05.01 Special Purpose Frameworks Flashcards
True or false: a nonpublic business entity can issue financial statements not based on GAAP?
True. Financial statements not based on GAAP may be issued by nonpublic business entities to avoid the time-consuming and costly application of GAAP. These financial statements are prepared in accordance with special purpose frameworks.
What are examples of special purpose frameworks?
Special purpose frameworks (also called OCBOA) include cash basis, modified cash basis, income tax basis, contractual basis, and regulatory basis. Cash basis, modified cash basis, and income tax basis are the most common frameworks used.
For cash basis financial statements, what are the names of the statements equivalent to the balance sheet and income statement?
Balance sheet > Statement of assets and liabilities arising from cash transactions
Income statement > Statement of cash receipts and disbursements
For modified cash basis financial statements, what are the names of the statements equivalent to the balance sheet and income statement?
Balance sheet > Statement of assets and liabilities - modified cash basis
Income statement > Statement of revenues collected and expenses paid - modified cash basis
For income tax basis financial statements, what are the names of the statements equivalent to the balance sheet and income statement?
Balance sheet > Statement of assets, liabilities, and capital - tax basis
Income statement > Statement of revenues and expenses - tax basis
Under the cash basis of accounting, when/how are transactions recognized?
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
Fixed assets and inventory are expensed, not capitalized
Accruals are not made, and prepaid assets are not recorded
What is the modified cash basis of accounting?
The modified cash basis results from using a combination of cash-basis accounting and accrual-basis (i.e. GAAP) accounting. In general, a modification to the cash basis is acceptable if it is logical and consistent and the affected transactions involve cash.
Modifications to the cash basis of accounting generally result when cash receipts or disbursements provide a benefit or obligation that covers multiple reporting periods. The most common and acceptable modifications include: capitalization and depreciation of PP&E acquired with cash; capitalization of inventory acquired with cash; recognition of deferred revenue from cash receipts; recognition of long-term notes and other debt arising from cash transactions.
When may it be necessary for a company to convert from cash basis to accrual basis of accounting?
When applying for a bank loan or reporting to owners, a company may need to report using the accrual basis of accounting. Conversion from cash basis to accrual basis will be required.
What is the income tax basis of accounting?
Income tax basis financial statements result from using the federal income tax rules and regulations that a firm uses, or expects to use, in filing its income tax return.
