05 Special purpose frameworks

Question 1

Describe a modified cash basis of accounting.

Answer 1

A modified cash basis of accounting results from adjustments made to cash basis accounting. Specifically, while most items continue to be accounted for using the cash basis, some items are accounted for using the accrual basis. As a consequence, the financial statements reflect accounts and amounts based on a combination of the cash basis and the accrual basis.

Question 2

What is a special purpose financial reporting framework?

Answer 2

A financial reporting framework, other than GAAP or IFRS (ie, a general purpose framework), used for the preparation of financial statements (eg, cash or tax basis). Previously known as an Other Comprehensive Basis of Accounting (OCBOA).

Question 3

List examples of acceptable names for a cash basis income statement and balance sheet equivalent.

Answer 3

Cash basis balance sheet equivalent: Statement of assets and liabilities arising from cash transactions
Cash basis income statement equivalent: Statement of cash receipts and disbursements

Question 4

List examples of acceptable names for a modified cash basis income statement and balance sheet equivalent.

Answer 4

Modified cash basis balance sheet equivalent: Statement of assets and liabilities—modified cash basis
Modified cash basis income statement equivalent: Statement of revenues collected and expenses paid—modified cash basis

Question 5

List examples of acceptable names for an income tax basis income statement and balance sheet equivalent.

Answer 5

Income tax basis balance sheet equivalent: Statement of assets, liabilities, and capital—tax basis
Income tax basis income statement equivalent: Statement of revenues and expenses—tax basis

Question 6

Describe how to account for revenues, expenses and accruals under the cash basis of accounting.

Answer 6

Revenues are recognized when they are received, regardless of when they are earned
Expenses are recognized when they are paid, regardless of when they are incurred
Accruals are not made

Question 7

How are fixed assets and inventory accounted for under the cash basis of accounting?

Answer 7

Under the cash basis, fixed assets and inventory are expensed when purchased. Depreciation is not recorded in subsequent years.

Question 8

List the steps to convert cash receipts to accrual basis revenue.

Answer 8

Add:
Increases in accounts receivable
Decreases in unearned revenue

Subtract:
Decreases in accounts receivable
Increases in unearned revenue

Question 9

List the steps to convert cash paid for operating expenses to accrual basis expenses.

Answer 9

Add:
Increases in accrued liabilities
Decreases in prepaid expenses

Subtract:
Decreases in accrued liabilities
Increases in prepaid expenses

Question 10

List the steps to convert cash paid to suppliers to accrual basis COGS.

Answer 10

Add:
Increases in accounts payable
Decreases in inventory

Subtract:
Decreases in accounts payable
Increases in inventory

Question 11

Describe the income tax basis of accounting.

Answer 11

Under the income tax basis of accounting, financial statements are prepared according to the federal income tax rules that a firm uses in filing its income tax return. The effects of events on a business are recognized when taxable income or deductible expense would be recognized on the tax return.