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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 AICPA FASB After.

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Presentation on theme: "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 AICPA FASB After."— Presentation transcript:

1 What an Examiner Should Know

2 U.S. GAAP - Then and Now Before September categories of U.S. GAAP Multiple promulgators of U.S. GAAP AICPA FASB After September 2009 U.S. GAAP has been codified under the FASB Accounting Standards Codification

3 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)

4 U.S. GAAP Post-2009 FASB Codification Authoritative Incorporated U.S. GAAP promulgated as of September 2009 Other Accounting Positions and Literature Non-Authoritative Instructive

5 U.S. GAAP Some Science and Art Qualitative Characteristics of U.S. GAAP Accounting Conceptual Framework Relevance Reliability Comparability Consistency

6 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

7 U.S. GAAP Some Science and Art Recognition and Measurement Concepts of U.S. GAAP Principles Historical Cost Revenue Recognition Matching Full Disclosure

8 U.S. GAAP Some Science and Art Recognition and Measurement Concepts of U.S. GAAP Constraints Objectivity Materiality Consistency Conservatism

9 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

10 Basic Accounting Equation Assets = Liabilities + Equity

11 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

12 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

13 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

14 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?

15 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

16 Basic Financial Statements Statement of Cash Flows Translation of accrual performance metric – net income to cash Three sections Operating Investing Financing Reconciles the flow of cash from the beginning to the end of a period

17 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

18 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

19 Basic Financial Statements Statement of Cash Flows - Financing Cash generated or expended from the raising and retiring capital Proceeds from capital transactions Investor notes Stocks Bonds Principal or interest of debt obligations Dividends or distributions paid to stockholders or to retire stock

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

21 Basic Financial Statements Statement of Stockholders’ Equity Stand-alone statement or incorporated into balance sheet Typical items include: Common Stock (at par, if one) Preferred Stock Additional Paid-in Capital Retained Earnings Distributions and dividends

22 Basic Financial Statements Financial Statement Notes Very integral to understanding the financial statements Typical notes include: Significant Accounting Policies Description of the Entity’s Operations Recent Accounting Pronouncements Related Party Transactions Fair Value of Financial Instruments Subsequent Events

23 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

24 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

25 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

26 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

27 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

28 Ratio Analysis Basic Categories Liquidity Activity Leverage Profitability

29 Ratio Analysis Key Liquidity Ratios Current Ratio Current Assets Current Liabilities Acid-Test Ratio Cash + Cash equivalents + Short-term investments + A/R Current Liabilities

30 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

31 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

32 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

33 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

34 GAAS Accountant Reports Engagement Levels Compilation Review/Examination Audit

35 GAAS Types of Audit Opinions Unqualified Qualified Exception to Accounting Application Going Concern Material Matter Disclaimer Scope Limitation Adverse

36 Questions?


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