Basic AccountingWhat an Examiner Should Know

U.S. GAAP - Then and Now

Before September 20094 categories of U.S. GAAPMultiple promulgators of U.S. GAAP

AICPA FASB

After September 2009U.S. GAAP has been codified under the FASB Accounting

Standards Codification

U.S. GAAPPre-2009

Category (A) (Most authoritative) FASB Standards and

InterpretationsAccounting Principles Board

(APB) OpinionsAccounting Research Bulletins

(ARBs) Category (B) FASB Technical BulletinsAICPA Industry Audit and

Accounting GuidesAICPA Statements of Position

(SOPs)

Category (C)FASB Emerging Issues

Task Force (EITF)AICPA AcSEC Practice

BulletinsCategory (D) (Least authoritative)AICPA Accounting

InterpretationsFASB Implementation

Guides (Q and A)

U.S. GAAPPost-2009

FASB CodificationAuthoritative

Incorporated U.S. GAAP promulgated as of September 2009

Other Accounting Positions and LiteratureNon-AuthoritativeInstructive

U.S. GAAPSome Science and Art

Qualitative Characteristics of U.S. GAAP Accounting Conceptual Framework

RelevanceReliabilityComparabilityConsistency

U.S. GAAPSome Science and Art

Recognition and Measurement Concepts of U.S. GAAP

Assumptions

Accounting EntityGoing ConcernMonetary Unit PrincipleTime-period Principle

U.S. GAAPSome Science and Art

Recognition and Measurement Concepts of U.S. GAAP

Principles

Historical CostRevenue RecognitionMatchingFull Disclosure

U.S. GAAPSome Science and Art

Recognition and Measurement Concepts of U.S. GAAP

Constraints

ObjectivityMaterialityConsistencyConservatism

U.S. GAAPSome Science and Art

May be multiple allowable methods to account for a transaction

By Following the Accounting Conceptual FrameworkEx: Depreciation

Cash vs. Accrual Basis

Prepaid AssetsDeferred Revenue

Basic Accounting Equation

Assets = Liabilities + Equity

What are Assets?

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

CashAccounts ReceivableContra-Asset Reserves (Allowance for Bad Debts)Goodwill

What are Liabilities?

A liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

Accounts or Notes PayableBonds PayableDeferred Revenue

What is Equity?

The portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital), assets and liabilities exchanged or acquired and retained earnings. Commonly referred to as book value.

Common StockAdditional Paid-in CapitalRetained Earnings

Basic Financial Statements

Balance Sheet (AKA: Statement of Financial Position)Point in time disclosureIn order of liquidityTwo major sectionsWhat are Retained Earnings?

Basic Financial Statements

Income Statement (AKA: Statement of Operations)Expenses and revenues recognized over a period of timeIncludes an operating section and other

income/expense/gain/loss sectionGains and losses on sale of assets

Basic Financial Statements

Statement of Cash FlowsTranslation of accrual performance metric – net income to

cashThree sections

Operating Investing Financing

Reconciles the flow of cash from the beginning to the end of a period

Basic Financial Statements

Statement of Cash Flows - OperatingCash generated or expended in the core business activity of

the entityDepreciation and amortization adjustmentsGains and losses from non-current assets are adjusted for

from this section

Basic Financial Statements

Statement of Cash Flows - InvestingCash generated or expended from the acquisition of assets,

liabilities, and entities through mergerUsually includes cash generated and expended from

acquisition/disposition of property, plant and equipment and long-term investments

Basic Financial Statements

Statement of Cash Flows - FinancingCash generated or expended from the raising and retiring

capitalProceeds from capital transactions

Investor notes Stocks Bonds

Principal or interest of debt obligationsDividends or distributions paid to stockholders or to retire

stock

Basic Financial Statements

Statement of Cash Flows – Material Non-Cash TransactionsRequired by U.S. GAAP to be disclosed either on statement

of cash flows or in the notes to the FSTypical items include:

Converting debt to equity Exchanging non-cash assets or liabilities for other non-cash items Issuing shares in exchange for assets

Basic Financial Statements

Statement of Stockholders’ EquityStand-alone statement or incorporated into balance sheetTypical items include:

Common Stock (at par, if one) Preferred Stock Additional Paid-in Capital Retained Earnings Distributions and dividends

Basic Financial Statements

Financial Statement NotesVery integral to understanding the financial statementsTypical notes include:

Significant Accounting Policies Description of the Entity’s Operations Recent Accounting Pronouncements Related Party Transactions Fair Value of Financial Instruments Subsequent Events

Financial Statements Interplay

Income Statement to Balance SheetNet Income is part of Retained EarningsInterest accrued but not paid is a liabilityExpenses paid but service or product not

rendered/received is an assetRevenue received but not earned/or right of return exists is

a liabilityExpenses incurred but not paid is a liability

Financial Statements Interplay

Income Statement to Cash Flow Statement

Net Income is part of Operations Cash Flow

Accrued differences not settled in cash over period are adjusted for in Operations Cash Flow

Financial Statements Interplay

Balance Sheet to Cash Flow Statement

Changes in current/core operating accounts year over year are adjusted for in Operations Cash Flow

Asset/Liability acquisition and dispositions settled in cash

Sale or retirement of debt/equity and distributions settled in cash

Vertical Analysis

Proportionality Analysis

Compares individual balance sheet items to the total of like items as a percentage of the total

Compares income statement items to net income

Allows one to make assumptions on relationships, especially comparing such percentages year over year

Horizontal Analysis

Timeline Analysis

Compares individual financial statement items in each statement to the same item across time periods

Allows one to gain insight on trends

Ratio Analysis

Basic Categories

LiquidityActivityLeverageProfitability

Ratio Analysis

Key Liquidity Ratios

Current Ratio

Current AssetsCurrent Liabilities

Acid-Test Ratio

Cash + Cash equivalents + Short-term investments + A/RCurrent Liabilities

Ratio Analysis

Key Activity Ratios

Total Asset Turnover

Net SalesAverage total assets

Fixed Asset Turnover

Net SalesAverage Fixed Assets

Intangible Asset Turnover

Net SalesAverage Intangible Assets

Ratio Analysis

Key Leverage Ratios

Debt to Equity

Total Debt (long-term and short-term)Total Equity

Times Interest Earned

Net Income before Interest and TaxesInterest Expense

Ratio Analysis

Key Profitability Ratios

Operating Profit Margin

Net Income before Interest and Taxes Net Sales

Return on Investment

Net Income + Interest Expense(1 – Tax Rate)Average Stockholders’ Equity + Long-Term Debt

GAASGenerally Accepted Auditing Standards

Developed by the AICPA

Currently changes to Public Company GAAS are through the PCAOB Public Company Audit Oversight Board

Professional Standards on Audit Procedures

GAASAccountant Reports

Engagement Levels

Compilation

Review/Examination

Audit

GAASTypes of Audit Opinions

Unqualified

Qualified Exception to Accounting Application Going Concern Material Matter

Disclaimer Scope Limitation

Adverse

Questions?