Accounting Cycle
- Understand the relationship
between balance sheet and income statement. Be
able to record regular transactions, adjusting entries and closing entries:
Type of entry: |
When made: |
Purpose: |
| Normal Transactions |
During the period |
Record transactions during the period |
| Adjusting Entries |
End of the period |
Adjust balance sheet/income statement accounts to proper
amounts:
- Assets: unexpired costs
- Liabilities: amounts owed
- Revenue:
amounts earned
- Expenses: amounts incurred
|
| Closing Entries |
End of the period |
Close Income Statement accounts to Retained Earnings.
Gets income statement accounts to zero and ready for next period |
- Know the
four sections of the income statement and what items impacts each section:
continuing operations, discontinued operations, extraordinary items, and
cumulative effect from change in accounting principles.
- Be
able to break cash flow into operating, financing, and investing
- Operating: cash based income
- Investing:
changes in cash and non-current assets
- Financing:
changes in cash and (1)non-current liabilities and (2)stockholders' equity
Accounting
Changes
- Know
the differences between changes in accounting estimates, changes in accounting
principles, and accounting
errors. Know how the above would be reflected in the financial
statements
- Know
that most changes in accounting principles and
accounting errors do not impact the income statement but go directly as a
restatement to opening balance of retained earnings.
-
Understand the current rules and the proposed
rules
Long-Lived
Assets (Property, Plant, and Equipment)
- Be familiar with issues related to capitalizing versus expensing of
costs. In particular understand the definition of "asset" and the periodic flow of costs from
the balance sheet to the income statement. In particular, how does this
relate to:
- property - costs flow to income statement via depreciation (depreciate
using SL, units or production, declining balance, sum of years' digits)
- software
- costs flow to income statement via amortization (amortize using higher of
straight-line or % of revenue approach)
- natural resources - costs
flow to income statement via depletion (know both full costing and
successful efforts as it applies to oil/gas industry)
- goodwill and
indefinite life intangibles - no amortization
- intangibles
with estimable life - costs flow to income statement via amortization
- changes in accounting estimates or changes in
accounting principles
- Know
how to
account for impairment of assets
- Understand how
capitalization/expensing issues can impact earnings management
- Understand
the differences between operating and capital leases and how to account for
both
Debt Securities (Issuing
Corporation and Investor)
Leases (Lessee Perspective)
- Understand
the differences between operating and capital leases and how to account for
both
- With regard to capital leases, pay attention to:
- What goes into the “minimum” lease payments
- Time period to record depreciation
- Impact on balance sheet and income statement
Equity
(Issuing Corporation)
- Understand the basic issues related to "contributed capital":
- Issuance of par value stock in either a cash or noncash transaction
- Accounting for stock sold on a subscription basis
- Accounting for stock issued in combination with other securities (lump
sum sales)
- Accounting for reacquisition of shares - treasury stock (cost method
only)
- Accounting for retirement of shares
- Knowing the features of preferred stock
- Stock splits, stock dividends, cash dividends
- Understand items impacting "retained earnings" (income/losses,
dividends, errors, quasi-reorganization)
- Understand liability versus equity issues
Equity (Investor)
-
Know how to account for investments in marketable equity securities (stock &
rights).
| Level of Influence |
Method |
| Insignificant |
FMV method (mark to market) - available for sale
unrealized gains/losses go to balance sheet; trading unrealized
gains/losses go to income statement |
| Significant |
Equity method (know how to account for difference between
BV, MV and Purchase Price of net assets |
| Control |
Consolidate |
- Know how to account for changes in levels of influence
Dilutive
Securities and
Compensation Plans
- Stock Options - intrinsic (APB 25) and FMV method (FAS123)
- Changing methods
(FAS 148)- Bonds with detachable warrants
(Allocate Proceeds between Debt and Equity)
- Convertible Bonds (Book Value and Market Value Method)
- Convertible Stock (Book Value Method)
EPS – Basic
and Diluted
- Be able to calculate weighted average shares for outstanding shares and/or
dilutive securities
- Know how to calculate both basic and diluted EPS
Pensions
and post retirement benefits other than pensions (PRBOTP)
- Understand the difference between defined benefit plans and defined
contribution plans; understand the accounting for both of the plans
- With regard to defined benefit plans:
- Understand conceptually how the VBO, ABO, and PBO are different
(these are different measurements of the pension liability)
- Understand how pension expense is derived (this is governed by
gaap), understand the funding implications (this is governed by cash flow decisions and
law)
- Understand the minimum liability issue
- Be familiar with the worksheet approach to determine the pension
entries
- Understand Retirement Benefits Other Than
Pensions. Two major differences:
- There is no "minimum liability"
requirement
- The transition amount
upon adopting the standard could be expensed
immediately or amortized over time
Cash Flow -
Direct and Indirect Methods
- Use t-account method to develop
cash flow statement
- Be
able to break cash flow into operating, financing, and investing
- Operating: cash based income
(Know both direct and indirect method)
- Investing:
changes in cash and non-current assets
- Financing:
changes in cash and (1)non-current liabilities and (2)stockholders' equity
