FAR - 1

Expenses (E)

*Expenses are outflows, uses of assets, or the incurrence of liabilities from delivering goods or services as part of normal operations *Operating

Selling Expense

*Freight out, salaries and commissions, advertising

Gains (G)

*Increases in equity from peripheral transactions and other events except revenue and investments from owners *Selling Price > Book Value *Non-Operating

Verifiability

*Means that different knowledgeable and independent observers can reach consensus that a particular depiction is faithfully represented *Does not require complete agreement

Continuing Operations

*Normal Operations + Non-Operating

SFAC No. 5: Fundamental Recognition Criteria

*Recognition is the process of formally recording or incorporating an item in the financial statements of an entity and classifying it as asset, liability, equity, revenue, or expense -Definitions -Measurability -Relevance -Reliability

Freedom from Error

*There are no errors in the selection or application of the process used to produce reported financial information and that there are no errors or omissions in the descriptions of economic phenomena *Freedom from error doesn't require perfect accuracy

International Financial Reporting Standards (IFRS)

*When IASB created, it adopted the International Accounting Standards (IAS) (predecessor to IASB) *The term International Financial Reporting Standards includes IFRSs, IASs, and Interpretations developed by the IFRIC and the former SIC *Single set of global standards want everyone to adopt

Characteristics of Nonbusiness Organizations

1. A significant portion of their resources come from contributions and grants 2. Their operating purposes are other than to provide goods or services for profit 3. They lack ownership interests that can be sold, transferred, or redeemed, or that allow a claim on resources upon liquidation

Authoritative Literature in Codification: FEDPRIA

1. FASB -Statements of Financial Accounting Standards -Interpretations -Technical Bulletins -Staff Positions -Staff Implementation Guides -Statement No. 138 Examples 2. Emerging Issues Task Force (EITF) Abstracts and Topic D 3. Derivative Implementation Group Issues 4. Accounting Principles Board Opinions 5. Accounting Research Bulletins 6. Accounting Interpretations 7. AICPA -Statements of Position -Auditing and Accounting Guides (incremental accounting guidance only -Practice Bulletins -Technical Inquiry Service (for software revenue recognition)

Objectives of Financial Reporting of Nonbusiness Organizations

1. Information useful in making resource allocation decisions 2. Information useful in assessing services and the ability to provide services 3. Information useful in assessing management stewardship and performance 4. Information about economic resources, obligations, and net resources, organization performance, the nature of and relationship between inflows and outflows, service efforts and accomplishments, and liquidity

Present Value Computations

1. Traditional Approach 2. Expected Cash Flow Approach -Expected Cash Flow -Risk and Uncertainty Adjustments to Cash Flows

SEC Standards Included in the Codification

1.Regulation S-X 2.Financial Reporting Releases (FRR) 3. Accounting Series Releases (ASR) 4. Interpretative Releases (IR) 5. Staff Accounting Bulletins (SAB) 6. EITF Topic D and SEC Staff Observer Comments

Completeness

*A complete depiction of financial information includes all information necessary for the user to understand the reported economic phenomena, including descriptions and explanations -Primary financial statements and notes

Historical Cost Principle

*As a general rule, financial information is accounted for and based on cost, not current market value

Periodicity Assumption

*Economic activity can be divided into meaningful time periods

Fundamental Assumptions (of US GAAP)

*Entity Assumption *Going Concern Assumption *Monetary Unit Assumption *Periodicity Assumption *Historical Cost Principle *Revenue Recognition Principle -Earned -Realized or Realizable *Matching Principle *Accrual Accounting *Full Disclosure Principle *Conservatism Principle

Expected Cash Flow

*Expected cash flow approach considers a range of possible cash flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted-average, or "expected," future cash flow

Extraordinary Items

*Reported/Presented net of tax and include items that are unusual in nature and infrequent in occurrence

Steps to Apply the Fundamental Qualitative Characteristics

1. Identify the phenomena that has the potential to be useful to the users of a reporting entity's financial information -What's issue/transaction? 2. Identify the types of information about the phenomena that would be most relevant -What would be relevant? 3. Determine whether the information is available and can be faithfully represented -Is information available yet? Can it be measured yet? *If information available and can be faithfully represented, then the fundamental qualitative characteristics have been satisfied. If not, the process is repeated with the next most relevant type of information

Users of Financial Information of Nonbusiness Organizations

1. Resources providers, including lenders, suppliers, employees, members, contributors, and taxpayers 2. Constituents who use and benefit from the services provided by nonbusiness organizations 3.Governing and oversight bodies who are responsible for setting policies and for overseeing and evaluating the managers of nonbusiness organizations 4. Managers who are responsible for carrying out the policy mandates of the governing bodies and managing the day-to-day operations of the nonbusiness organization

Revenue Recognition Principle

*As a general rule, revenue should be recognized when it is earned and when it is realized or realizable -Earned: Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues -Realized or Realizable: Revenues and gains are recognized when products, merchandise, or other assets are exchanged for cash or claims to cash or when related assets received or held are readily convertible to known amounts of cash or claims to cash *Realized: Already been paid *Realizable: Accrue for revenue (A/R)

5 Elements of Present Value Measurement

*Asset or Liability 1. Estimate of future cash flow 2. Expectations about timing variations of future cash flows (timing) 3. Time value of money (the risk-free rate of interest) 4. The price for bearing uncertainty -Credit Risk 5. Other factors (e.g., liquidity issues and market imperfections) -3,4,5 Impacts discount rate and/or future cash flow

IASB Elements

*Assets, liabilities, equity, income (including revenue and gains), expenses (including expenses and losses), and capital maintenance adjustments -Capital maintenance adjustments are increases and decreases in equity that arise from the revaluation or restatement of assets and liabilities

SFAC No 8, "Conceptual Framework for Financial Reporting - Chapter 3: Qualitative Characteristics of Useful Financial Information"

*Characteristics that are likely to be most useful to existing and potential investors, lenders, and other creditors in making decisions about the reporting entity based on financial information

Expenses

*Costs that only benefit the current period or the allocation of unexpired costs to the current period for the benefit received) -Reported at gross amounts -Gross Concept

Unexpired Costs

*Costs that will expire in future periods and be charged (allocated in a systematic and rational manner or matched) against revenues from future periods *Examples: -Unexpired Costs (Asset) ---> Expired Costs (Expense) -Inventory --> COGS -Unexpired (prepaid) cost of insurance ---> Insurance Exp -Net book value of fixed assets --> Dep Exp -Unexpired cost of patents --> Patents Exp (amort)

Distributions to Owners

*Decreases in assets from transfers of cash, property, or services, or the incurrence of a liability to owners

Losses (L)

*Decreases in equity from peripheral transactions and other events except expenses and distributions to owners *Selling Price < Book Value *Impairment/Writedown

Entity Assumption

*Economic activity can be accounted for when considering an identifiable set of activities (e.g., a separate corporation, division, etc.)

US GAAP - FASB Accounting Standards Codification

*Effective July 1, 2009, the FASB Accounting Standards Codification became the single source of authoritative nongovernmental US GAAP -Accounting and financial reporting practices not included in the Codification are not GAAP

SFAC No. 6, "Elements of Financial Statements" (REGL ALE needs ID)

*Elements are the components of the financial statements. They must be measurable and meet the recognition requirements 1. Comprehensive Income 2. Revenues 3. Expenses 4. Gains 5. Losses 6. Assets 7. Liabilities 8. Equity 9. Investments by Owners 10. Distributions to Owners

Securities and Exchange Commission (SEC)

*Established by the Securities and Exchange Act of 1934 *All companies that issue securities in the US are subject to SEC rules and regulations *SEC has issued public company specific accounting rules and regulations in Regulation S-X, Financial Reporting Releases (FRR), Accounting Series Releases (ASR), Interpretative Releases (IR), Staff Accounting Bulletins (SAB), and EITF Topic D and SEC Observer comments

Matching Principle

*Expenses are necessarily incurred to generate revenue *In accordance with the matching principles, all expenses incurred to generate a specific amount of revenue in a period matched against that revenue *The matching principle doesn't govern the recognition of losses since they result from unusual events

Income Statement

*Purpose: To provide information about the uses of funds in the income process (i.e., expenses), the uses of funds that will never be used to earn income (i.e., losses), the sources of funds created by those expenses (i.e., revenues), and the sources of funds not associated with the earnings process (i.e., gains) *Performance over a "period of time"

Present Value Computations: Expected Cash Flow Approach

*Rather than focusing on the interest rate selection, this approach uses only the risk-free rate of return as the discount rate and then turns its attention to the expected future cash flows, considering uncertainties (e.g., default risk) as adjustments to the future cash flows

Fundamental Qualitative Characteristics

*Relevance *Faithful Representation -Both characteristics must be present for financial information to be useful

Relevance ("Passing Confirms Money")

*Relevant if it is capable of making a difference in the decisions made by users 1. Predictive Value (P) 2. Confirming Value (C) 3. Materiality (M)

Income (or Loss) from Discontinued Operations

*Reported "net of tax"

Revenues

*Reported at their gross amounts (less allowance for returns and discounts given) *Gross Concept

Gains

*Reported at their net amounts (i.e., proceeds less net book value) -A gain is the recognition of an asset either not in the ordinary course of business (e.g., gains on the sale of a fixed asset) or without the incurrence of an expense (e.g., finding gold on the company's property) *Net Concept

Losses

*Reported at their net amounts (i.e., proceeds less net book value) -A loss is cost expiration either not in the ordinary course of business (e.g., loss on the sale of investment assets) or without the generation of revenue (e.g., abandonment)

Discontinued Operations

*Reported separately from continuing operations in the income statement *The (normal) loss from discontinued operations can consist of an impairment loss, a gain/loss from actual operations, and a gain/loss on disposal -Impairment (carrying value too high) -Gain/loss on disposal: Difference between selling price and carrying value -All of these amounts are included in discontinued operations in the period in which they occur (not before) *Once have plan to sell --> Discontinued

Normal Operations

Net Sales (including goods, services, and rentals) Cost of Sales (including goods, services, and rentals) Gross margin (Sub-Total) Selling expenses General and administrative expenses Depreciation expense Income (loss) from operations (Sub-Total)

Monetary Unit Assumption

*It is assumed that money is an appropriate basis by which to measure activity -Assumption is that the monetary unit does not change over time; thus, the effects of inflation aren't reflected in the financial statements

Comparability (Consistency)

*Information is more useful if it can be compared with similar information about other entities or from other time periods *Enables users to identify similarities and differences among items *Consistency, which is the use of the same methods for the same items either from period to period or across entities, helps to achieve comparability -Current Year vs. Prior Year -Apple vs. Microsoft

Non-Operating

Other revenues and gains: Interest income Gain on sale of fixed assets (e.g., equipment) Other income Other expenses and losses: Interest expense Loss on sale of fixed assets (e.g., equipment) Income before unusual items and income tax Unusual or infrequent items Loss on sale of available-for-sale securities

Understandability

*Information is understandable if it is classified, characterized, and presented clearly and concisely -Even well-informed and diligent users may need assistance of advisors to understand complex and difficult phenomena

Enhancing Qualitative Characteristics ("Compare and Verify in Time to Understand")

*Not the fundamental qualitative characteristics, but enhance the fundamental qualitative characteristics *These characteristics can be used to determine how a phenomena should be depicted if 2 ways are equally relevant and faithfully represented 1. Comparability 2. Verifiability 3. Timeliness 4. Understandability -All enhance the usefulness of information that is relevant and faithfully represented

SFAC No. 8, "Conceptual Framework for Financial Reporting - Chapter 1: The Objective of General Purpose Financial Reporting"

*Objective: Disclose the entity's performance *Objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to reporting entity 1. Primary Users 2. Financial Information Provided in General Purpose Financial Reports

General & Administrative

*Officer's salaries, accounting and legal, insurance

SFAC No. 4, "Objectives of Financial Reporting by Nonbusiness Organizations"

*Outlines the characteristics that distinguish nonbusiness organizations from business organizations, describes the users of the financial information provided by nonbusiness organizations, and sets forth the objectives of external financial reporting by nonbusiness organizations

Accounting Principles Board (APB)

*Part-time committee of the AICPA *Issued Accounting Principles Board Opinions (APBO) and APB Interpretations -Determined GAAP from 1959-1973

SFAC No. 8: Primary Users

*Primary users of general purpose financial reports are existing and potential investors, lenders, and other creditors -External (outside organization)

Assets

*Probable future economic benefits to be received by the company as a result of past transactions or events -Valuation accounts may be used to show reduction to or increases in an asset that reflect adjustments beyond the historical cost or carrying amount of the asset *Balance Sheet

Liabilities

*Probable future sacrifices of economic benefits arising from a present obligation of the company to transfer assets or provide services to other entities in the future as a result of past transactions or events *Balance Sheet

SFAC No. 7, "Using Cash Flow Information and Present Value in Accounting Measurements"

*Provides a framework for accountants to employ when using future cash flows as a measurement basis for assets and liabilities *Provides a set of principles that govern the use of present value, especially when the timing and/or amount of future cash flows are uncertain *PV= (FCF/Disc. Rate) 1. Measurements Based on Future Cash Flows Only 2. 5 Elements of Present Value Measurement 3. Fair Value Objective 4. Present Value Computations 5. Liability Measurement Considers Additional Factors 6. Changes in Estimated Cash Flows Using the Catch-Up Approach

International Financial Reporting Interpretations Committee (IFRIC)

*Provides guidance on newly identified financial reporting issues not addressed in the IFRSs and assists the IASB in achieving international convergence of accounting standards *Established in 2002

Inventory Cost

*Purchase price, freight in (shipped to us)

Non-operating

* Auxiliary activities (incidental, not part of core activities), interest expense *"Other"

Faithful Representation ("Completely Neutral is Free from Error")

*(Reliable) *To be useful, financial information must faithfully represent the reported economic phenomena 1. Completeness 2. Neutrality 3. Freedom from Error

Neturality

*A neutral depiction of financial information is free from bias in selection or presentation

Standard-Setting Process - Accounting Standards Updates

*Accounting Standard Updates aren't authoritative literature, but instead provide background information, update the Codification, and describe the basis for conclusions on changes in the Codification *All new GAAP and SEC amendments are fully integrated into the existing structure of the Codification

Risk and Uncertainty Adjustments to Cash Flows

*Adjustments to the expected cash flows used in complex present value computations (rather than interest rate adjustments) are required for uncertainties (e.g., default risk)

Cost

*An amount (measured in money) expended for items such as capital assets, services (e.g., payroll), and merchandise received *The amount actually paid for something

Conceptual Framework Underlying Financial Accounting

*FASB has created a conceptual framework (set forth in Statements of Financial Accounting Concepts, or SFAC) that serves as a basis for all FASB pronouncements -SFAC aren't GAAP,but they provide a basis for financial accounting concepts for business and nonbusiness enterprises *FASB and IASB have a joint project to improve and converge their financial reporting frameworks -As phases of this project are completed, the FASB will issue each component of the joint conceptual framework as a chapter in Statement of Financial Accounting Concepts No. 8, Conceptual Framework for Financial Reporting -When the project is completed, the FASB and IASB will share a single Conceptual Framework for Financial Reporting

SFAC No. 8: Financial Information Provided in General Purpose Financial Reports

*Financial information needed by existing and potential investors, lenders, and other creditors includes information about the resources of the entity, the claims against the entity, and how efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's resources -Meet "informational needs" -Financial information should be presented using the accrual basis of accounting *Existing and potential investors, lenders, and other creditors use financial information to assess the reporting entity's prospects for future net cash inflows to the entity -Such information may be used to estimate the value of the reporting entity

Going Concern Assumption

*For financial accounting, it is presumed (subject to rebuttal by evidence to the contrary) that the entity will continue to operate in the foreseeable future

Cumulative Effect of Change in Accounting Principle

*General Rule: Reported "net of tax" *Reported on Statement of Retained Earnings *It is the cumulative effect (calculated as of the beginning of of the earliest period presented in the period of implementation of the new method) of a change from one acceptable method of accounting to another ("GAAP to GAAP") because the new method presents the financial information more fairly than the old method -Can't haphazardly switch

International Convergence of Accounting Standards

*Goal: A single set of high-quality, international accounting standards that companies can use for both domestic and cross-border financial reporting *Working at since 2002 *FASB continues to issue US GAAP and IASB continues to issue IFRS with the expectation that over time the 2 sets of standards will become increasingly similar, if not the same *SEC supports the IASB/FASB convergence project

International Accounting Standards Board (IASB)

*IASB established in 2001 as part of the International Financial Reporting Standards (IFRS) Foundation *Purpose: To develop a single set of high-quality, global accounting standards *Has 15 full-time members and 2 part-time members -Auditors, preparers, users, and academics

IASB and Fundamental Assumption

*IASB outlines only 2 fundamental assumptions: 1. Accrual basis accounting 2. Going concern

Fair Value Objective

*If fair value cannot be determined in the marketplace, the objective must be to obtain an estimate of fair value (i.e., a present value of future cash flows)

Conservatism Principle

*If in doubt when selecting from alternative GAAP methods, the method that is least likely to overstate assets (and revenues/gains) and understate liabilities (and expenses/losses) in the current period should be selected 1. Recognize revenues/gains when the earnings process is complete (or virtually completed) 2. Recognize expenses/losses immediately

Full Disclosure Principle

*Important that the user be given information that would make a difference in the decision process but not so much information that the user is impeded in analyzing what is important *Notes "completeness"

Comprehensive Income

*Includes all differences between beginning equity and ending equity other than transactions with owners (i.e., net income plus other comprehensive income)

Presentation Order of the Major Components of an Income and Retained Earnings Statement (IDEA)

*Income (or Loss) from Continuing Operations *Income (or Loss) from Discontinued Operations *Extraordinary Items *Cumulative Effect of Change in Accounting Principle

Investments by Owners

*Increases in assets from transfers of cash, property, or services from owners *Excluded from Comprehensive Income

Financial Accounting Standards Board (FASB)

*Independent full-time organization established in 1973 and has established GAAP since *Through 2009, FASB issued Statements of Financial Accounting Standards (SFAS), FASB Interpretations (FIN), FASB Technical Bulletins (FTB). Emerging Issues Task Force Statements (EITF), FASB Staff Positions, FASB Implementation Guides, and Statements of Financial Accounting Concepts (SFAC) *Has 7 full-time members -Serve 5 year terms and may be reappointed to one additional five-year term -Board members must sever connections with firms of institutions before joining the Board

Income (or Loss) from Continuing Operations

*Individual line items show "gross of tax" (before), then total reported "net of tax" (gross and net of tax) *Income from continuing operations includes operating activities (i.e., revenues, costs of goods sold, selling expenses, and administrative expenses, non-operating activities (e.g., other revenues and gains and other expenses and losses), and income taxes

Revenues (R)

*Inflows, enhancements of assets, or reductions of liabilities from delivering goods or services as a part of normal operations -Recognize revenue at the gross amount (less allowances for returns and discounts given) *Operating

Confirming Value

*Information has confirming value if it provides feedback about evaluations previously made by users

Predictive Value

*Information has predictive value if it can be used by users to predict future outcomes

Timeliness

*Information is available to users in time to be capable of influencing their decisions

Materiality

*Information is material if an omission or misstatement of the information could affect the decisions made by users based on financial information *Entity-specific aspect of relevance *FASB/IASB haven't specified a uniform quantitative threshold for materiality and haven't specified what would be material in specific situations

Multiple Step Income Statement

*Reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses -Enhanced user information Net Sales (including goods, services, and rentals) Cost of Sales (including goods, services, and rentals) Gross margin (Sub-Total) Selling expenses General and administrative expenses Depreciation expense Income (loss) from operations (Sub-Total) Other revenues and gains: Interest income Gain on sale of fixed assets (e.g., equipment) Other income Other expenses and losses: Interest expense Loss on sale of fixed assets (e.g., equipment) Income before unusual items and income tax Unusual or infrequent items Loss on sale of available-for-sale securities Income before income tax (Sub-Total) Provision for income taxes: Current Deferred Net Income (or "income from continuing operations")

Accrual Accounting

*Revenues recognized when they are earned and expenses are recognized in same period as the related revenue (matching or using a systematic and rational allocation or expensing in the period in which they expire), not necessarily in the period in which the cash is received or expended by the company *Record revenue and/or expense without exchange of cash

Standard-Setting Bodies in the US

*SEC has the legal authority to establish US GAAP *In most instances, SEC has allowed the accounting profession to establish GAAP and self-regulate Bodies: -Securities and Exchange Commission (SEC) -Committee on Accounting Procedure (CAP) -Accounting Principles Board (APB) -Financial Accounting Standards Board (FASB)

SFAC No. 5, "Recognition and Measurement in the Financial Statements"

*Sets forth the recognition criteria and guidance on what and when information should be incorporated in the financial statements -Full Set of Financial Statements -Fundamental Recognition Criteria -Measurement Attributes for Assets and Liabilities -Fundamental Assumptions

SFAC No. 5: Full Set of Financial Statements

*Statement of financial position (the balance sheet) (F1) *Statement of earnings (the income statement) (F1) *Statement of comprehensive income (F1) *Statement of cash flows (F7) *Statement of changes in owners' equity (F7)

The Cost Constraint

*The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information

Equity (of net assets)

*The residual interest in the assets of the company that remains after deducting its liabilities *Balance Sheet

Present Value Computations: Traditional Approach

*The traditional approach (i.e., one discount rate used to take the present value of a future cash flow stream) to present value computations may be used when assets and liabilities have contractual (i.e., fixed) cash flows that aren't expected to vary -In this approach, interest rate selection is paramount -PV of Bonds - Scheduled known payments

SFAC No. 1, "Objectives of Financial Reporting by Business Enterprises"

*This statement was replaced by Chapter 1 of SFAC No. 8

SFAC No. 2, "Qualitative Characteristics of Accounting Information"

*This statement was replaced by Chapter 3 of SFAC No. 8

SFAC No. 3, "Elements of Financial Statements of a Business"

*This statement was replaced by SFAC No. 6

Single Step Income Statement

*Total expenses (including income tax expense) are subtracted from total revenues Revenues and other items: Sale of goods Sale of services Interest income Rental income Gain on sale of fixed assets (e.g., equipment) Other income Total Revenues and other items Expenses and other items: Cost of goods sold (including freight in) Cost of services sold Cost of rental income Selling expenses (including freight out) General and administrative expenses (including property tax, insurance, officers' salaries, and legal expense) Interest expense Depreciation expense Loss on sale of fixed assets (e.g., equipment) Loss on sale of available-for-sale securities Income tax expense (provision for income tax) Total expenses and other items Net Income (or income from continuing operations, if necessary)

Uses of the Income Statement

*Useful in determining profitability, value for investment purposes, and credit worthiness -Useful in predicting information about future cash flows (e.g., the amounts, timing, and uncertainty of cash flows) based on past performance

SFAC No. 5: Measurement Attributes for Assets and Liabilities

*Variety of ways -Historical Cost (PP&E) -Current Cost (Inventory) -Net realizable value (A/R) -Current market value (marketable securities) -Present value of future cash flows (Long-term debt "bonds")

Committee on Accounting Procedure (CAP)

*Was a part-time committee of the American Institute of Certified Public Accountants (AICPA) that promulgated Accounting Research Bulletins (ARB) -Determined GAAP from 1939-1959