2 - Accrual Accounting

Question 1

The financial report issued by business enterprises, is a general-purpose one intended for all external users. External users of financial reports do not have access to the internal records of businesses and thus are dependent on the information in the report. The provision of information is accomplished through the issuance of a

Answer 1

General Purpose External Financial Report.

Question 2

is prepared by applying Generally Accepted Accounting Principles (GAAP). AKA the annual report

Answer 2

External Financial Report

Question 3

The general-purpose external financial report has the following key components.

Answer 3

1. Income Statement
2. Statement of Comprehensive Income
3. Balance Sheet
4. Statement of Changes in Owners’ Equity
5. Statement of Cash Flows
6. Footnote Disclosures and supplementary schedules
7. Auditor’s Opinion

Question 4

The composition of GAAP includes principles, methods, and procedures that are generally accepted by the accounting profession. The majority of GAAP includes the pronouncements issued by the Committee on Accounting Procedure (CAP), the Accounting Principles Board (APB), and the Financial Accounting Standards Board (FASB). The FASB Codification is the sole authoritative source for such GAAP and includes guidance from the above sources. For publicly traded entities, the SEC has additional reporting guidelines.

Answer 4

GAAP

Question 5

is the sole source of authoritative U.S. GAAP for nongovernmental entities, except for SEC guidance.

Answer 5

FASB Accounting Standards Codification

Question 6

carries the same level of authority (one level of GAAP). There is no longer a hierarchy of GAAP.

Answer 6

All guidance in the Codification

Question 7

Accounting and financial reporting practices not included in the Codification are

Answer 7

nonauthoritative

Question 8

The Codification does not change GAAP but rather provides accounting standards in a newly structured electronic form. The Codification is a compilation and reorganization of existing GAAP before the Codification, with updates being added as they are promulgated. The individual accounting-standard form of presentation is not used in the Codification. Rather, material is organized by major area and topic. Basis for conclusions, appendices and other ancillary content are included in the Codification only if the material is considered essential to the understanding and application of GAAP.

Answer 8

Some accounting standards have allowed entities to apply the provisions of superseded standards for transactions that have an ongoing effect on an entity’s statements. Such superseded guidance continues to be authoritative but is not included in the Codification. Examples include pooling of interests and pension transition obligations.

Question 9

The Codification does not include guidance for non-GAAP matters including:

Answer 9

1. Other Comprehensive Basis of Accounting
   
   2. Cash Basis
   3. Income Tax Basis
   4. Regulatory Accounting Principles

Question 10

If guidance for a transaction or event is not specified in the Codification, authoritative GAAP for similar transactions or events should be considered before considering nonauthoritative GAAP. Sources of nonauthoritative guidance include widely recognized and prevalent practices, FASB Concepts Statements, AICPA Issues Papers, IFRS, and others. There is no implied hierarchy for these sources.

Answer 10

The guidance for similar transactions or events is not followed if that guidance either prohibits the application of the guidance to the particular transaction or event, or indicates that the accounting treatment not be applied by analogy.

Question 11

Authoritative GAAP include relevant SEC rules and interpretative releases (applicable only to publicly traded firms). The Codification includes relevant portions of SEC content but does not contain the entire text of relevant SEC rules, regulations, interpretive releases and staff guidance. For example, the Codification does not include SEC content related to Management’s Discussion and Analysis and other items appearing outside the financial statements. The Codification does not replace or affect guidance issued by the SEC and is provided on a convenience basis

Answer 11

An adjacent lesson provides additional details on the structure and use of the Codification.

Question 12

GAAP, and therefore the financial statements, reflect the accrual basis of accounting rather than the cash basis of accounting. Both U.S. and international GAAP reflect the accrual basis of accounting.

Answer 12

Under the accrual basis, revenues are recognized when earned, regardless of the period of cash collection. Expenses are recognized when incurred, regardless of the period of cash payment.

Question 13

The accrual basis of accounting is preferred over the cash basis of accounting because it reflects a better association of revenues and expenses with the appropriate accounting period. The accrual basis of accounting recognizes all resource changes when they occur. The cash basis of accounting limits the recognition of resource changes to cash flows.

Answer 13

The accrual basis provides a more comprehensive measurement of the change in value of the firm resulting from income producing activities for a period because it does not limit the recognition of resource changes to the cash flows for that period. Accrual accounting much more fully reflects the economic substance of transactions.

Question 14

Accrual basis accounting recognizes and reports the economic activities of the firm in the period the activity was _______ regardless of when the cash activity takes place.

Answer 14

incurred

Question 15

When the economic event occurs, first you create an

Answer 15

accrual account. (You are accruing the cash owed or to be paid as an asset or liability.)

Question 16

When the cash activity occurs, first you create a

Answer 16

deferral account. (You are deferring the recognition of an expense or revenue as an asset or liability.)

Question 17

Recognizes and reports economic activity of entity in the period the activity was incurred, regardless of when cash activity takes place. Helps user asses the company better for future cash flows and shows the resources they have, like receivables and payables.

Answer 17

Accrual basis accounting

Question 18

Accounting Equation to get from an accrual NI to Cash NI

Answer 18

CHANGE(CASH)=CHANGE(L)+CHANGE(E)-CHANGE(OA)

Question 19

From Cash NI to Accrual NI

Answer 19

CHANGE(E)=CHANGE(A)-CHANGE(L)

Question 20

Event(Good or serv Provided) - Accrual Account(AR) - Cash

Answer 20

Accrual - Asset Account

Question 21

Event(Good or Serv Rec’d) - Accrual (AP) - Cash

Answer 21

Accrual - Liab account

Question 22

Cash pd - Deferral Acct(Prepd exp) - Event (use good or serv)

Answer 22

Deferral - Asset Acct

Question 23

Cash Recd - Deferral Acct (unearned Rev) - Event (provide good or serv)

Answer 23

Deferral - Liab Acct

Question 24

Record as an asset/liab right now to recognize exp or rev in the future.

Answer 24

deferral

Question 25

Dannon Co. reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information:

Beginning prepaid expense $1,300
Beginning accrued expense 1,650
Ending prepaid expense 1,800
Ending accrued expense 1,200

What amount of expense should Dannon report on its books under the accrual basis?

Answer 25

34,250
Correct! The best way to approach this question is by thinking through the effect on cash basis expenses for the change in the prepaid and accrued expenses. The expenses reported on a cash basis are 35,200. Prepaid expenses increased by 500; which means that more cash was paid than expense incurred. Therefore, the 500 should be deducted from the cash basis expense to derive accrual basis expense. Accrued expenses decreased by 450; which means more cash was paid than expenses incurred. Therefore, the 450 should be deducted from the cash basis expense to derive the accrual basis expense. The correct answer is 35,200 – 500 – 450 = 34,250.

Question 26

U Co. had cash purchases and payments on account during the current year totaling $455,000. U's beginning and ending accounts payable balances for the year were $64,000 and $50,000, respectively. What amount represents U's accrual-basis purchases for the year?
$441,000
$469,000
$505,000
$519,000

Answer 26

$441,000
Using an equation, or a T-account, to analyze accounts payable (AP) yields accrual purchases: Beginning AP ($64,000) + Accrual purchases—Cash payments ($455,000) = Ending AP ($50,000). Solving for accrual purchases yields $441,000.

Question 27

INFO: When going from Cash basis to Accrual basis:

total exp + beg ppd exp - end ppd exp - beg yr accd exp + end yr accd exp

Answer 27

The general rule to convert from cash to accrual is to add decreases in liabilities and increases in assets, and subtract increases in liabilities and decreases in assets.

Question 28

When converting from cash to accrual NI or accrual to cash NI, subtract ending balances MINUS beginning balances, why?

Answer 28

this will tell you if your account is increasing (pos number) or decreasing (neg number)

Question 29

If given accrued exp or rev, to solve for cash paid or rec’d (vice vera) use what?

Answer 29

T Accounts!

Question 30

To convert cash basis income to accrual basis income or accrual basis income to cash basis, use what?

Answer 30

T accounts OR modified accounting equations A = L + E