2016 Wiley CPAexcel ® exam review FOCUS NOTES 2016 Wiley CPAexcel ® exam review FOCUS NOTES Financial Accounting and Reporting Cover Design: Wiley Cover image: © turtleteeth/iStockphoto Copyright © 2016 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://wiley.com/go/permission Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at http://www.wiley.com ISBN: 978-1-119-12007-0; ISBN: 978-1-119-24060-0 (ebk); ISBN: 978-1-119-24059-4 (ebk) Printed in the United States of America 10 Contents Preface vii About the Author ix About the Contributor ix Module 9: Basic Theory and Financial Reporting   Financial Statements Module 10: Inventory   Long-Term Construction Contracts Module 11: Fixed Assets Module 12: Monetary Current Assets and Current Liabilities Module 13: Present Value 11 41 64 68 95 124  Bonds 138   Debt Restructure 151  Pensions Module 14: Deferred Taxes Module 15: Stockholders’ Equity Module 16: Investments 155 162 172 198 v Module 17: Module 18: Module 19: Module 20: Statement of Cash Flows Business Combinations and Consolidations Derivative Instruments and Hedging Activities Miscellaneous 209 218 234 246  Partnership 249   Foreign Currency 257   Interim Reporting 261   Personal Financial Statements 265 Module 21: Governmental (State and Local) Accounting Module 22: Not-for-Profit Accounting 268 317 Index 332 Contents vi 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 vii • • • 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; and Economics and Finance classes     Good luck on the exam, Ray Whittington, PhD, CPA Preface viii Contributions Made to and Received by Not-for-Profit Organizations In general, contributions are income to a not-for-profit organization • • Those that are part of the major, ongoing, and central operations are revenues Those that are not are gains Unrestricted cash donations: Cash Donations (unrestricted funds) xxx xxx Permanently restricted donations: Cash Donations (permanently restricted funds) xxx xxx Focus on Not-for-Profit Accounting—Module 22 324 Contributions Made to and Received by Not-for-Profit Organizations (continued) Donated services: Program expense (fair market value) xxx Donations (unrestricted funds) xxx Cash donations restricted for a specific purposes: When made: Cash Donations (temporarily restricted funds) xxx xxx Focus on Not-for-Profit Accounting—Module 22 325 Contributions Made to and Received by Not-for-Profit Organizations (continued) When used: Temporarily restricted net assets Unrestricted net assets Expense Cash xxx xxx xxx xxx Cash donated for purchase of property: When made: Cash Donations (temporarily restricted funds) xxx xxx Focus on Not-for-Profit Accounting—Module 22 326 Contributions Made to and Received by Not-for-Profit Organizations (continued) When used: Temporarily restricted net assets Unrestricted net assets Property Cash xxx xxx xxx xxx Focus on Not-for-Profit Accounting—Module 22 327 Pledges Promises by outside parties to donate assets • • • • Recognized in period of pledge Allowance for uncollectible amount established Some or all may have time restriction—temporarily restricted Some or all may be unrestricted Pledges Allowance for uncollectible pledges Donations (unrestricted funds) Donations (temporarily restricted funds) xxx xxx xxx xxx Focus on Not-for-Profit Accounting—Module 22 328 Other Donations Donations of art, antiques, or artifacts not recognized if: • • • Asset held for research or exhibition Asset preserved and unaltered Proceeds from sale of asset to be used to buy additional art, antiques, and artifacts Donated assets to be held in trust • • Not recognized by not-for-profit organization Disclosed in footnotes to financial statements Focus on Not-for-Profit Accounting—Module 22 329 Hospital Revenues Patient service revenue recorded net of the allowance for patient bad debts • • • Billing may be less due to Medicare allowance or employee discount Difference recorded in allowance account, including estimated bad debts from patients Statement of activities will report net amount Services provided for free due to charity not recognized as revenues Special transactions: • • • Miscellaneous revenues from cafeteria, gift shop, parking lot fees, and educational programs classified as other revenue Donated supplies reported as operating revenue and expense when used Donations of essential services and unrestricted donations are nonoperating revenues Focus on Not-for-Profit Accounting—Module 22 330 College Tuition Revenues Students may receive refunds or price breaks Refunds to students reduce tuition revenues Price breaks may result from scholarships or reductions for family members of faculty or staff • • Tuition recognized at gross amount Price break recognized as expense Focus on Not-for-Profit Accounting—Module 22 331 Index Accounting for an Acquisition, 220 Accounting for Changing Prices, 34 Accounting for Income Taxes, 162 Accounts Payable, 111 Accounts Receivable, 96 Admitting a Partner, 249 Agency Fund, 310 Applying FIFO, 46 Applying LIFO, 49 Balance Sheet, 13 Bank Reconciliation, 95 Bankruptcy, 154 Basic EPS, 194 Basic Rules and Concepts, Bond Issue Costs, 144 Bond Retirement, 145 Bonds, 138 Book Value Per Share, 190 Business Combinations, 218, 233 Capitalization of Interest, 70 Capital Leases, 126 Capital Projects Fund, 306 Change in Accounting Principle, 26 Change in Estimate, 28 Characteristics of Derivatives, 235 College Tuition Revenues, 331 Common Stock Subscribed, 173 Compensated Absences, 122 Completed Contract, 67 Computing Net Income, 21 Consolidations, 223 Contingencies, 112, 113 332 Contributions Made to and Received by Not-for-Profit Organizations, 324 Conventional Retail (Lower of Cost or Market), 62 Convertible Bonds, 146, 195 Converting from Cash Basis to Accrual Basis, 11 Cost of Goods Sold, 43 Cost Recovery Method, 10 Costs Incurred After Acquisition, 71 Coupons, 120 Current Assets and Liabilities, 13, 15 Current Income Tax, 163 Debt Restructure, 151 Debt Service Fund, 307 Deferred Income Tax Expense or Benefit, 168 Deferred Tax Assets and Liabilities, 166 Deferred Taxes, 162 Depreciation and Depletion, 72 Detachable Warrants, 148, 189 Diluted EPS, 195 Disclosure of Information About Capital Structure, 191 Discontinued Operations, 30 Disposal of Property, Plant, and Equipment, 78 Dividends, 178 Dollar Value LIFO, 53 Earnings Per Share, 193 Elements of Financial Statements, Eliminate the Investment, 223 Eliminating Entries, 227 Enterprise Fund, 308 Equity Instruments with Characteristics of Liabilities, 177 Equity Method, 199 Error Corrections, 29 Index 333 Errors Affecting Income, 23 Estimated and Accrued Amounts, 114 Fiduciary Funds, 294, 309 Financial Instruments, 239 Financial Statement Analysis, 107 Financial Statements of Fiduciary Funds, 294 Financial Statements of Governmental Funds, 286 Financial Statements of Governmental Units, 272, 273 Financial Statements of Not-for-Profit Organizations, 317 Financial Statements of Proprietary Funds, 289, 290 Financing Activities, 216 Financing Receivables—Assignment, 104 Financing Receivables—Discounting, 103 Financing Receivables—Factoring, 105 Financing with Recourse, 106 Foreign Currency, 257 Foreign Currency Financial Statements, 259 Foreign Currency Transactions, 257 Forward Exchange Contracts, 258 Franchises, 92 Fund Financial Statements, 285 General Fund Accounting, 298 Goodwill, 87 Governmental Accounting, 268, 269 Governmental Funds, 296, 297 Government-Wide Financial Statements, 275 Gross Profit Method for Estimating Inventory, 62 Hospital Revenues, 330 Index 334 Impairment, 76, 79, 88 Installment Sales Method, 10 Insurance, 117 Intangibles, 84 Intercompany Bond Holdings, 229 Intercompany Sales of Inventory, 227 Intercompany Sales of Property, Plant, and Equipment, 228 Interfund Transactions, 311 Interim Reporting, 261 Internal Service Fund, 308 Inventory, 41 Inventory Errors, 43 Inventory Valuation Methods, 45 Investing Activities, 215 Investments in Derivative Securities, 234 Investment Trust Fund, 310 Issuance of Common Stock, 172 Land and Building, 69 Leasehold Improvements, 90 Leases, 124 Life Insurance, 208 Long-Term Construction Contracts, 64 Lower of Cost or Market, 60 Management Discussion and Analysis, 274 Marketable Securities, 205 Methods of Reporting Investments, 198 Miscellaneous Liabilities, 123 Modified Accrual Accounting, 271 Nonmonetary Exchanges, 80, 81 Exception, 81 Not-for-Profit Accounting, 317 Notes Received for Cash, 99 Notes Received for Goods or Services, 101 Index 335 Notes to Government Financial Statements, 295 Objectives of Financial Reporting, Operating Activities, 212 Operating Leases, 135 Partnership, 249 Partnership Liquidation, 256 Patents, 90 Pension Expense, 155 Pension Plans, 283 Pension Trust Fund, 309 Percentage of Completion, 64 Periodic Versus Perpetual, 44 Permanent and Temporary Differences, 164 Personal Financial Statements, 265 Postretirement Benefits, 160 Preferred Stock, 176 Preferred Stock—Special Issuances, 180 Presentation of EPS Information, 197 Prior-Period Adjustments, 183 Private Purpose Trust Fund, 310 Property, Plant, and Equipment, 78, 89, 228 Proprietary Funds, 289, 308 Qualitative Characteristics of Accounting Information, Quasi Reorganizations, 189 Refinancing Liabilities, 123 Reportable Segments, 247 Reporting Comprehensive Income, 33 Reporting Discontinued Operations, 31 Reporting Earnings Per Share, 193 Reporting the Results of Operations, 20 Research and Development, 91 Retained Earnings, 182, 222 Index 336 Retiring a Partner, 254 Revenue Recognition, 10 Royalties, 118 Sale-Leaseback Transactions, 136 Sales-Type and Direct-Financing Leases, 132 Segment Reporting, 246 Service Contract, 119 Software, 92 Solid Waste Landfill Operations, 315 Special Disclosures, 17 Special Revenue Fund, 306 Start-up Costs, 92 Statement of Activities, 279 Statement of Activities for NPO, 320 Statement of Cash Flows, 209, 211 Statement of Cash Flows for NPO, 323 Statement of Financial Position, 318 Statement of Functional Expenses, 323 Statement of Net Position, 277, 278, 291 Statement of Retained Earnings, 184 Stock Appreciation Rights, 188 Stockholders’ Equity, 172 Stock Options Plans, 185 Treasury Stock, 174 Unusual and Infrequently Occuring Items, 25 Use of Derivatives, 236, 237 Variable Interest Entities (VIEs), 230 Warranties, 121 Index 337 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... 2016 Wiley CPAexcel ® exam review FOCUS NOTES 2016 Wiley CPAexcel ® exam review FOCUS NOTES Financial Accounting and Reporting Cover Design: Wiley Cover image: © turtleteeth/iStockphoto... Ownership and capital structure Accounting resources Learning about new financial reporting guidance Focus on Basic Theory and Financial Reporting Module Private Company Standards (continued) Examine... resources and claims not resulting from financial performance Focus on Basic Theory and Financial Reporting Module Financial statements are designed to meet the objectives of financial reporting: