lease Termination?
How Do I Account for a Sub-Lease?
What General Information Should I Disclose for a Lease?
What Information Should I Disclose for an Operating Lease?
What Information Should I Disclose for a Capital Lease?
What Information Should I Disclose for a Sale-Leaseback Transaction?
Chapter 31 Nonmonetary Transactions
What is a Nonmonetary Transaction?
What is the General Accounting for Nonmonetary Transactions?
What is Boot?
How Do I Account for a Transaction Involving Boot?
How Do I Account for a Donation?
How Do I Account for a Nonmonetary Inventory Exchange?
What Are Barter Credits?
How Do I Account for Barter Credits?
How Do I Account for an Asset Purchased with an Entity's Stock?
What Information Do I Disclose about Nonmonetary Transactions?
Chapter 32 Not-for-Profit Entities
What is a Not-for-Profit Entity?
What is a Donor-Imposed Restriction?
What is a Donor-Imposed Condition?
What is a Promise to Give?
How Do I Determine the Reporting Entity for Related Not-for-Profits?
What is Included in the Financial Statements of a Not-for-Profit?
How Do I Report Asset Restrictions?
What is a Performance Indicator?
How Do I Report Not-for-Profit Revenues?
How Do Restrictions and Conditions Impact Revenue Recognition?
When Do I Recognize Promises to Give?
When Do I Recognize Contributions Held by a Trustee?
How Do I Account for the Value of Volunteer Services?
How Do I Classify Not-for-Profit Expenses?
Does a Not-or-Profit Depreciate Its Assets?
How Do I Record Joint Costs?
How Do I Account for Investments and Endowment Funds?
What if a Donor Does Not Specify Restrictions on Investment Gains?
How Do I Account for Perpetual Restricted Donations?
How Do I Account for a Collection?
What is a Split-Interest Agreement?
How Does a Trustee Handle a Contribution?
What is Variance Power?
What Information Should I Disclose about a Not-for-Profit Organization?
Index
About The Author
Steven Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young. He received a master's degree in finance from Bentley College, an MBA from Babson College, and a Bachelor's degree in Economics from the University of Maine. He has been the two-time President of the Colorado Mountain Club, and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written the following books:
Accounting and Finance for Your Small Business
Accounting Best Practices
Accounting Control Best Practices
Accounting Policies and Procedures Manual
Advanced Accounting Systems
Billing and Collections Best Practices
Business Ratios and Formulas
Controller's Guide to Costing
Controller's Guide to Planning and Controlling Operations
Controller's Guide: Roles and Responsibilities for the New Controller
Controllership
Cost Accounting
Cost Reduction Analysis
Essentials of Payroll
Fast Close
Financial Analysis
GAAP Guide
GAAP Policies and Procedures Manual
GAAS Guide
Inventory Accounting
Inventory Best Practices
Investor Relations
Just-in-Time Accounting
Management Accounting Best Practices
Managing Explosive Corporate Growth
Mergers and Acquisitions
Outsourcing
Payroll Accounting
Payroll Best Practices
Revenue Recognition
Run the Rockies
Running a Public Company
Sales and Operations for Your Small Business
The Controller's Function
The New CFO Financial Leadership Manual
The Ultimate Accountants’ Reference
Throughput Accounting
Treasury Management
Vest Pocket Controller
Vest Pocket GAAP
Vest Pocket IFRS Guide
What This Book Will Do For You
This is a handy pocket problem-solver for the accountant, controller, and chief financial officer. It provides broad coverage of generally accepted accounting principles (GAAP), using a question-and-answer format that provides concise explanations and hundreds of supporting examples for all GAAP topics. The layout is designed for quick comprehension of such questions as:
Can I offset information in the balance sheet?What are the direct and indirect method layouts for the statement of cash flows?What are the thresholds for segment reporting?How do I calculate diluted earnings per share?Do I retrospectively adjust interim financial statements?What related party information should I disclose?How do I account for subsequent events after the reporting period?How do I measure losses from uncollectible receivables?How do I account for held-to-maturity investments?How do I use the equity method of accounting?What costs can I include in inventory?How do I account for preproduction costs?What depreciation method should I use?How do I assign goodwill to reporting units?How do I account for an asset retirement obligation?When do I recognize a loss contingency?What is the effective interest method?How do I account for treasury stock?When can I recognize revenue?How do I account for pension plans?How do I account for a share-based payment?What is a claims-made insurance contract?What is a research and development arrangement?How do I recognize a tax loss carryback?How do I disclose a change in accounting principle?How do I account for a business combination?What is hedging, and how do I account for it?When can I record assets and liabilities at their fair values?How do I determine an entity's functional currency, and how do I report transactions in that currency?When should I capitalize interest cost?How do I account for a capital lease?How do I account for a non-monetary exchange?Vest Pocket GAAP is divided into sections, where each deals with four main categories of GAAP: the financial statements, assets and liabilities, revenue and expenses, and special transactions.
Part I, The Financial Statements (Chapters 1–6) addresses GAAP for the construction of financial statements. Part I is divided into separate chapters to address the basic form of the financial statements, how to consolidate them, and how to report on special situations. These special situations include the reporting of operating segments, earnings per share, and interim reporting, all of which are required for publicly-held entities. Other chapters address special disclosures, including related-party disclosures and the reporting of subsequent events.
Part II, Assets and Liabilities (Chapters 7–17) addresses GAAP for accounting issues related to assets, liabilities, and equity. There are separate chapters covering the accounting for receivables, investments, inventory, deferred costs, fixed assets, and intangible assets, as well as for asset retirement obligations, contingencies, debt, and equity.
Part III, Revenue and Expenses (Chapters 18–23) delves into a variety of revenue and expense topics. These include revenue recognition, employee benefits, stock compensation, research and development expenses, and income taxes.
Part IV, Broad Transactions (Chapters 24–32) addresses a broad range of accounting transactions. These include accounting changes, business combinations, derivatives, fair value accounting, foreign currency matters, and the appropriate handling of interest cost, as well as leases, non-monetary transactions, and not-for-profit entities.
Throughout, Vest Pocket GAAP has been structured to provide concise answers to the GAAP questions that an accountant is most likely to encounter during a typical business day. Keep it handy for easy reference and daily use.
Free On-Line Resources by Steve Bragg
Steve issues a free accounting best practices podcast. You can sign up for it at www.accountingtools.com, or access it through iTunes. The www.accountingtools.com Web site also contains hundreds of articles about a broad range of accounting topics.
Part I
The Financial Statements
Chapter 1
Financial Statements Presentation
What is Profit or Loss?
Profit or loss is the total of an entity's revenues and expenses, not including any components of other comprehensive income (see the next question). It is also known as net income.
Total comprehensive income is the combination of profit or loss and other comprehensive income.
What is Other Comprehensive Income?
Other comprehensive income contains all changes including financial items that are not permitted in profit or loss. Items that you should insert in other comprehensive income include:
Available-for-sale securities fair value changes that were previously written down as impairedAvailable-for-sale securities unrealized gains and lossesCash flow hedge derivative instrument gains and lossesDebt security unrealized gains and losses arising from a transfer from the available-for-sale category to the held-to-maturity categoryForeign currency gains and losses on intra-entity currency transactions where settlement is not planned or anticipated in the foreseeable futureForeign currency transaction gains and losses that are hedges of an investment in a foreign entityForeign currency translation adjustmentsPension or post-retirement benefit plan gains or lossesPension or post-retirement benefit plan prior service costs or creditsPension or post-retirement benefit plan transition assets or obligations that are not recognized as a component of the net periodic benefit or costIt is acceptable to either report components of other comprehensive income net of related tax effects, or before related tax effects with a single aggregate income tax expense or benefit shown that relates to all of the other comprehensive income items.
An example of a possible format for reporting other comprehensive income in the income statement is:
Example 1.1
Guttering Candle Company Statement of Income and Comprehensive Income For the Year Ended December 31, 20X1
Revenues$1,000,000Expenses800,000Net income200,000Other comprehensive income, net of tax:Foreign currency translation adjustments10,000Unrealized gains on securities:Unrealized holding gains arising during the period$12,000Less: reclassification of gains included in net income(3,000)9,000Defined benefit pension plans:Net loss arising during the period(2,000)Prior service cost arising during the period(4,000)Less: amortization of prior service cost included in net periodic pension cost1,000(5,000)Other comprehensive income14,000Comprehensive income$214,000You should list the total of other comprehensive income for each reporting period to a component of equity that is displayed separately from retained earnings and additional paid-in capital in the balance sheet, and call it accumulated other comprehensive income. An example showing the placement of this line item within the equity section of an entity's balance sheet follows:
Example 1.2
Equity:Common stock$1,000,000Paid-in capital10,000Retained earnings450,000Accumulated other comprehensive income25,000Total equity$1,485,000If an item listed in other comprehensive income becomes a realized gain or loss, you then shift it out of other comprehensive income and into net income or loss. This can happen, for example, when you sell an investment security for which you already recorded an unrealized gain in other comprehensive income. At the point of sale, this is now a realized gain, which shifts into net income. You can display this reclassification adjustment either on the face of the financial statements, or in the accompanying notes.
Total comprehensive income is the combination of profit or loss and other comprehensive income.
What Information is Included in a Complete Set of Financial Statements?
All of the following financial reports should be included in a complete set of financial statements for a reporting period:
StatementDescriptionBalance sheet (Statement of financial position)Contains all asset, liability, and equity itemsStatement of comprehensive incomeContains all income and expense itemsStatement of changes in equityReconciles changes in equity for the presented periodsStatement of cash flowsDisplays all cash inflows and outflows from operating, financing, and investing activitiesNotesSummarizes accounting policies and explanatory informationYou should clearly identify these financial statements and distinguish them from other information presented in the same report, so that users will be more likely to understand which documents within the report adhere to specific accounting standards.
You should include in the financial statements a prominent display of the name of the reporting entity (and note any change in it from the preceding reporting period), whether the statements are for a single entity or group of entities, the period covered by the statements, and the level of rounding used to present amounts. This information is usually most easily presented in column and page headers.
What Line Items Do I Include in the Balance Sheet?
There is no specific requirement for the line items to be included in the balance sheet. The following line items, at a minimum, are normally included in the balance sheet:
Assets
Cash and cash equivalentsTrade and other receivablesInvestmentsInventoriesProperty, plant, and equipmentIntangible assetsAssets held for saleLiabilities
Trade and other payablesAccrued expensesCurrent tax liabilitiesOther financial liabilitiesLiabilities held for saleEquity
Capital stockAdditional paid-in capitalRetained earningsYou should add headings and subtotals to this minimum set of information if it will improve a user's understanding of the financial statements. You should add other line items when their size, nature, or function makes separate presentation relevant to the user.
Example 1.3
Holystone Dental Corporation presents its balance sheet in the following format:
Holystone Dental Corp. Statement of Financial Position
(000s)as of 12/31/x2as of 12/31/x1ASSETSCurrent assetsCash and cash equivalents$270,000$215,000Trade receivables147,000139,000Inventories139,000128,000Other current assets15,00027,000571,000509,000Non-current assetsProperty, plant, and equipment551,000529,000Goodwill82,00082,000Other intangible assets143,000143,000776,000754,000Total assets$1,347,000$1,263,000LIABILITIES AND EQUITYCurrent liabilitiesTrade and other payables$217,000$198,000Short-term borrowings133,000202,000Current portion of long-term borrowings5,0005,000Current tax payable26,00023,000Accrued expenses9,00013,000Total current liabilities390,000441,000Non-current liabilitiesLong-term debt85,00065,000Deferred taxes19,00017,000Total non-current liabilities104,00082,000Total liabilities494,000523,000Shareholders' EquityCapital$100,000$100,000Additional paid-in capital15,00015,000Retained earnings738,000625,000Total equity853,000740,000Total liabilities and equity$1,347,000$1,263,000When Do I Present Information as Current or Non-Current?
You should classify all of the following as current assets:
Cash. Cash that is available for current operations, and any short-term, highly liquid investments that are readily convertible to known amounts of cash and which are so near their maturities that they present an insignificant risk of value changes. Do not include cash whose withdrawal is restricted, to be used for other than current operations, or segregated for the liquidation of long-term debts.Inventory. Includes merchandise, raw materials, goods in process, finished goods, operating supplies, and maintenance parts.Accounts receivable. Includes trade accounts, notes, and acceptances that are receivable. Also include receivables from officers, employees, affiliates, and others, if they are collectible within a year. Do not include any receivable that you do not expect to collect within 12 months.Marketable securities. Includes those securities representing the investment of cash available for current operations, including trading securities.Prepaid expenses. Includes prepayments for insurance, interest, rent, taxes, unused royalties, advertising services, and operating supplies.You should classify an asset as current when an entity expects to sell or consume it during its normal operating cycle or within 12 months after the reporting period. If the operating cycle is longer than twelve months, then use the longer period to judge whether an asset can be classified as current. You should classify all other assets as non-current.
You should classify all of the following as current liabilities:
Payables. All accounts payable incurred in the acquisition of materials and supplies that are used to produce goods or services.Prepayments. Amounts collected in advance of the delivery of goods or services by the entity to the customer. Do not include a long-term prepayment in this category.Accruals. Accrued expenses for items directly related to the operating cycle, such as the accruals for compensation, rentals, royalties, and various taxes.Short-term debts. Debts maturing within the next 12 months.You should classify a liability as current when the entity expects to settle it during its normal operating cycle or within 12 months after the reporting period, or if it is scheduled for settlement within 12 months. You should classify all other liabilities as non-current.
Current liabilities include accruals for amounts that can only be determined approximately, such as bonuses, and where the payee to whom payment will be made cannot initially be designated, such as a warranty accrual.
Can I Offset Information in the Balance Sheet?
Offsetting involves reporting only the net amount of an asset and a liability in the balance sheet. Generally, it is improper to do so unless there is a right of setoff. A right of setoff is a debtor's legal right to discharge all or some portion of the debt owed by another party by applying the debt against an amount that the other party owes to the debtor. If a right of setoff exists, generally accepted accounting principles (GAAP) generally allows offsetting in the balance sheet only if there are just two parties involved.
There is a right of setoff when each party owes the other party a determinable amount, the reporting party has the right to set off the amount owed with the amount owed by the other party, the reporting party intends to set off the amounts, and the reporting party's setoff right is legally enforceable.
What Line Items Do I Include in the Income Statement?
You should present all items of income and expense for the reporting period in a statement of comprehensive income. Alternatively, you can split this information into an income statement and a statement of comprehensive income.
There are no specific requirements for which line items are included in the income statement, but the following line items are typically used, based on general practice:
RevenueTax expensePost-tax profit or loss for discontinued operations and for the disposal of these operationsProfit or lossExtraordinary gains or lossesOther comprehensive income, subdivided into each component thereofTotal comprehensive incomeA key additional item is to present an analysis of the expenses in profit or loss, using a classification based on their nature or functional area, maximizing the relevance and reliability of presented information. If you elect to present expenses by their nature, the format looks similar to the following:
RevenueXXXExpenses:Change in finished goods inventories
Raw materials used
Employee benefits expense
Depreciation expense
Telephone expense
Other expenses
Total expenses
Profit before tax
Alternatively, if you present expenses by their functional area, the format looks similar to the following:
RevenueXXXCost of sales
Gross profit
Administrative expenses
Distribution expenses
Research and development expenses
Other expenses
Total expenses
Of the two methods, presenting expenses by their nature is easier, since it requires no allocation of expenses between functional areas. Conversely, the functional area presentation may be more relevant to users of the information, who can more easily see where resources are being consumed.
You should add additional headings, subtotals, and line items to the items noted above if doing so will increase a user's understanding of the entity's financial performance.
Example 1.4
Plasma Storage Devices presents its statement of financial position in two statements by their nature, resulting in the following format, beginning with the income statement:
Plasma Storage Devices Income Statement For the years ended December 31
(000s)20x220x1Revenue$900,000$850,000Other income25,00020,000Changes in finished goods inventories(270,000)(255,000)Raw materials used(90,000)(85,000)Employee benefits expense(180,000)(170,000)Depreciation and amortization expense(135,000)(125,000)Impairment of property, plant, and equipment0(50,000)Other expenses(75,000)(72,000)Finance costs(29,000)(23,000)Profit before tax146,00090,000Income tax expense(58,000)(32,000)Profit for the year from continuing operations88,00058,000Loss for the year from discontinued operations(42,000)0Profit for the Year$46,000$58,000Earnings per share:Basic$0.13$0.16Diluted0.090.10Plasma Storage Devices then continues with the following statement of comprehensive income:
Plasma Storage Devices Statement of Comprehensive Income
(000s)20x220x1Profit for the year$46,000$58,000Other comprehensive income:Exchange differences on translating foreign operations5,0009,000Available-for-sale financial assets10,000(2,000)Actuarial losses on defined benefit pension plan(2,000)(2,000)Other comprehensive income, net of tax13,0005,000TOTAL COMPREHENSIVE INCOME59,00063,000How Do I Account for Extraordinary Items?
An extraordinary item is an event or transaction that is distinguished by both its unusual nature and the infrequency of its occurrence. Something is considered to be unusual if it represents a high degree of abnormality and is unrelated to an entity's typical activities. Something occurs infrequently if you do not reasonably expect it to recur in the foreseeable future.
Examples of extraordinary items are:
A tornado destroys crops in an area where tornado damage is rare.An earthquake destroys a building.A hurricane destroys a business in an area where there is no record of hurricane damage.Items that are not considered to be extraordinary are:
Adjustments to accruals on long-term contractsAsset disposal gains or lossesEffects of a strikeForeign currency transaction gains or losses (including currency devaluations and revaluations)Remaining excess of the fair value of acquired net assets over costWrite-downs of accounts receivable, inventory, deferred research and development costs, and other intangible assetsThe following are examples of events that are not extraordinary:
A farmer's grapes are destroyed by frost in an area where frost damage is relatively common.A company is unable to complete a public equity registration.A company incurs costs to defend itself from a hostile takeover.If you classify an item as extraordinary, then classify it separately in the income statement if it is material in relation to the income before extraordinary items, or to the trend of annual earnings before extraordinary items. You should make this decision for individual items, and not in aggregate for multiple items.
Extraordinary items should be segregated from the results of ordinary operations and shown separately in the income statement, using the following format:
Income before extraordinary items$XXX,XXXExtraordinary items (less applicable taxes of $___) (Note XX)X,XXXNet income$XXX,XXXIn the accompanying notes to the financial statements, disclose the nature of the extraordinary event and the principal items entering into its determination as an extraordinary item, as well as the related amount of income taxes. Also, if earnings per share disclosure are required, then separately disclose the earnings per share for extraordinary items.
What Line Items Do I Include in the Statement of Changes in Equity?
You should include the following line items in the statement of changes in equity:
Total comprehensive income (with separate presentation of the amounts attributable to the owners of the parent entity and to non-controlling interests)Effects of retrospective applications or restatements on each component of equity (which are usually adjustments to the opening balance of retained earnings)Reconciliation of changes during the period for each component of equity resulting from profit or loss, each item of other comprehensive income, and transactions with owners (including contributions by and distributions to them)Dividends recognized, and the related amount per share (this item can alternatively be presented in the associated notes)Example 1.5
Musical Heritage Company presents its statement of changes in equity as follows to reflect changes in its equity over a two-year period:
What are the Main Components of the Statement of Cash Flows?
The statement of cash flows contains information about activities that generate and use cash. The primary activities are:
Operating activities. These are an entity's primary revenue-producing activities. Examples of operating activities are cash receipts from the sale of goods, as well as from royalties and commissions, amounts received or paid to settle lawsuits, fines, payments to employees and suppliers, cash payments to lenders for interest, contributions to charity, and the settlement of asset retirement obligations.Investing activities. These involve the acquisition and disposal of long-term assets. Examples of investing activities are cash receipts from the sale of property, the sale of debt or equity instruments of other entities, and repayment of loans made to other entities. Examples of cash payments that are investment activities include the acquisition of property, plant, and equipment, and purchases of the debt or equity of other entities.Financing activities. This refers to those activities resulting in alterations to the amount of contributed equity and the entity's borrowings. Examples of financing activities include cash receipts from the sale of the entity's own equity instruments or from issuing debt, proceeds received from derivative instruments, as well as cash payments to buy back shares, pay dividends, and to pay off outstanding debt.The statement of cash flows also incorporates the concept of cash and cash equivalents. A cash equivalent is a short-term, very liquid investment that is easily convertible into a known amount of cash, and which is so near its maturity that it presents an insignificant risk of changes in value because of changes in interest rates.
What are the Direct and Indirect Method Layouts for the Statement of Cash Flows?
You can use the direct method or the indirect method to present the statement of cash flows. The direct method presents the specific cash flows associated with items that affect cash flow. Items typically affecting cash flow include:
Cash collected from customersInterest and dividends receivedCash paid to employeesCash paid to suppliersInterest paidIncome taxes paidUnder the indirect method, the presentation begins with net income or loss, with subsequent additions to or deductions from that amount for non-cash revenue and expense items, resulting in net cash provided by operating activities.
Examples of both methods are located in the answer to the next question.
What Line Items Should I Include in the Statement of Cash Flows?
The statement of cash flows reports cash activities during a reporting period, subdivided into operating, investing, and financing activities. The information you should include in these activities is as follows:
Operating activities. Use either the direct method (disclosing major classes of gross cash receipts and payments) or the indirect method (adjusting profit or loss for changes in inventories, receivables, payables, and a variety of non-cash items).Investing activities. Separately report the major classes of gross cash receipts and payments caused by investing activities. You should separately report investing cash inflows and outflows; for example, a payment for property, plant, and equipment is reported separately from a receipt from the sale of property, plant, and equipment.Financing activities. Separately report the major classes of gross cash receipts and payments caused by financing activities.Examples of the direct method and indirect method of presenting a statement of cash flow follow.
Example 1.6
Ajax Machining Company constructs the following statement of cash flows using the direct method:
Ajax Machining Company Statement of Cash Flows for the year ended 12/31/x1
Cash flows from operating activitiesCash receipts from customers$45,800,000Cash paid to suppliers(29,800,000)Cash paid to employees(11,200,000)Cash generated from operations4,800,000Interest paid(310,000)Income taxes paid(1,700,000)Net cash from operating activities$2,790,000Cash flows from investing activitiesPurchase of property, plant, and equipment(580,000)Proceeds from sale of equipment110,000Net cash used in investing activities(470,000)Cash flows from financing activitiesProceeds from issuance of common stock1,000,000Proceeds from issuance of long-term debt500,000Principal payments under capital lease obligation(10,000)Dividends paid(450,000)Net cash used in financing activities1,040,000Net increase in cash and cash equivalents3,360,000Cash and cash equivalents at beginning of period1,640,000Cash and cash equivalents at end of period$5,000,000Reconciliation of net income to net cash provided by operating activities:
Net income$2,665,000Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization$125,000Provision for losses on accounts receivable15,000Gain on sale of equipment(155,000)Increase in interest and income taxes payable32,000Increase in deferred taxes90,000Increase in other liabilities18,000Total adjustments125,000Net cash provided by operating activities$2,790,000Example 1.7
Eagle Construction Company constructs the following statement of cash flows using the indirect method:
Eagle Construction Company Statement of Cash Flows for the year ended 12/31/X1
Cash flows from operating activitiesNet income$3,000,000Adjustments for:Depreciation and amortization$125,000Provision for losses on accounts receivable20,000Gain on sale of facility(65,000)80,000Increase in trade receivables(250,000)Decrease in inventories325,000Decrease in trade payables(50,000)25,000Cash generated from operations3,105,000Cash flows from investing activitiesPurchase of property, plant, and equipment(500,000)Proceeds from sale of equipment35,000Net cash used in investing activities(465,000)Cash flows from financing activitiesProceeds from issue of common stock150,000Proceeds from issuance of long-term debt175,000Dividends paid(45,000)Net cash used in financing activities280,000Net increase in cash and cash equivalents2,920,000Cash and cash equivalents at beginning of period2,080,000Cash and cash equivalents at end of period$5,000,000Cash paid during the year for:
Interest (net of amount capitalized)$100,000Income taxes420,000You should disclose the following items related to the statement of cash flows:
Cash equivalents. The policy for determining which items are treated as cash equivalents.Interest and taxes paid. If you use the indirect method of reporting cash flows, then disclose the amounts of interest paid, net of any amounts capitalized, and income taxes paid during the period.Investing and financing activities. The investing and financing activities affecting recognized assets or liabilities, but which do not result in cash receipts or payments during the period. Examples are the conversion of debt to equity, acquiring assets by assuming related liabilities, exchanging non-cash assets for other non-cash assets, and obtaining an asset by entering into a lease. This disclosure can be in the financial statements or in the accompanying notes.When Should I Report Discontinued Operations?
You should separately report the results of the operations of a component of an entity if it has either been disposed of or is classified by the entity as held for sale. More specifically, a discontinued operation is one where the operations and cash flows of the operation either have been or will be eliminated from the ongoing operations of the entity, and the entity will not have any significant continuing involvement in its operations after the disposal is complete. An example of the presentation of a discontinued operation follows:
Example 1.8
Income from continuing operations before income taxes$100,000Income taxes(30,000)Income from continuing operations$70,000Discontinued operationsLoss from operations of discontinued business component(15,000)Income tax benefit5,000Loss on discontinued operations(10,000)Net income$60,000If there is a recognized loss on the disposal of a discontinued operation, then disclose it either on the face of the income statement or in accompanying notes.
If you adjust an amount previously reported in discontinued operations, and that is directly related to the disposal of an entity component from a prior period, then classify it separately in the current period, within discontinued operations. Such a situation may arise when an entity resolves contingencies related to the terms of a disposal transaction.
You should also allocate to discontinued operations the interest on any debt to be assumed by the buyer, as well as any debt that is to be repaid as a result of the disposal transaction.
Do not allocate general corporate overhead to a discontinued operation.
What Information Should I Disclose about Discontinued Operations?
If you have a component of an entity that is a discontinued operation (see the criteria for a discontinued operation in the answer to the last question), then present the assets and liabilities associated with the discontinued operation separately in the asset and liability sections of the statement of financial position. Do not offset and present them as a single line item. In addition, present the major classes of these assets and liabilities either on the face of the statement of financial position, or in the accompanying notes.
In addition to the above information, present the following items in the notes to the financial statements:
Adjustments. The nature and amount of adjustments made to amounts that were previously reported in discontinued operations.Cash flows. If the segment generates continuing cash flows, then disclose the nature of the activities causing the cash flows, the time period over which cash flows are expected to continue, and the main factors used to decide that the expected cash flows are not direct cash flows of the disposal group.Facts and circumstances. The facts and circumstances leading to the expected disposal, and the manner and timing of the disposal.Gain or loss. The gain or loss recognized on the discontinuance.Segment. The segment in which the disposal group is reported.Taxes. The amounts of revenue and pretax profit or loss reported for the discontinued operation.What Accounting Policies Should I Disclose with the Financial Statements?
