FAR 1 Module 7

Question 1

Cash basis pretax income to Accrual basis pretax income conversion.
How do increases and decreases affect

AR
AP
Deferred Revenue
Prepaid expenses
Accrued labilities

Answer 1

Cash to accrual income

Current Assets increase = accrual income increase

Current Assets decrease = accrual income decrease

Current liabilities increase = accrual income decrease

Current liabilities decrease = accrual income increase

Cash to accrual expense you just flip it

PPD means prepaid expense

Question 2

What is OCBOA?

What is a key guideline for presenting OCBOA in financial statements?

Is statement of financial position part of OCBOA?

Answer 2

OCBOA: Other Comprehensive Basis of Accounting

Financial statement titles should differentiate OCBOA financial statements
from accrual basis financial statements.

NO: Statement of financial position ACCRUAL basis by not-for-profit and not part of OCBOA

Question 3

What are Special purpose frameworks?
Are they with GAAP?

Answer 3

Special purpose frameworks are a non-GAAP presentations including

1. Cash basis
2. Modified Cash basis
3. Tax basis

Question 4

Under cash basis of accounting
Is unearned revenue recognized?

What financial statement is included under a special purpose framework?

Answer 4

Unearned revenue is not recognized (revenue is recognized immediately when received).

The statement of cash receipts and disbursements is part of financial statements prepared under the Special Purpose Framework.

Question 5

Under cash basis of accounting
Is the Statement of Comprehensive Income part of Cash Basis accounting?

Can OCBOA use GAAP accrual-based terms?

Answer 5

The Statement of Comprehensive Income is NOT part of Cash Basis accounting.

OCBOA (Other Comprehensive Basis of Accounting) CANNOT use GAAP accrual-based terms like the Statement of Comprehensive Income.

Question 6

What is capitalizing inventory?

Is this a modification used to prepare the modified cash basis in financial statements?

Answer 6

Capitalizing inventory means recording inventory purchases as an asset on the balance sheet

Rather than expensing them immediately

YES: Common modification used to prepare modified Cash basis statements

Question 7

When calculating for Operating expenses
Are the following accounts included?

Prepaid expense
Accrued Liability

Answer 7

Prepaid expense: YES, Prepaid expense appears in operating expenses on the income statement

Accrued Liability: NO, Accrued liabilities represent expenses incurred but not yet paid
Accrued Liabilities are recorded as liabilities on the balance sheet

Question 8

Under the income tax basis financial statements

What does it not included that GAAP does in the financial statements?

Answer 8

The income tax basis
Does not include nontaxable revenues and nondeductible expenses in determining income

IGNORES any money earned that isn’t subject to taxes (nontaxable revenue)
Doesn’t count expenses that the tax rules don’t allow you to deduct (nondeductible expenses)

Question 9

When preparing income tax basis financial statements, how should nondeductible portion
of expenses such as meals and entertainment be reported?

Answer 9

This should be included in the expense category in the determination of income

This is because the nondeductible portion of expenses such as (meals and entertainment)
reflects the actual expenditure of the business

Question 10

When reporting Cash basis income, what would be the formulas for:

sales
inventory purchase
expenses
AR
Inventory
AP Inventory

Answer 10

Cash sales = Sales - AR

Cash purchase = Inventory purchase - AP inventory

Other expenses

Cash Basis income = Cash sales - Cash purchase - other expenses