Foreword to the Sixth Edition 5 results
- 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.
- 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).
- 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.
- 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.
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Chapter 9 Accounting for Investments 157 results (showing 5 best matches)
- 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.
- One of the principal accounting benefits sought in using a VIE is that it provides a form of off-balance sheet financing if consolidation is not required. Off-balance sheet financing generally removes what would otherwise be assets and liabilities from the balance sheet of the company using the VIE, which in turn lowers the debt-equity ratio of the company. This can create more borrowing capacity for the sponsoring company, reduce the sponsoring company’s cost of capital by lowering the risk of the company that comes with a higher debt-equity ratio, or provide a combination of these and other financial benefits.
- 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.
- 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.
- If the derivative is a hedging instrument, the accounting for gains and losses on the derivative depends on the accounting for the hedged item. Generally, a derivative is a hedging instrument if it is being used to offset the risk that would otherwise be associated with an asset or liability of the business. In general, the gains and losses on the derivative are “matched” with the earnings effects of the hedged items. The types of hedges and the related accounting will be discussed below. There are detailed procedural requirements that must be followed for determining when a derivative is a hedge.
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Chapter 11 Accounting for Leases 65 results (showing 5 best matches)
- 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 guidance on this issue is found in ASC 840. If a lease is not recharacterized, it is referred to as an “operating lease.” If the lease is recharacterized as a purchase of an asset with debt, the lease is referred to as a “capital lease.”
- 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:
- 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.
- A direct financing lease would be accounted for by the lessor in a similar fashion except that there would be no gross profit recognized at the time of the execution of the lease. The accounting for the lease payments would be the same as illustrated above for the sales-type lease.
- 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.
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Chapter 19 International Accounting Issues 59 results (showing 5 best matches)
- When U.S. businesses operate in foreign markets, such operations affect the accounting and preparation of financial statements in accordance with generally accepted accounting principles in the United States. Aside from the political and legal issues presented by such operations, which are beyond the scope of this Nutshell, foreign operations create significant accounting issues because of the need to present financial information in a single currency, which is the U.S. dollar for financial statements prepared by companies based in the United States.
- 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 ...on consistent accounting...
- 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 ( , patents) in situations where such recognition 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...
- The rules for translating foreign financial statement are quite complex. Different rules apply depending on whether the “functional currency” of the foreign operations is the U.S. dollar or a foreign currency. ASC 830-10-45-2 provides that the functional currency of a branch or subsidiary is “the currency of the primary economic environment in which the entity operates,” which would normally be the currency in which the branch or subsidiary “primarily generates and expends cash.” ASC 830-10-55-5 provides a number of factors for determining the functional currency. Factors include the currency in which the business generally receives its revenues and pays its expenses, the extent to which cash flows of the branch or subsidiary are retained in the foreign country as opposed to being made available to the parent for its own use, the currency in which the branch or subsidiary raises financing and the extent to which the branch or subsidiary can service that financing out if its own...
- In February of 2010, the SEC issued a Commission Statement in Support of Convergence and Global Accounting Standards. The SEC noted that it continues to support the goal of a single set of high quality globally accepted accounting standards. In this Statement, the SEC indicated that it had directed its staff to develop and execute a work plan to position the Commission to make a determination in 2011 regarding incorporating IFRS into the financial reporting system for U.S. issuers.
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Chapter 1 The Basic Financial Statements 43 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.
- In addition to the actual financial statements described above, a complete set of financial 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.
- 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.
- At least for companies that are required to file financial statements with the Securities and Exchange Commission, another important part of the financial statements is a section called “Management’s Discussion and Analysis.” This provides management’s explanation of operating and financing matters for the company as well as additional detailed financial figures. This discussion is very useful in helping to understand the basic financial statements and what they mean.
- Some items listed in the assets section of the balance sheet fall in both of the above categories. A building represents tangible property owned by the business. At the same time, the cost of the building represents a type of prepaid or deferred expense that will be recognized and deducted in computing net income over the life of the building through a process called depreciation accounting (discussed in Chapter 7).
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Chapter 10 Accounting for Long-Term Debt 66 results (showing 5 best matches)
- Long-term debt is issued in a variety of forms. The debt may be in the form of a note payable, particularly where the loan is negotiated with a single lender such as a bank. Frequently, however, long-term debt is issued in the form of bonds that divide an aggregate debt into smaller pieces that may be sold to different investors. Notes or bonds, in turn, may take different forms. The notes or bonds may be unsecured obligations of the debtor, in which case they are frequently referred to as debentures. Mortgage notes or bonds are secured by a mortgage 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...
- 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.
- At one time, the FASB provided that a retirement of debt could result for accounting purposes from an “in-substance defeasance.” An in-substance defeasance occurred when assets that would generate sufficient cash flow to make all future payments on the outstanding debt were placed in a trust for the purpose of making future payments on the debt and certain requirements were met.
- 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 ., the conversion feature is in the money on the date of issuance). In this situation, the intrinsic value of the conversion feature...
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Chapter 2 The Accounting Process 105 results (showing 5 best matches)
- 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.
- Note that the debit items equal the credit items. This must always be true. The convention is that the debit entries are offset to the left of the credit entries in the journal. An actual journal entry would also have associated with it the date of the entry and in some cases, a description of the transaction that produced the entry. In a similar manner, all the other transactions of the business and other events affecting the accounting records would be recorded in the journal with the debits always equaling the credits. This format for journal entries will be used throughout this Nutshell to illustrate accounting for different events and transactions.
- As was discussed above, this entry has the effect of closing out (creating a zero balance in) the revenue and expense accounts. For example, the sales revenues account had a credit balance of $100,000. The $100,000 debit in the closing entry reduces the sales revenue account to zero. The same is true of the expense accounts. The net of all the revenue and expense accounts, $20,000, is now a credit balance in the income summary account.
- With the help of the T-accounts representing the ledger, we can now expand on the concepts of debits and credits and explain the significance of posting the journal entry on either the left or right hand side of the T-account (the left and right hand sides of the T-accounts represent two columns in the ledger—one for the debit entries and one for the credit entries). The terms debit and credit are merely labels that are used in describing the process of recording accounting transactions. A debit entry is a left-side entry and a credit entry is a right-side entry. In the journal entry for the land purchase, the debit entry is set off slightly to the left of the credit entry and the credit entry is similarly to the right of the debit entry. In posting this journal entry to the ledger, the debit entry to the Land account for $100,000 has been posted to the left hand side of the Land T-account. The credit entries for Cash and Notes Payable have been posted to the right hand side of...
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Chapter 12 Accounting for Other Long-Term Liabilities 87 results (showing 5 best matches)
- ASC 715-30-35 also addresses settlements and curtailments of pension plans and accounting for the benefits resulting from a termination of a pension plan. The details of these rules are beyond the scope of this Nutshell.
- 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 items that are deducted as expenses for one purpose are never deducted as expenses for the other purpose.
- 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 deferred tax asset does not represent a present right to receive a tax refund from any government. Further, deferred tax 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...
- 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 book income from a timing perspective. If the relationship between book and taxable income had been reversed with taxable income greater than book income in year 1, the same procedure would have recognized a deferred tax asset in year 1 that would then be reversed in year 2.
- 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.
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Chapter 14 Partnership Accounting 57 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.
- 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:
- A new partner may also be admitted to the partnership in return for a contribution of additional assets to the partnership. The amount required to be contributed by the new partner will frequently reflect the fair market value of the net assets of the partnership so that the new partner may be required to contribute an amount to the partnership that represents a premium over, or discount from, the amount that would be expected based on the current book values of the capital accounts. In the example involving the EF partnership, assume that G is now to be admitted to the partnership as a 25% partner in return for a contribution to the partnership of cash in the amount of $50,000. If G’s contribution were simply combined with the current book value of the capital accounts of E and F, G would have a capital account equal to approximately 29.4% (50,000/170,000) of the total partnership capital following G’s admission. There are three approaches to accounting for G’s admission.
- 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 13 Accounting for Stock and Stockholders’ Equity 117 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 entries made in the retained earnings account are quite limited. At the end of each year in connection with the closing of the books, the net income or loss for the year is transferred from the temporary accounts to the retained earnings permanent account. If a corporation has net income for the year of $150,000 and the corporation used an “income summary” account to summarize the net income for the year, the entry to transfer the net income to retained earnings would be:
- 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:
- A redemption of preferred stock pursuant to a call provision in the preferred stock certificate or as the result of an open market purchase would typically be accounted for using the par value method of accounting for purchases of treasury stock.
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Chapter 5 Current Assets and Liabilities 123 results (showing 5 best matches)
- 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.
- 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 absence of any unrecorded loans that may be used to conceal a cash shortage.
- 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.
- This chapter will discuss accounting issues related to current assets and liabilities. Current assets are assets that are generally expected to be converted into cash or consumed in the business within the next year or within the operating cycle for businesses with an operating cycle greater than one year. The operating cycle is the length of time needed for a business to acquire raw materials or other inputs, produce and sell its goods or services, and collect the cash generated by the revenue-producing activities. For most businesses, the primary components of current assets are cash, marketable securities, receivables, inventories, and short-term prepayments. Accounting for inventories will be discussed separately in Chapter 6 and accounting for marketable securities is discussed further in Chapter 9.
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Appendix Time Value of Money 33 results (showing 5 best matches)
- 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.
- The annuity illustrated above called for payments to made at the end of each year during the annuity period. This is called an ordinary annuity or an
- The factors in the present value tables discussed above are normally based on the present value of an annuity in arrears. Adjustments must be made to
- Aside from performing the mathematical calculation each time a future value factor is needed, there are two primary sources for future value factors. Many books have future value tables that give the future value factors for a number of different interest rates and different time periods. The interest rates are listed on the top or side margin and the time periods are listed on the other margin. The appropriate factor for use in a calculation is taken from the intersection in the table of the interest rate and the number of time periods (called compounding periods). A future value factor table is included at the end of this appendix (Table 1). As can be seen, the future value factor for 6% interest for three periods is 1.191. A principal limitation of the table approach is that the factors are only provided for certain discrete interest rates and numbers of compounding periods. Other factors can be estimated by
- Future value tables for annuities are prepared just as in the case of future values and present values of $1. The factors in these tables represent the future value of an annuity of $1 for the number of periods indicated and at the interest rate indicated. A sample table of future value factors for annuities is included at the end of this appendix as Table 3. Calculators and computer software also have functions that calculate the future value of an annuity.
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Chapter 17 Special Reporting Issues 48 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.
- 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.
- 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 ( the cumulative change in income net of tax). This cumulative effect was reported as a separate item in the income statement. The new accounting principle was then applied prospectively in the current year and all future years.
- Previously, a change in accounting principle like the one illustrated above would not have been reported retroactively. If the change in accounting principle had been made at the beginning of 20x6, the cumulative effect would have been determined as of the beginning of 20x6. In the example above, the cumulative income before tax through the beginning of 20x6 would have been $1,500 ($1,000 as of the beginning of 20x4, $200 in 20x4, and $300 in 20x5). After tax, this would have resulted in additional income of $900. This $900 would have been reported separately in the income statement as the effect of a change in accounting principle. Thus, the principal differences under current rules are that the cumulative effect is determined as of the earliest period reported, that cumulative effect is reported as an adjustment to retained earnings rather than being included in the income statement for the year of the change, and all previously reported years are restated to reflect the effect of...
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Chapter 16 Earnings per Share and Financial Ratios 66 results (showing 5 best matches)
- 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.”
- 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).
- This ratio indicates the extent to which current earnings are being distributed in the form of dividends or reinvested in the business. A high payout ratio is normally associated with a mature business that is not growing and is therefore not reinvesting earnings. A low payout ratio normally indicates that the business is growing and is reinvesting earnings to finance that growth.
- 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.
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Copyright Page 6 results (showing 5 best matches)
- Nutshell Series, In a Nutshell
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Chapter 7 Property, Plant, and Equipment and Depreciation 83 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 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.
- Thus, on an annualized basis, the business has invested $167,917 for the current year. There is no debt specifically incurred to finance the construction. The interest allocable to these funds invested in the construction process is $167,917 × 11%, or $18,471. This amount would be transferred from the interest expense account for the year to the account in which the construction costs are being accumulated. The entry would be as follows:
- 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.
- The depreciation expense is deducted in computing net income for the period. In some cases, depreciation for the year is not recorded as an expense. It is recorded as an addition to some other asset account. For example, in the case of a manufacturer, the depreciation on the manufacturing facilities and equipment is initially recorded as part of the cost of the manufactured goods and is included in inventory cost. This depreciation will be recorded as an expense as part of the cost of goods sold when the inventory is sold. Depreciation is also transferred to another asset account when the depreciation is incurred in connection with the self-construction of assets.
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Chapter 3 Generally Accepted Accounting Principles 73 results (showing 5 best matches)
- Another governmental source of accounting principles are the rules and regulations of various federal and state regulatory agencies that require financial statements to be filed with them. In some cases, these agencies have established accounting rules or procedures for issues that have not been addressed by the official private sector accounting standard setting bodies and to this extent, the regulatory rules can be an additional source of guidance for GAAP. However, these agencies frequently issue their own accounting procedures and rules that in some cases conflict with GAAP. In those cases, the companies subject to the jurisdiction of the regulatory agencies will often prepare one set of financial statements for filing with the regulatory agencies and another set of financial statements prepared in conformity with GAAP for use by shareholders, creditors, and other users. It may not be possible for an auditor to give an opinion that the financial statements prepared for filing...
- 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 developing a solution to the particular
- Throughout this Nutshell, references will be made to topics, subtopics, sections, or paragraphs in the Accounting Standards Codification or ASC ( , ASC 740 on Income Taxes or ASC 730-10-25 on recognition of research and development costs). These references are to the FASB Accounting Standards Codification, which can be found on the FASB’s website at . Where helpful, references will also be made to the individual FASB statements (like FASB Statement No. 168) and interpretations and other pronouncements including those issued by predecessors to the FASB that, prior to the issuance of the ASC, were the source of official authoritative guidance on financial accounting matters (
- The requirement for yearly reporting requires that a conceptual basis be developed for assigning revenue that may be earned through a continuous process to a particular accounting period. The “revenue recognition principle” is the conceptual basis for assigning revenue to particular accounting periods. Similarly, it is necessary to assign costs incurred in generating revenue as expenses to the appropriate accounting period. The conceptual approach to this issue is that expenses should be matched (recorded as expense) in the same period as the revenues to which they relate. Revenue recognition and the matching principle are the subject of Chapter 4.
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Chapter 18 Corporate Finance— Valuation 70 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.
- The market interest rates to be used in valuing bonds are determined by several factors. The primary determinants of the market interest rates for a bond issue for a particular company are discussed in this section. This Nutshell does not discuss the determinants of the overall level of interest rates in the economy since these factors are not specific to the bond issue.
- A more sophisticated variation of this approach is to use a model called the capital asset pricing model to determine appropriate rates of return. The theoretical and conceptual basis for the capital asset pricing model is beyond the scope of this Nutshell. A simplified application of this model will, however, illustrate its use in determining common stock values. Analysts determine the expected rate of return for a “market portfolio of stocks” consisting, for example, of all of the stocks in the Standard & Poors 500 index. This rate of return for a broad based market index is composed of two elements, a risk free interest rate and a risk premium. The expected rate of return for individual stocks is determined to bear a relationship to the rate or return for the market as a whole. This relationship is stated as follows:
- Several types of multiples can be used. A multiple based on book value of a company may be used. This multiple would be based on the relationship between the price paid for other comparable businesses and the book value of those businesses at the time of the acquisition. For most industries, book value 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.
- Analysts use different techniques to estimate this terminal cash flow value. The terminal value may be based on the projected book value of the business taking into account the projected income, capital expenditures, and changes in working capital, and distribution of all free cash flow to the owners over the projection period. Another procedure used to estimate the terminal cash flow is an earnings-based value computing by multiplying the estimated earnings (unleveraged) for the final year in the cash flow projection period by an appropriate price/earnings multiple to compute a terminal value for the business. A third calculation might involve a calculation of a terminal value of the business based on an appropriate multiplier applied to the free cash flow for the final year in the projection period. From these amounts, the analyst will determine a subjective estimate of the terminal cash value for the firm.
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Chapter 15 Accounting for Business Combinations 18 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.
- 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 ( between a parent and its subsidiary or between two subsidiaries of a common parent corporation). The rules apply to an acquisition of the assets of an unrelated entity or to the acquisition of stock of an unrelated entity. All references to “acquisitions” in this chapter mean acquisitions that meet the definition of a business combination.
- The next step is to determine whether any goodwill results from the acquisition. Goodwill is the value of an acquired business over and above the value of the identifiable assets of the target less its liabilities. Goodwill is (a) the fair value of the consideration issued by the acquirer plus (b) the fair value of any noncontrolling interest in the target not acquired by the acquirer less (c) the net amount of the fair value of the identifiable assets acquired less the liabilities of the target recorded at the date of acquisition. In this case, the fair value of the consideration issued is $90,000 and the fair value of the noncontrolling interest in the target is $10,000, for a total of $100,000. The fair value of the identifiable assets of the target is $105,000 and the liabilities of the target are $30,000, or a net amount of $75,000. Therefore, the goodwill to be recorded is $100,000 minus $75,000, or $25,000. The post-acquisition accounting for goodwill is discussed in Chapter 8.
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Chapter 6 Accounting for Inventories 62 results (showing 5 best matches)
- 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 ( 400,000 units were purchased during the year at a cost of $1 per unit). A summary journal entry for all of the inventory purchase transactions for the year 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.
- 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:
- In the examples used in Section A above, it was assumed that the unit cost or value of the inventory did not change during the year. A major complicating factor in accounting for inventory is the reality that inventory items are acquired at varying costs throughout the year. A procedure is necessary to determine the costs to be assigned to the units still in inventory at the end of the year and the costs to be assigned to the units that were sold during the year.
- This entry returns the purchases account to a zero balance, corrects the inventory to be reported in the balance sheet to the appropriate end of the year amount, and records cost of goods sold for the year.
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Chapter 4 Recognition of Revenues and Expenses 54 results (showing 5 best matches)
- Where there appears to be a financing component involved but that component is not separately stated ( , where the buyer has the right to delay its payments for a significant period), an appropriate financing component should be separated from the basic consideration and recognized over the relevant financing period. Where payments are not expected to go beyond a year after the goods or services are provided, an entity can elect to ignore any requirement to compute the financing component. Where there is noncash consideration involved, it will be necessary to determine the fair value of the noncash consideration.
- 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 ...as expenses prior to the actual resolution of the lawsuit. Thus, expense is recognized prior to any actual costs being incurred. It is the matching principle and the expense recognition rules derived therefrom that determine when “costs” are treated as “... ...and...
- 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.
- It is also necessary to determine how to associate the expenses that are incurred by the business with the revenues that are recognized. Some costs or expenses may be easily identified with particular revenues. For example, the costs of the raw materials that were used in producing an order can be easily identified and associated with the appropriate revenue from that order. On the other hand, many expenses do not bear such a direct relationship to any particular revenue generating transaction and there is a need to determine when such expenses should be recognized for accounting purposes.
- The alternative method for accounting for this type of contract is the percentage of completion method. Under this method, an estimate is made at the end of 201x of the portion of the contract that has been completed at that point in time. That estimate is usually made on the basis of engineering analysis of the project or on the basis of the proportion of estimated total costs that have been incurred at the balance sheet date (in this example, both approaches indicate that the contract is 60% complete at the end of 201x). A corresponding portion of the total revenue on the project is recognized. Thus, $600,000 of the revenue would be recognized in 201x and the remaining $400,000 would be recognized in the next year. This approach also results in recognition of a portion of the total gross profit on the contract in each of the two years.
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Chapter 8 Intangible Assets 33 results (showing 5 best matches)
- 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).
- Amortization is generally on a straight-line basis unless a different pattern can be reliably determined. ASC 350-30-35-6. The amount subject to amortization is generally the full cost of the intangible but may be reduced by an estimated 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:
- 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.
- The accounting treatment for some of the costs related to the internal development of intangible assets is the subject of specific guidance from the FASB. Research and development expenses are expensed as incurred even though the research and development efforts may lead to a valuable patent, trade secret, or other valuable right. ASC 730-10-25. All the costs related to research and development must be accumulated and separately classified as research and development expenses since the financial statements must disclose the amount of research and development costs for each period for which an income statement is reported.
- Goodwill must be evaluated annually to determine if its value has been impaired (testing must occur more frequently than annually if circumstances or events occur that indicate a need for such testing). If the goodwill has been impaired, the goodwill must be written down with a corresponding recognition of expense. If there is no impairment of the goodwill, no expense or loss is recognized on account of the goodwill. To determine if there is impairment, goodwill (as well as other assets and liabilities) must first be assigned to individual “reporting units” of a business. Goodwill only exists as part of a business and can’t be tested for impairment in isolation as other assets would be. ASC 350-20-35 provides rules for determining what constitutes a reporting unit and how the aggregate amount of goodwill is allocated among the reporting units of an acquired business. A reporting unit may be an operating segment that is required to disclose separate financial information under ASC...
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Outline 133 results (showing 5 best matches)
Index 109 results (showing 5 best matches)
WEST ACADEMIC PUBLISHING’S LAW SCHOOL ADVISORY BOARD 6 results (showing 5 best matches)
- 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.