ACCOUNTING OUTLINE – 09F – SORIN
PRINCIPLES OF ACCOUNTING
I. Historical Costs, NOT current market values
a. Lower of cost or FMV
b. Write Downs
i. Company should write down obsolete or depreciated assets to their new value
1. Ex → MBS should be written down to pennies on the dollar
a. Other side of the write down: Expense on I/S (“loss on devalued securities”)
i. Ultimately gets back to B/S by effect on Retained Earn.
ii. Never “write up” until you realize a return on devalued assets
II. 3 Part Test for Assets:
a. Control
b. Reasonable Expectation of Future Benefit
c. Acquired in a Transaction Able to Be Measured by Cost or Value
III. GAAP (don’t need to know other than it mean “Generally Accepted Accounting Principles”)
a. Modifying Conventions
i. Materiality
1. When item is so minor as to make it unimportant to anyone reading financial statements, materiality permits accountant to disregard otherwise applicable principles and rules.
ii. Conservatism
1. Try to offset natural optimism of business owners
2. “recognize all losses, anticipate no gains”
iii. Industry Practices
1. Peculiarities in some industries allow departure from basic principles
b. Areas of Discretion
i. Firms can use considerable discretion in these areas:
1. “Collectibility” of A/R
2. “Useful Life” of assets
IV. Audit, Review, and Compilation → mechanisms for producing statements and having them certified by independent CPAs (see Notes p. 2-3)
V. Pro-Forma Fin. Statements → these disclose what the company would look like if a proposed transaction happens…
VI. Matching Concepts:
a. Accruals → when the cash effect comes AFTER the P&L (Income Statement) effect
b. Deferrals → when the cash effect comes BEFORE the P&L effect
VII. RULEMAKERS → see Notes, p. 12 – 14.
a. AICPA and FASB
b. CONGRESS
c. EXCHANGES
d. SEC 33/34 ACT
i. Public Companies
ii. Disclosure Obligations
iii. 3 categories for public companies:
1. Large Accelerated Filers
2. Accelerated Filers
3. Non-Accelerated Filers
ACCRUAL ACCOUNTING
I. Seek to allocate revenues and expenses to accounting periods, regardless of when the cash receipts or expenditures actually occur.
a. Revenue → when earne
h to meet short term debt obligations?
ii. Are there any balloon payments coming up??
j. OWNER’S EQUITY
i. Common Stock, $0.01 or Par Value
1. # Authorized?
2. # Issued & Outstanding?
ii. Blank Check Preferred Stock (no par value set yet)?
1. # authorized?
2. # issued & outstanding?
iii. Additional Paid-In Capital (aka capital in excess of par value)?
1. Calculated from the amount company actually sold shares for, minus par value
iv. Retained Earnings?
1. Connects Balance Sheet to Income Statement
v. WHAT TO LOOK FOR….
1. Do they have retained earnings or accumulated deficit?
a. “represents the amount of earnings retained in the business”
b. Earnings decline? → either loss or paid dividend
c. Deficit reduced? → made a profit!
2. How many shares are issuable?
a. Authorized v. Issued and Outstanding
i. Include CSE in Issued & Outstanding…
