Financial Accounting and Reporting F O U R T H E D I T I O N Less Antman • concepts • problem-solving • terms • rules and criteria WILEYCPAEXAM REVIEW Financial Accounting and Reporting F O U R T H E D I T I O N Less Antman • concepts • problem-solving • terms • rules and criteria WILEYCPAEXAM REVIEW Copyright © 2006, by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada. 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ISBN 13: 978-0471-78440-1 ISBN 0-471-78440-0 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Contents Basic Theory & Financial Reporting .............................................1 Inventory .....................................................................................26 Fixed Assets ...............................................................................49 Monetary Current Assets & Current Liabilities............................72 Present Value .............................................................................95 Deferred Taxes.........................................................................127 Stockholders’ Equity .................................................................133 Investments ..............................................................................158 Statement of Cash Flows..........................................................166 Business Combinations & Consolidations................................174 Derivative Instruments & Hedging Activities.............................184 Miscellaneous ...........................................................................188 Governmental ...........................................................................209 Not-For-Profit ............................................................................251 Index .........................................................................................263 Preface This publication is a comprehensive, yet simplified study program. It provides a review of all the basic skills and concepts tested on the CPA exam, and teaches important strategies to take the exam faster and more accurately. This tool allows you to take control of the CPA exam. This simplified and focused approach to studying for the CPA exam can be used: • As a handy and convenient reference manual • To solve exam questions • To reinforce material being studied Included is all of the information necessary to obtain a passing score on the CPA exam in a concise and easy-to-use format. Due to the wide variety of information covered on the exam, a number of techniques are included: • Acronyms and mnemonics to help candidates learn and remember a variety of rules and checklists • Formulas and equations that simplify complex calculations required on the exam • Simplified outlines of key concepts without the details that encumber or distract from learning the essential elements • Techniques that can be applied to problem solving or essay writing, such as preparing a multiple-step income statement, determining who will prevail in a legal conflict, or developing an audit program • Pro forma statements, reports, and schedules that make it easy to prepare these items by simply filling in the blanks • Proven techniques to help you become a smarter, sharper, and more accurate test taker This publication may also be useful to university students enrolled in Intermediate, Advanced and Cost Accounting, Auditing, Business Law, and Federal Income Tax classes. Good Luck on the Exam, Less Antman, CPA About the Author Less Antman, CPA has been preparing individuals for the CPA exam since 1979. For many years, he taught CPA review classes on a full-time basis for various programs, including Mark’s CPA Review Course and Kaplan CPA Review. He currently operates his own CPA review program in the state of California, under the name Antman CPA Review, located in Arcadia, California. He has taught more than 5,000 totally live CPA review classes, more than any other CPA review instructor in the United States, and his written materials have been used in several different instructor-based CPA review programs. Focus on Basic Concepts - Module 7 1 Objectives of Financial Reporting Financial statements are designed to meet the objectives of financial reporting: Balance Sheet Direct Information Financial Position Statement of Earnings and Comprehensive Income Direct Information Entity Performance Statement of Cash Flows Direct Information Entity Cash Flows Financial Statements Taken As a Whole Indirect Information Management & Performance Focus on Basic Concepts - Module 7 2 Qualitative Characteristics of Accounting Information Primary Qualitative Characteristics Ingredients Secondary Qualitative Characteristics Relevance Predictive value Feedback value Timeliness Reliability Representational faithfulness Verifiability Neutrality Usefulness Consistency & Comparability Focus on Basic Concepts - Module 7 3 Elements of Financial Statements = Revenues _ Expenses + Gains _ Losses Comprehensive Income = Net income ± Adjustments to stockholders’ equity Assets _ Liabilities = Equity Equity = _ = Contributions by owners Distributions to owners Comprehensive Income Comprehensive Income Focus on Basic Concepts - Module 7 4 Basic Rules & Concepts Consistency Realization Conservatism Recognition Allocation Matching Full disclosure You’ll get more credit (CR) if you CRAM your essays FULL of these rules and concepts Focus on Basic Concepts – Module 7 5 Revenue Recognition Accrual method Collection reasonably assured Degree of uncollectibility estimable Installment sale Collection not reasonably assured Cost recovery Collection not reasonably assured No basis for determining whether or not collectible Installment Sales Method Installment receivable balance Cash collections × Gross profit percentage × Gross profit percentage = Deferred gross profit (balance sheet) = Realized gross profit (income statement) Cost Recovery Method All collections applied to cost before any profit or interest income is recognized Focus on Basic Concepts – Module 7 6 Converting from Cash Basis to Accrual Basis Revenues Cash (amount received) xx Increase in accounts receivable (given) xx Decrease in accounts receivable (given) xx Revenues (plug) xx Cost of Sales Cost of sales (plug) xx Increase in inventory (given) xx Decrease in accounts payable (given) xx Decrease in inventory (given) xx Increase in accounts payable (given) xx Cash (payments for merchandise) xx Focus on Basic Concepts – Module 7 7 Expenses Expense (plug) xx Increase in prepaid expenses (given) xx Decrease in accrued expenses (given) xx Decrease in prepaid expenses (given) xx Increase in accrued expenses (given) xx Cash (amount paid for expense) xx Balance Sheet Current Assets Current Liabilities Cash Short-term debt Trading securities Accounts payable Current securities available for sale Accrued expenses Accounts receivable Current income taxes payable Inventories Current deferred tax liability Prepaid expenses Current portion of long-term debt Current deferred tax asset Unearned revenues