Accounting and Finance for Lawyers in a Nutshell
Author:
Meyer, Charles H.
Edition:
6th
Copyright Date:
2017
25 chapters
have results for ACCOUNTING
Chapter 14 Partnership Accounting 40 results (showing 5 best matches)
- Alternatively, separate partner accounts could be used during the year to record income and loss and distributions during the year. For example, distributions during the year could be recorded in a “drawing account.” At the end of the year, the debit balance in the drawing account would be deducted from the capital account by crediting the drawing account and debiting the capital account for each partner. Similarly, a separate account could be used to record the share of income or loss that accrues to the partner. If such separate accounts are maintained, each partner’s capital in the partnership would be the total of the amounts in each of these accounts.
- A partnership may use a single account for each partner’s capital. That account may be called, for example, “Partner X, Capital Account.” This capital account could be used to record all entries affecting the capital of the partner. Contributions by partners are credited to their capital accounts. Contributions of assets other than cash are recorded at their fair market values at the time of contribution.
- In the case of a partnership, a separate capital account is maintained for each partner. Each partner’s capital account is used to record that partner’s contributions to the partnership, that partner’s share of income or loss, and any distributions made to the partner. This differs from the accounting for stockholders’ equity of a corporation, which generally does not maintain a separate account for each shareholder in the corporation but only for separate classes of stock.
- The alternative approach to dealing with the retiring partner is the bonus method. Under the bonus method, amounts in the capital accounts of the partners are reallocated among them in order to adjust the retiring partner’s capital account to the amount to be distributed to the retiring partner. In this case, T’s capital account must be increased by $15,000. If the book value of the net assets is to remain the same, this capital must come from the capital accounts of the other partners. The $15,000 will be charged against the capital accounts of the continuing partners in the ratio in which they share partnership losses. Since R and S share income and loss in a 2:1 ratio (50% for R and 25% for S), $10,000 will be charged to R’s capital account and $5,000 will be charged to S’s capital account. The entry would be as follows:
- The partnership form of entity presents some unique accounting issues that do not exist with the corporation, which is the form of entity that is typically used to illustrate accounting for owner’s equity. These differences are attributable primarily to the fact that a separate account is maintained for the owners’ equity of each partner in the case of a partnership and the book value of each partner’s interest in the partnership may vary from that of the other partners, even partners that have the same general percentage interest in the partnership. This chapter will review the key issues related to accounting for partnerships that differ from the accounting rules applicable to corporations.
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Chapter 17 Special Reporting Issues 16 results (showing 5 best matches)
- ASC 250-10-45 governs the reporting for changes in accounting principles. A change in accounting principle is the decision to adopt one accepted accounting approach for a particular accounting issue in place of the accounting approach previously utilized where both of the methods are generally accepted accounting principles. Such a change must be justified on the basis of improving the financial reporting. An example of a change in accounting principle would be a change in the method of pricing inventory (see Chapter 6). A change in accounting principle also occurs where a previously accepted accounting principle is no longer generally accepted.
- A change in accounting principle does not include a change in the many estimates that are inherent in the accounting process. A change in an accounting estimate ( a change in the estimated useful life of depreciable property) is applied prospectively only with no restatement or cumulative effect reporting. ASC 250-10-45-17. Under ASC 250-10-45-18, certain changes in accounting principles are treated as “changes in accounting estimates effected by a change in accounting principle.” For these types of changes in accounting principles, the changes are implemented prospectively as in the case of changes in estimates. ASC 250-10-45-18 indicates that a change in the method of depreciating long-lived assets (see Chapter 7 B.3.) would be an example of a change in accounting estimate effected by a change in accounting principle.
- Previously, the general rule for reporting most changes in accounting principle was to determine the cumulative effect of the change in accounting principle as of the beginning of the period in which the change occurred. The cumulative effect of the change in accounting principle was the amount that retained earnings would change as of the beginning of the year in which the change is adopted if the new accounting principle had been applied in all prior periods (accounting principle was then applied prospectively in the current year and all future years.
- Under ASC 250-10-45-5, the appropriate reporting for a change in accounting principle now requires “retrospective application” of the new accounting principle to all prior periods. Under retrospective application, the balances of affected assets and liabilities are adjusted for the cumulative effect that the change would have had to those assets and liabilities as of the beginning of the earliest period presented. If the new accounting principle would have affected the net income of the company for periods prior to the earliest period presented, the cumulative effect of the change in accounting principle on net income as of that date (net of income tax effects) would be recorded as an adjustment to retained earnings. The financial statements for each separate period presented would then be adjusted for the effects in that period of the changed accounting principle.
- Note that a change in accounting principle may have certain indirect effects on profit sharing plans or other contractual arrangements calculations under which are based on net income in prior periods. The accounting impact of such indirect effects is not applied retroactively. These indirect effects are reported in the period in which the change in accounting principle giving rise to such indirect effects occurs.
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Chapter 2 The Accounting Process 64 results (showing 5 best matches)
- Periodically, the transactions that have been recorded in the journals are “posted” to various ledger books. A separate ledger page is maintained for each account that the business has. The ledger is used to consolidate all the accounting entries that have been made in each of the accounts of the business. Thus, the ledger for the cash account includes all the entries increasing or decreasing the cash account. For illustrative purposes, the separate ledgers for each account are frequently represented by “T-accounts.” The land purchase transaction recorded above would be posted to the ledger (as represented here by T-accounts) as follows:
- By convention, debit or left-hand entries are used to show an increase in an asset account or a decrease in a liability or owners’ equity account. The debit entry to Land means that the Land account has been increased, which would be the expected result of a purchase of land. Credit or right-hand entries are used to show a decrease in an asset account or an increase in a liability or owners’ equity account. The credit entry to Cash, an asset account, means that the Cash account has been decreased. The credit entry to Notes Payable, a liability account, means that Notes Payable has been increased as result of the purchase of the land.
- The expense of $5,000 will be included in the determination of net income for the year. The accumulated depreciation account is an example of a “contra account.” A contra account is an offsetting account to some other account. In this case, the accumulated depreciation account is a contra account to the buildings account. To determine the remaining carrying cost or book value of the buildings owned by the business, you subtract the amount in the accumulated depreciation account from the amount in the buildings account. Thus, the remaining book value of the building purchased in 201x on the December 31, 201x, balance sheet would be $95,000 ($100,000 minus $5,000). Contra accounts are used in this situation to retain in the financial records the original cost of an asset and to record separately the portion of the original cost that has been transferred to expense through the depreciation process.
- The other unique feature of the revenue and expense accounts is that they are temporary accounts that exist for a certain period (usually one year) and are then closed out at the end of the year. Balance sheet accounts (the accounts for assets, liabilities, and the permanent owners’ equity accounts) are permanent accounts. While the balances in these permanent accounts are computed at the end of the year and entered in the balance sheet, the next year’s entries are made in the same accounts. There may be physical changes in that the business starts making entries in the permanent accounts on a new page, or a new book, or a new computer file, but continuity is maintained because each permanent (balance sheet) account starts with the balance in that account as of the end of the immediately preceding period. Thus, if the cash account, after all the debit and credit entries for 201x, has a debit balance on December 31, 201x, of $40,000, then the cash account for the next year will begin...
- At the end of each year, the process of closing the books begins. The first step is the preparation of a trial balance. The balances in all the accounts (both permanent accounts and the revenue and expense accounts) are computed and listed on a worksheet in separate columns for the accounts with debit balances and the accounts with credit balances. A preliminary check is made to confirm that the total of the accounts with debit balances equals the total of the accounts with credit balances. A corollary to the requirement that for each accounting entry the debit entries must equal the credit entries is the similar requirement that the total amount in the accounts with debit balances equals the total amount in the accounts with credit balances.
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Chapter 6 Accounting for Inventories 19 results (showing 5 best matches)
- An accounting entry is made at the end of the year to update the inventory account, close out the purchases account, and enter the appropriate amount in the cost of goods sold account. That entry would be as follows:
- ASC 330 generally governs the accounting for inventory. Accounting for inventory involves three primary steps. First, there must be a procedure for determining the physical quantities of goods included in the inventory at the balance sheet dates and typically at certain interim points during the accounting year. Second, items that are included in inventory are acquired from time to time at different prices or costs. In addition to determining the number of items on hand, it becomes necessary to determine the appropriate unit cost to be assigned to the items that are still on hand from time to time. Third, generally accepted accounting principles require that inventory be periodically evaluated to determine if its “value” is less that its cost. Where that is the case, the lower of cost or market rule requires that the carrying amount or book value of the inventory be adjusted to its lower value.
- To determine cost of goods sold under this system, one more item of information is necessary. The business will have maintained a temporary account during the year called “Purchases” (assuming that we are dealing with a retail or wholesale operation) and all the purchases of inventory items during the year will have been recorded in that account. Assume that the balance in the Purchases account for the year is $400,000 (
- One of the key determinations in accounting for inventory is the actual quantities of items on hand from time to time. Several celebrated cases of fraudulent or misleading financial statements have involved the overstatement of inventory quantities on hand. Overstating inventory normally translates into a corresponding overstatement of income.
- The periodic inventory system employs a periodic physical count of the inventory on hand from time to time. This count will usually be performed at the end of the accounting period although some businesses may conduct more frequent counts particularly where inventory is highly valuable. A separate count is made of each type, size, or other characteristic of the inventory.
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Chapter 10 Accounting for Long-Term Debt 23 results (showing 5 best matches)
- After initial issuance, the accounting for the debt would follow the normal rules. With respect to the warrants, if they are exercised, the amount in the stock warrants account would be added to the cash received and recorded in the common stock and additional paid-in-capital accounts. If stock warrants lapse unexercised, the amount in the stock warrants account would be reclassified as additional paid-in-capital through an account called stock warrants lapsed. For example, assume that one-half of the warrants described above are exercised. The company would receive $250,000 in cash (12,500 shares × $20). The entry to record the exercise of the warrants would be:
- Accounting by the debtor for long-term debt such as bonds payable and mortgages payable is very similar to the accounting by investors in debt securities that are intended to be held to maturity. This chapter will review the principal accounting rules applicable to long-term debt. In appropriate places, reference will be made to the discussion of investments in debt securities in Chapter 9 for more detail regarding certain computations.
- on the debtor’s real property. Long-term debt may also be secured by personal property such as equipment, in which case they may be in the form of equipment trust certificates. These are the basic forms. The financial markets have developed numerous additional specialized forms of debt. For accounting purposes, the form of the debt is not important. The accounting treatment will be based on the substantive terms of the debt and the market conditions at the time of issuance. In this Nutshell, bonds will be used to illustrate the accounting for long-term debt because bonds generally present all of the significant issues related to accounting for most long-term debt.
- Companies may issue bonds or other debt instruments that are convertible at the option of the holder into stock of the issuing corporation. Financial theory indicates that the amount paid by the purchaser of convertible debt consists of two components, (1) the value of the debt exclusive of the conversion feature and (2) the value of the conversion option. In accounting for the issuance of convertible debt, however, the convertibility feature is generally ignored. The proceeds are all recorded in the convertible debt account, which is reported as a liability in the balance sheet. ASC 470-20-25-12. Any discount or premium from face value is accounted for in the normal manner. In certain situations, a portion of the proceeds from the issuance of convertible debt will be recorded separately from the debt. This would occur, for example, where it appears
- If the event that causes the stock to be redeemable is not certain to occur, the stock would initially be treated as equity for accounting purposes. If that uncertain event occurs, at that time, the stock would be reclassified as a liability for accounting purposes. ASC 480-10-25-5. For example, assume that a preferred stock contains a provision that specifies that if the price of the issuer’s common stock falls below $25 per share, the preferred stock becomes redeemable. If the common stock falls below this trigger price, the preferred stock would be reclassified as a liability immediately even if the required redemption date were set at a future date.
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Chapter 16 Earnings per Share and Financial Ratios 10 results (showing 5 best matches)
- Aside from questionable accounting policies, the analyst is also sensitive to the fact that many acceptable accounting practices are choices from available alternatives. Since most securities analysis involves comparison of the financial data for several companies, the existence of multiple acceptable accounting practices makes the analysis difficult since the financial statements of the different companies using different accounting practices are not necessarily comparable. For example, one company may use LIFO in accounting for inventory and another company may employ FIFO in accounting for inventory. In this situation, the analysts will attempt to adjust the financial statements in such a way as to reflect comparable accounting policies among all the companies under review.
- If the net income for the year includes separately reported items such as effects of changes in accounting principles or gain or loss from the disposal of a business (see Chapter 17), EPS is calculated and reported separately for each of these components (as well as for the net income before these items and the overall net income).
- As noted above, the basic and diluted EPS numbers are shown at the bottom of the income statement. If the income statement includes the effect of changes in accounting principles, or amounts attributable to the disposal of a business, basic and diluted EPS amounts would also be shown for these separately disclosed items.
- Before computing the financial ratios discussed below, most analysts undertake a careful review of the financial statements. This review is necessary to determine if any questionable accounting policies are being applied. If that is the case, the analyst will attempt to adjust the financial statements to remove the effect of the questionable practices.
- Finally, companies may not be directly comparable not because of different accounting policies but because of different business practices that create different accounting results even though the underlying business realities are not different in substance. An example of this situation is the choice by one company to finance its assets through leasing while another company finances its assets through debt financing. As discussed in Chapter 11, the financial statements of companies leasing assets will be significantly different from the statements of companies that purchase assets. Securities analysts will frequently “reconstruct” the financial statements of the companies employing lease financing to make the statements of all companies under review more comparable regardless of the form of financing used. This will be less of an issue after the effective date of the new rules requiring that most operating leases be “capitalized.”
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Chapter 5 Current Assets and Liabilities 63 results (showing 5 best matches)
- There are few accounting issues related to the cash account. Because of its highly liquid status and the exposure to theft, embezzlement, or other loss, the cash account is subject to extensive internal control procedures and stringent audit procedures to be certain that the amount of cash reported in the balance sheet is in existence and that cash is not being used for unauthorized purposes. Bank reconciliations are prepared on a regular basis to compare the company’s reported cash in its bank accounts with the reported bank balances and to identify items that may have been entered directly into the bank accounts but for which accounting entries have not yet been made. Auditors will confirm with the banks the amounts reported in the accounts for those banks at the end of the year. At the same time, the auditors will confirm with the banks the
- When a specific account is determined to be uncollectible, no additional bad debt expense is recorded. The identified account is removed from the receivables account and a like amount is removed from the allowance account with no net effect on income or on the balance sheet (since the net receivables reported in the balance sheet are unchanged). Thus, if a $5,000 receivable were determined to be uncollectible, the following entry would be made:
- Another accounting issue related to receivables arises from the practice of converting receivables into cash prior to collection either by borrowing using the receivables as security for the loan or by selling the receivables. If the receivables are assigned or pledged as collateral for a loan, the loan is recorded as a liability and accounted for in the normal manner. Generally, the assignor of the receivables retains the responsibility for collecting the receivables. The assigned receivables remain as current assets, although they may be transferred to an account called “Assigned Accounts Receivable” to facilitate segregation of the assigned accounts from accounts that have not been assigned. Thus, assume that a business borrows $95,000 by assigning accounts receivable in the amount of $100,000. An interest bearing note is executed. This transaction would be recorded as follows:
- The second approach for determining the bad debt expense for the period is the aged accounts receivable analysis. The accounts receivable are periodically divided into categories based on the age of the receivables. The amount in each aging category is examined and a determination is made, based on past experience, about how much of the receivables in each category will eventually be uncollectible. The total amount expected to be uncollectible is then computed and compared to the amount currently in the allowance account. The difference is recorded as an adjustment to bad debt expense and the allowance account. This aged accounts receivable analysis is also used as a periodic check on the amount computed under the percentage of sales method.
- ASC 860-10 and -20 govern the accounting for sales of receivables and other transfers of financial assets. In this discussion, a sale of receivables will be used to illustrate the accounting issues that arise in these types of transfers. After reviewing the requirements to treat the transfer as a sale, the accounting for a transfer of receivables treated as a sale will be illustrated.
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Chapter 9 Accounting for Investments 43 results (showing 5 best matches)
- This chapter will address issues related to accounting for investments. Accounting for short-term investments in securities that are reported as current assets was discussed briefly in Chapter 5. Expanding on that discussion, Section A will discuss the appropriate accounting for investments in bonds. Section B will discuss the methods for accounting for investments in the stock of other companies. Section C will address the accounting for certain other investments.
- Accounting for investments in stock is more complicated than accounting for investments in bonds because the appropriate accounting treatment depends in part on the amount of stock that is owned in the investor company. There are three basic methods for accounting for investments in stock, the cost method, the equity method, and consolidation.
- This chapter will discuss in detail the rules for reporting investments including the rules requiring that certain investments be reported at market value. These rules apply to current assets and noncurrent assets. The accounting described in this chapter represents the general rules for accounting for investments for most businesses. Certain specialized industries, particularly finance and investment companies, have special rules for accounting for investments.
- When bonds are acquired as an investment, there are several steps in the accounting process. The bonds are initially recorded at their cost. The business that invests in the bonds must then account for the receipt of interest revenue and the accrual of interest revenue when interest is not paid currently through the date of the financial statements. Finally, bonds are often acquired at a price that differs from the face amount of the bonds. When this occurs, the business must account for the resulting discount or premium on the bonds. This section will review first the accounting for bonds acquired at face value and then will discuss the accounting treatment when bonds are acquired at a discount or premium. There will then be a discussion of the accounting for changes in market value of the bonds.
- The unrealized change account does not affect net income for the year but it is included in determining other comprehensive income. The cumulative amount of changes in the value of available for sale securities is reported as a separate component of stockholders’ equity. The allowance account is deducted (in this case) or added to the investment in stock account to determine the amount to be reported as investment in stock ($45,000 in this case) in the balance sheet.
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Chapter 11 Accounting for Leases 30 results (showing 5 best matches)
- Leveraged lease accounting is a special form of accounting by a lessor for leases that meet certain requirements (the lessee does not apply this special accounting treatment). In order to use leveraged lease accounting, the lease must first qualify as a direct financing form of a capital lease. In other words, leveraged lease accounting is not available to sellers using the lease as a method of providing financing to buyers. In addition, the lease must have all of the following features:
- The details of leveraged lease accounting go beyond this introductory discussion. In practice, leveraged lease transactions require careful integration of commercial law, accounting, and tax and this need for integration produces conflicts among these three disciplines that effectively involve the lawyer intimately in the accounting requirements and rules.
- Closely related to the topic of accounting for long-term debt is the accounting treatment of leases. Long-term leases, sometimes called finance leases or capital leases, are an alternative to the use of debt financing for the acquisition of assets. If the acquisition of an asset is accomplished by the means of a lease rather than through debt, the financial accounting consequences can be quite different. In addition, the income tax consequences of the two forms of financing are different as are the legal rights of the parties under commercial law including bankruptcy.
- To understand why the issue of accounting for leases is so significant, it is helpful to illustrate the difference in the accounting that results if the lease is treated as a “true” lease for accounting purposes as compared to the accounting that would apply if the asset were acquired with borrowed funds. Assume that a piece of equipment with a cost of $100,000 is being acquired. The seller offers two alternatives for financing the acquisition of the asset. The “buyer” could sign a lease giving the buyer the right to use the asset for twenty years in return for the payment of a monthly rental in the amount of $1,101.09. Alternatively, the buyer could sign a twenty-year note payable with an interest rate of 12% per annum payable in 240 equal monthly payments. The monthly payment on this note would be $1,101.09.
- Given the motivation of borrowers to structure loans in the form of leases to accomplish financial accounting and other objectives, GAAP has a set of rules that are used to determine when a transaction structured as a lease will be treated as a lease for accounting purposes and when such leases will instead be recharacterized and accounted for as purchases of assets financed with debt. The basic
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Chapter 13 Accounting for Stock and Stockholders’ Equity 45 results (showing 5 best matches)
- The first issue that arises in accounting for stockholders’ equity is accounting for contributions to the capital of a corporation. A contribution to capital normally involves the issuance of stock by the corporation and the receipt of assets by the corporation. In order to review the accounting for contributions to capital, the principal accounts that are included in stockholders’ equity must be introduced.
- The dividends declared account is a temporary account in which the dividends for the year are recorded. At the end of the year, the amount in the dividends declared account would be transferred to, and deducted from, retained earnings. If the total amount in the dividends declared account at the end
- The stockholders’ equity accounts would be reported in the balance sheet at their reduced amounts reflecting the repurchase of the shares. The account called “Treasury Stock” used under the par value method is a contra account to the common stock account. This account is used in states where the treasury stock retains its status as legally issued stock and can be resold by the corporation free of some of the legal restrictions normally associated with an initial issuance of stock.
- Similar accounting applies to the issuance of preferred stock. The par or stated value of the preferred stock would be recorded in an account called “Preferred Stock.” Any additional amount received for the stock would be recorded in an additional paid-in-capital account for the preferred. Thus, if 10,000 shares of $100 par value preferred stock are issued for $105 per share, the entry to record the issuance would be as follows:
- The third principal component of the stockholders’ equity in a corporation is the account called “Retained Earnings.” This account includes the accumulated net income of the corporation reduced by dividends, other distributions to stockholders, and certain miscellaneous items that are charged or credited directly to retained earnings. If the balance in the retained earnings account is a negative or debit balance (because the corporation has experienced losses), the account is usually called “Accumulated Deficit” in the balance sheet.
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Chapter 19 International Accounting Issues 28 results (showing 5 best matches)
- The discussion in this Nutshell relates to generally accepted accounting principles in the United States. While certainly in most developed countries at a minimum the basics of accounting would be the same, the actual accounting principles and practices for many transactions will differ among countries (which is understandable given that even in the U.S., there are situations where companies can choose from alternative acceptable accounting practices). While efforts are underway to harmonize the accounting principles followed in different countries, differences still exist. Just as there is no international tribunal or body that can create law applicable in all countries around the world, there is no single, all-powerful accounting body that can set mandatory accounting principles for all countries. The process for harmonizing accounting around the world essentially involves countries participating in international projects the goal of which is to reach ...accounting practices and...
- International accounting has two primary areas of concern (looking at accounting from the perspective of the United States). One area of concern focuses on U.S. businesses and addresses the special accounting problems that such businesses face when they operate in foreign markets. The other area of concern focuses on the fact that capital markets have become increasingly global with companies from many countries raising capital by issuing debt or selling stock in securities markets other than in their home country. The accounting rules that apply to these global companies may vary depending on the jurisdictions in which the companies are raising capital because not all countries have the same accounting principles and policies.
- When the functional currency is a foreign currency, the foreign branch or subsidiary would maintain its financial books and records in that foreign currency. When it is necessary to issue financial statements, several steps must be completed. If the financial records are maintained in accordance with accounting rules in the foreign country and those accounting rules differ from the U.S. accounting rules, adjustments must be made to convert the financial statements to a U.S. accounting basis.
- The FASB has been working with the IASB to make their financial reporting standards compatible on a standard by standard basis. When the FASB adopts new accounting standards, it now includes a statement regarding the extent to which adoption of the new standard contributes to convergence of U.S. accounting standards with international accounting standards.
- The IFRS rules on accounting for leases and the classification of leases are more subjective than under U.S. GAAP (Chapter 11). With the adoption of the new lease accounting rules by the FASB, the balance sheet differences will be reduced but the income statement impact will still differ. IFRS does not permit the use of LIFO accounting for inventory (Chapter 6). While the completed contract method (Chapter 4) is still allowed (or required) under U.S. GAAP in certain circumstances, this method of accounting for construction contracts is not permitted under IFRS. There are a number of differences at the technical level in the accounting for share based compensation arrangements (Chapter 13) between U.S. GAAP and IFRS. IFRS permits recognition of internally developed intangible assets ( ...would not be allowed under U.S. GAAP (Chapter 8). Many other differences still exist between U.S. GAAP and IFRS, particularly when looking at the detailed applications of specific accounting...
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Chapter 1 The Basic Financial Statements 14 results (showing 5 best matches)
- The main subject matter of this Nutshell is financial accounting. Financial accounting involves the process of recording transactions in the accounting records of a business and periodically extracting, sorting, and summarizing the recorded transactions to produce a set of financial statements. Financial statements are the primary means by which businesses communicate financial information to various users. When a business issues a complete set of financial statements, there are four individual statements that are typically prepared. This chapter will introduce and describe the basic financial statements. Various items and concepts introduced briefly in this chapter will be discussed in more detail in later chapters. A general familiarity with the output of the financial accounting process should assist in understanding the accounting process and the issues that arise in the preparation of the financial statements.
- The second adjustment modifies income for changes in certain current assets and liabilities. For example, net income includes all sales for the year. But not all sales are immediately collected in cash. If the business extends credit to its customers, some sales will be represented by accounts receivable (cash to be received in the future). If the balance in accounts receivable has increased during the period covered by the financial statements, this increase must be subtracted from net income to convert the sales component of net income to an amount reflecting the actual on account of sales, which is the correct amount to include in the cash flow from operations. Similar adjustments are made for changes in inventory, accounts payable, and other current asset and liability accounts.
- statements includes certain additional information. Financial statements include a number of footnotes. One critical footnote describes the significant accounting policies adopted by the issuer of the financial statements. As we will see in many of the chapters in this Nutshell, there are many areas where alternative accounting treatments are available for material items included in the financial statements. The footnote on accounting policies alerts the readers to which of the alternative accounting procedures have been adopted by the issuer in question.
- Accounts Payable
- Accounts Receivable
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Chapter 3 Generally Accepted Accounting Principles 44 results (showing 5 best matches)
- Before the APB, official guidance on accounting came from the Committee on Accounting Procedure, which was also a part of the AICPA. From 1939 to 1959, the Committee issued 51 Accounting Research Bulletins (ARBs).
- Notice that none of the sources of GAAP listed above are governmental in nature. The Securities and Exchange Commission (“SEC”), which regulates the sale of securities and the securities markets in the United States, obviously has a significant interest in the development of accounting principles since issuers of securities subject to the jurisdiction of the SEC must file audited financial statements with the SEC. For the most part, however, the SEC has elected to leave the development of accounting principles to the private sector accounting bodies described above. The exception to this has occurred when the SEC has determined that the accounting profession is not acting fast enough in a particular area. On those occasions, the SEC has issued its own guidance on accounting principles for financial statements filed with the SEC. The usual response when this happens has been prompt action by the private sector with the SEC then withdrawing its own pronouncement. The SEC thus acts as...
- The foregoing discussion of GAAP relates primarily to how accountants determine whether a specific accounting treatment must be used for a particular transaction or event. From time to time, the accounting profession has also tried to establish a broader set of fundamental accounting principles (sometimes referred to as concepts, pervasive principles, conventions, postulates, axioms, etc.) that could be used primarily in two ways. These fundamental principles serve as the conceptual basis for the official standard-setting bodies when they are considering adopting a new accounting standard. A new standard is expected to be in conformity with the underlying, fundamental principles. Alternatively, when an accountant is trying to determine the accounting for a specific transaction or event and there is no guidance in any of the sources described above, the accountant should presumably be guided by the fundamental underlying principles in ...a solution to the particular accounting issue...
- The Financial Accounting Standards Board (the “FASB”) is an independent body that was created to establish and improve standards for financial accounting and reporting. The FASB’s five members are selected by the Financial Accounting Foundation, which also provides the funding for the FASB. The members of the FASB represent a cross-section of accountants and users of financial statements. Its members must relinquish their private employment while serving as members of the Board to enhance the independence of the Board. SOX has generally adopted the accounting principles promulgated by the FASB as GAAP for purposes of financial statements the audits of which are subject to SOX, although the SEC can override the FASB.
- issued setting forth the appropriate accounting for different types of transactions or events. These statements could cover narrow topics (Statement 42 clarified a single technical point related to capitalization of interest) or may have extremely broad scope and application (Statement 13 and various amendments thereto covered the general topic of accounting for leases). The FASB also published interpretations that modified or extended the application of existing accounting standards.
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Chapter 7 Property, Plant, and Equipment and Depreciation 27 results (showing 5 best matches)
- In the noncurrent asset section of the balance sheet, the principal component for most businesses is the property, plant, and equipment account, also called the fixed asset account. The property, plant, and equipment account is generally composed of the tangible property other than inventory that is used in the operations of the business and expected to be used for more than one year. It includes land used in the business (but not land held for investment), machinery and equipment, furniture and fixtures, and buildings and other structures. There are four principal issues in accounting for property, plant, and equipment. These issues relate to recording the initial acquisition, allocating the cost of the property to expense over the life of the property through a process called depreciation accounting, reporting post-acquisition costs incurred to keep the property operational, and accounting for the disposal of the property.
- The construction in progress account is an asset account used to accumulate the cost of the construction until the asset is ready for use in the business. The effect of the foregoing entry capitalizing interest is to increase income for the year by the amount of the interest transferred to the construction account. This interest will eventually be deducted as part of the depreciation expense when the asset is completed and put in service.
- Accumulated depreciation is a contra asset account. That means that the accumulated depreciation is an offset to (reduction in) the related asset account in the balance sheet. Maintaining a separate accumulated depreciation account permits the business to retain a record of, and report, the original cost of the fixed assets separately from the amount of depreciation that has been recognized, which gives some indication of the relative age of the assets. This also permits reporting information about assets in the balance sheet even when those assets have become fully depreciated.
- The third principal accounting issue related to fixed assets is the accounting treatment for expenditures made on fixed assets after they are acquired and placed in service. When a post-acquisition expenditure is made in connection with a fixed asset, two possible accounting treatments are available. The expenditure could be immediately expensed (such an expenditure is sometimes referred to as a revenue expenditure). To expense an item means to recognize it as an expense in full in computing net income at the time the expenditure is made. Revenue expenditures in connection with fixed assets are generally expenditures for normal maintenance of the assets and for minor repairs.
- As will be seen below, historical cost accounting is used to account for fixed assets. There is no attempt to revalue the assets and maintain them at their fair market values. The only exception applies when an asset has experienced a reduction in value to an amount below the current book value of the asset and that loss of value is not temporary. Such a reduction in value would be recorded as a loss in the financial statements.
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Chapter 15 Accounting for Business Combinations 9 results (showing 5 best matches)
- Under the acquisition method of accounting, the accounting for the acquisition of a business is similar in many respects to any purchase of assets. The assets, liabilities, and any non-controlling interest in the acquired entity are recorded on the acquirer’s books at their fair value. The acquirer’s stock or some types of noncash consideration for the acquisition will be measured at their fair value. The book values of the assets and liabilities of the target are ignored. There is no carryover of any particular accounting attributes from the seller as was the case under an old method of accounting for business combinations called the pooling of interests method.
- Under the acquisition method of accounting, the acquiring company records the acquired net assets on the basis of their fair values at the date of acquisition. In illustrating the accounting for business combinations, I will assume an acquisition of stock of the target rather than an acquisition of the target’s assets. The rules for acquisitions of assets are essentially the same. The following balance sheets of the purchaser and the target will be used to illustrate acquisition accounting.
- In the case of a business combination in the form of an acquisition of stock, the adjustments to the fair value of the assets and the liabilities of the acquired business under the acquisition method of accounting are often recorded in the process of preparing consolidated financial statements, as discussed in Chapter 9. These adjustments are not generally recorded in the regular books of the target. In certain situations where the acquired subsidiary must issue its own separate financial statements, a procedure called “push down accounting” is employed. Under push down accounting, the assets and liabilities of the acquired subsidiary are adjusted based on the fair values at the time of the acquisition in the same manner that those values are adjusted in the preparation of the parent company’s consolidated financial statements.
- ACCOUNTING FOR ACQUISITION COSTS
- The rules for accounting for business combinations are not applicable to a transfer by a corporation of its net assets to a newly created corporate entity, nor does it apply to a transfer of assets among corporations under common control (
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Chapter 12 Accounting for Other Long-Term Liabilities 24 results (showing 5 best matches)
- Accounting for income taxes is the subject of ASC Topic 740. The principal accounting issues related to income taxes arise from the fact that the rules for determining income for income tax purposes are different from the rules of GAAP used in determining income tax for financial reporting. There are two types of differences. “Temporary differences” arise when an item of income or expense is taken into account in determining financial or book income in a different period from the period in which the item is taken into account in determining taxable income. “Permanent differences” arise because some items that are income for one purpose are never treated as income for the other purpose and similarly some
- There are four basic categories of temporary differences in accounting for deferred income taxes that we will discuss. Certain types of temporary differences can also arise related to accounting investment tax credits, tax effects from changes in foreign currency and business combinations. ASC 740-10-25-20.
- ASC 715-60 sets forth requirements to account for these arrangements on an accrual basis similar in many ways to the accounting for defined benefit pension plans. Accrual of the expense related to these plans will now occur over the service lives of the employees that are entitled to the benefits.
- In effect, the accounting for deferred taxes permits the business to allocate its tax liability as expense to each accounting period in a manner that reflects the
- The deferred tax liabilities and deferred tax assets are merely accounting deferral techniques used to match income tax expense with the related book income. A deferred tax liability does not represent a present obligation to make a payment to any governmental agency. Whether any liability to the government will exist in the future depends on the future taxable income of the business. Similarly, a ...assets and deferred tax liabilities can become very substantial in amount as they accumulate over time. Take, for example, a growing capital-intensive business. Each year, the business adds new equipment and other depreciable property eligible for the accelerated tax depreciation that causes deferred tax liabilities to arise. While the book depreciation on older assets may exceed the tax depreciation on those assets and such reversals would lead to a reduction in the deferred tax liabilities, the addition of new assets requires additional amounts in the deferred tax liability account...
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Foreword to the Sixth Edition 5 results
- The accounting world and accounting rules continue to change reflecting both changes in the business environment and refined thinking about how transactions and events should be presented in financial statements. The sixth edition reflects the key developments that have occurred since the fifth edition.
- The Financial Accounting Standards Board (FASB) has adopted a significant change in the approach to accounting guidance for revenue recognition. Rather than providing specific rules for the recognition of various types of revenues, the Accounting Standards Codification has a new Section 606 that provides a principles based approach to revenue recognition. Principles based approaches are designed to provide a general framework that should guide the accounting for all types of revenues. This development is covered in Chapter 4. This new guidance is generally effective starting in 2017 for public entities (with optional effective dates for other types of entities).
- As always, I trust that this sixth edition will continue to provide law students, lawyers, and other readers with a sufficient understanding of the basics of accounting and finance so that they can better appreciate the significance of accounting and its importance in the commercial and legal world.
- The long-awaited changes in the accounting for leases were finally issued by the FASB. The changes primarily affect the balance sheet presentation for operating leases requiring almost all such leases to be capitalized. The concept of special accounting for leveraged leases is eliminated. The new rules will end a major source of off balance sheet financing. These rules are generally effective for public business entities and certain other issuers in 2019 and a year later for other issuers. Earlier application is permitted.
- Other changes include refinements in the accounting for share-based compensation (stock options, for example), elimination of the separate line-item for “extraordinary items” in the income statement, and changes in the lower of cost or market rules for inventory.
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Chapter 4 Recognition of Revenues and Expenses 13 results (showing 5 best matches)
- Two concepts have been developed to deal with these issues. The “revenue recognition principle” guides the determination of when to recognize for accounting purposes the revenue from the various transactions of a business. The “matching principle” determines when expenses should be recognized for accounting purposes.
- Certain types of costs can be directly related with revenue. These costs are recognized as expense when the related revenues are recognized. The cost of goods sold is an example of this approach to expense recognition. A retailer incurs costs in acquiring inventory that is held for sale. When the inventory is acquired, the cost is not treated as an expense but is reported in a current asset account called inventory. When sales occur and revenue is recognized, the appropriate cost of the items sold is removed from the inventory account and recognized as an expense called cost of goods sold.
- Where there is substantial uncertainty about the ability to collect service revenue that is earned, revenue may be recognized under a cash collection method where revenue would be recognized only as cash is collected. Note that recognition only when cash is collected by a business otherwise using the accrual method required by GAAP is different from a business that has decided to use the cash receipts and disbursements method of accounting.
- In the limited cases described in the previous section, the accounting recognition of changes in
- On the other hand, expenses may be recognized in some cases before any identifiable costs are actually incurred by the business. For example, when a business sells goods subject to a warranty, the normal practice is to report an estimated warranty expense at the time of the sale of the goods. The offsetting entry to the warranty expense (which is a debit entry) is a credit to a liability account for future warranty costs. The actual warranty costs will not be incurred until some later time. At that time, the warranty costs will be debited to the liability account rather than being deducted as an expense. Certain contingent expenses (such as the possible loss from litigation in which the business is a defendant) are
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Chapter 8 Intangible Assets 10 results (showing 5 best matches)
- residual value for the intangible in relatively rare situations. When amortization is recognized for intangible assets, there are two ways for recording the credit entry to reduce the book value of the intangible asset. The credit entry could be to an accumulated amortization account like the accumulated depreciation account used for tangible property. For intangible assets, however, the amortization is frequently credited directly to the asset account. Under this approach, the entry to record $100,000 of amortization expense related to a patent would be as follows:
- The accounting for intangible assets is a function of the method by which the intangibles are acquired (whether they are purchased or whether they are internally developed) and by the nature of the intangible assets (including whether they are specifically identifiable, whether they have indeterminate lives, and whether they are inherent in a continuing business). The accounting for goodwill and other intangible assets is now governed by ASC 350 and by ASC 805-30 (which addresses the original recognition of goodwill and other intangibles acquired as part of a business combination, as discussed in Chapter 15).
- ASC 350 also governs the post-acquisition accounting for the goodwill and other intangible assets resulting from the business combination. The accounting for the intangible assets other than goodwill will depend on whether those assets have finite useful lives. ASC 350-30-35-1. If these assets have a finite useful life, they must be amortized over that useful life and if they do not have a finite useful life, they are not amortized. Both assets with and without finite lives must also be tested periodically for impairment.
- ACCOUNTING FOR THE PURCHASE OF IDENTIFIABLE INTANGIBLE ASSETS
- INITIAL ACCOUNTING FOR INTERNALLY CREATED IDENTIFIABLE INTANGIBLE ASSETS
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Chapter 18 Corporate Finance— Valuation 6 results (showing 5 best matches)
- A significant use of financial accounting information is in connection with the valuation of business enterprises and the valuation of the individual securities issued by businesses. The information from the financial statements may be used directly in the valuation process or the accounting information may be used indirectly in projecting such items as earnings or cash flow or in determining the risk associated with the securities of the business. Risk is reflected in the discount rate or required rate of return that is a central element of many valuation techniques used in the area of corporate finance.
- multiples are extremely unreliable because of the use of historical costs in accounting for inventory and property, plant, and equipment. Different businesses may have widely disparate book values solely as the result of historical cost accounting.
- Other more reliable multiples would be based on the relationship between the price paid for comparable businesses and the earnings or cash flow of those businesses. The earnings multiple analysis would be similar to the use of price/earnings ratios to compute the value of the common stock of a company as discussed in Section A.3 above. To apply a meaningful earnings multiple analysis, the earnings for the comparable companies must be “cleaned up.” This cleanup process involves converting the companies under consideration to common bases of accounting where multiple acceptable accounting approaches exist ( ...accounting) and eliminating from the earnings any unusual or nonrecurring items that would distort the comparisons. Earnings multiples can be based on net income or they may be based on some partial earnings number such as operating earnings before or after interest expense. Cash flow multiples are similar to earnings multiples except that the multiples are based on an...
- To illustrate, assume that Company P has determined that its cost of debt is 9%, its cost of preferred stock is 10%, and its cost of common stock is 15%. Interest on debt is deductible in computing income tax so that the cost of debt to Company P is really the cost of the debt after taking into account the deductibility of interest. If the applicable tax rate is 40%, the after-tax cost of the debt capital is 9% × (1 − .4), or 5.4%. Assume that the target capital structure for Company P would have 40% debt, 20% preferred stock, and 40% common stock. The weighted average cost of capital for Company P would be:
- The initial step is the estimation of the future cash flows of the business for an appropriate number of years (typically ten (10) years). When valuing individual securities, the cash flows that are analyzed and discounted are the projected cash flows on the particular securities being valued. When valuing a business, the cash flows that are analyzed are the expected cash flows of the whole business. These cash flows are determined before the payment of any cash to suppliers of capital such as creditors so that the cash flows are sometimes referred to as unleveraged free cash flows. These estimates are based on the analyst’s judgment as to the future prospects of the business. The unleveraged free cash flows from operations are approximately equivalent to the amount shown as cash flow from operations in the Statement of Cash Flows discussed in Chapter 1 except that interest expense is not taken into account.
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Outline 42 results (showing 5 best matches)
Index 61 results (showing 5 best matches)
Appendix Time Value of Money 1 result
- This appendix will discuss the concept of the time value of money (also known as present value and future value analysis or discounting). Time value of money concepts are employed extensively in the areas of accounting and corporate finance. This appendix will introduce the concepts of present and future value for those who are not familiar with them and will serve as a convenient review for those who are familiar with these concepts.
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- Publication Date: April 28th, 2017
- ISBN: 9781634608510
- Subject: Accounting
- Series: Nutshells
- Type: Overviews
- Description: This product provides a well-rounded summary of the relevant accounting areas from basic financial statements to complex earnings-per-share ratios and corporate finance and valuation. Learn how to recognize revenue, expenses, assets, and liabilities. It reviews accounting principles for many different areas, including acquisitions, investments, long-term debt, leases, stocks, and partnerships. It also discusses recent developments such as adoption of new requirements to place most operating leases on the lessee’s balance sheet, a new principles based approach to accounting for revenue, refinements in the accounting for stock options, and revised rules for applying the lower of cost or market rule to inventory.
