Special Purpose Frameworks

Question 1

T/F: special purpose frameworks, aka other comprehensive bases of accounting (OCBOA), are non-GAAP presentations that have widespread understanding and support

Answer 1

True; the cash basis, modified cash basis, and tax basis of accounting are the most commonly used special purpose frameworks

Question 2

What are some guidelines that apply to OCBOA financial statement presentations?

Answer 2

financial statement titles should differentiate the OCBOA financial statements from accrual basis financial statements

the required financial statements are the equivalents of the accrual basis balance sheet and income statement

the financial statements should explain changes in equity accounts

a statement of cash flows is not required

disclosures in OCBOA financial statements should be similar to the disclosures in GAAP financial statements

Question 3

T/F: cash basis financial statements are not well-suited for entities that have complex operations

Answer 3

True; however, tax basis financial statements are well-suited for entities that have complex operations

Question 4

T/F: tax basis financial statements are prepared based on the methods and principles used to prepare the entity’s tax return

Answer 4

True; special accounting treatment must be given to nontaxable revenues and expenses not reported on the tax return

nontaxable revenues and expenses must be recognized in tax basis financial statements in the period received or paid for cash-basis taxpayers and in the period accruable for accrual-basis taxpayers; nontaxable revenues and expenses may be reported as: separate line items in the revenue and expense sections of the statement of revenues and expenses, additions and deductions to net income, or a disclosure in a note

Question 5

Converting cash basis to accrual basis

Answer 5

cash basis
revenue recognition = cash received
expense recognition = cash paid

accrual basis
revenue recognition = realized or realizable and earned
expense recognition = incurred / owed / benefit received

converting cash basis revenue to accrual basis revenue
cash basis revenue + ending AR - beginning AR - ending unearned revenue + beginning unearned revenue = accrual basis revenue

converting cash paid for purchases to cost of goods sold
cash paid for purchases + ending AP - beginning AP - ending inventory + beginning inventory = COGS

converting cash paid for operating expenses to accrual basis operating expenses
cash paid for operating expenses + ending accrued liabilities - beginning accrued liabilities - ending prepaid expenses + beginning prepaid expenses