Basic Accounting - North American Securities

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Transcript Basic Accounting - North American Securities

What an Examiner Should Know
U.S. GAAP - Then and Now
Before September 2009
 4 categories of U.S. GAAP
 Multiple promulgators of U.S. GAAP
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AICPA
FASB
After September 2009
 U.S. GAAP has been codified under the FASB Accounting
Standards Codification
U.S. GAAP
Pre-2009
Category (A)
(Most authoritative)
 FASB Standards and
Interpretations
 Accounting Principles Board
(APB) Opinions
 Accounting Research Bulletins
(ARBs)
Category (B)
 FASB Technical Bulletins
 AICPA Industry Audit and
Accounting Guides
 AICPA Statements of Position
(SOPs)
Category (C)
 FASB Emerging Issues Task
Force (EITF)
 AICPA AcSEC Practice Bulletins
Category (D)
(Least authoritative)
 AICPA Accounting
Interpretations
 FASB Implementation Guides
(Q and A)
U.S. GAAP
Post-2009
FASB Codification
 Authoritative
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Incorporated U.S. GAAP promulgated as of
September 2009
Other Accounting Positions and Literature
 Non-Authoritative
 Instructive
U.S. GAAP
Some Science and Art
Qualitative Characteristics of U.S. GAAP Accounting
Conceptual Framework
 Relevance
 Reliability
 Comparability
 Consistency
U.S. GAAP
Some Science and Art
Recognition and Measurement Concepts of U.S. GAAP

Assumptions
Accounting Entity
 Going Concern
 Monetary Unit Principle
 Time-period Principle
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U.S. GAAP
Some Science and Art
Recognition and Measurement Concepts of U.S. GAAP

Principles
Historical Cost
 Revenue Recognition
 Matching
 Full Disclosure

U.S. GAAP
Some Science and Art
Recognition and Measurement Concepts of U.S. GAAP

Constraints
Objectivity
 Materiality
 Consistency
 Conservatism
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U.S. GAAP
Some Science and Art
May be multiple allowable methods to account for a
transaction
 By Following the Accounting Conceptual Framework
 Ex: Depreciation
Cash vs. Accrual Basis
 Prepaid Assets
 Deferred 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.
Cash
Accounts Receivable
Contra-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 Payable
Bonds Payable
Deferred 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 Stock
Additional Paid-in Capital
Retained Earnings
Basic Financial Statements
Balance Sheet
(AKA: Statement of Financial Position)
 Point in time disclosure
 In order of liquidity
 Two major sections
 What are Retained Earnings?
Basic Financial Statements
Income Statement
(AKA: Statement of Operations)
 Expenses and revenues recognized over a period of time
 Includes an operating section and other
income/expense/gain/loss section
 Gains and losses on sale of assets
Basic Financial Statements
Statement of Cash Flows
 Translation of accrual performance metric – net income to
cash
 Three sections
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Operating
Investing
Financing
 Reconciles the flow of cash from the beginning to the end
of a period
Basic Financial Statements
Statement of Cash Flows - Operating
 Cash generated or expended in the core business activity of
the entity
 Depreciation and amortization adjustments
 Gains and losses from non-current assets are adjusted for
from this section
Basic Financial Statements
Statement of Cash Flows - Investing
 Cash generated or expended from the acquisition of assets,
liabilities, and entities through merger
 Usually includes cash generated and expended from
acquisition/disposition of property, plant and equipment
and long-term investments
Basic Financial Statements
Statement of Cash Flows - Financing
 Cash generated or expended from the raising and retiring
capital
 Proceeds from capital transactions
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Investor notes
Stocks
Bonds
 Principal or interest of debt obligations
 Dividends or distributions paid to stockholders or to retire
stock
Basic Financial Statements
Statement of Cash Flows – Material Non-Cash
Transactions
 Required by U.S. GAAP to be disclosed either on statement
of cash flows or in the notes to the FS
 Typical items include:
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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’ Equity
 Stand-alone statement or incorporated into balance sheet
 Typical items include:
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Common Stock (at par, if one)
Preferred Stock
Additional Paid-in Capital
Retained Earnings
Distributions and dividends
Basic Financial Statements
Financial Statement Notes
 Very integral to understanding the financial statements
 Typical notes include:
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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 Sheet
 Net Income is part of Retained Earnings
 Interest accrued but not paid is a liability
 Expenses paid but service or product not
rendered/received is an asset
 Revenue received but not earned/or right of return exists is
a liability
 Expenses 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
 Liquidity
 Activity
 Leverage
 Profitability
Ratio Analysis
Key Liquidity Ratios
 Current Ratio
Current Assets
Current Liabilities
 Acid-Test Ratio
Cash + Cash equivalents + Short-term investments + A/R
Current Liabilities
Ratio Analysis
Key Activity Ratios
 Total Asset Turnover
Net Sales
Average total assets
 Fixed Asset Turnover
Net Sales
Average Fixed Assets
 Intangible Asset Turnover
Net Sales
Average 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 Taxes
Interest 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
GAAS
Generally 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
GAAS
Accountant Reports
Engagement Levels
 Compilation
 Review/Examination
 Audit
GAAS
Types of Audit Opinions
 Unqualified
 Qualified
 Exception to Accounting Application
 Going Concern
 Material Matter
 Disclaimer
 Scope Limitation
 Adverse
Questions?