Assets
Probable future benefits
Controllable by the firm
Based on the past
Liabilities
Probable future sacrifices
Unavoidable by the firm
Based on the past
Accrued Revenues
recognized at one point in time, and actually collected in cash at a later point in time, perhaps in a different accounting period
Accrued Expenses
recognized at one point in time, and actually paid at a later point in time, perhaps in a different accounting period
Deferred (unearned) revenues
collected in advance, and earned at a later point in time
Deferred (prepaid) expenses
paid in advance, and used up at a later point in time or over time
Purpose of accrual accounting
Accruals adjust for lags in cash flows; deferrals adjust for advances in cash flows.
Accrued Revenue JE
Recognize in one period:
+A/R xx
+Sales xx
Realize in another period:
+Cash xx
-A/R xx
Accrued Expense JE
Recognize in one period:
+Interest Expense xx
+Acc. Interest Payable xx
Realize in another period:
-Acc. Interest Payable xx
-Cash xx
Deferred Revenue JE
Realize in one period:
+Cash xx
+Deferred Revenue xx
Recognize in another period:
-Deferred Revenue xx
+Revenue xx
Deferred Expense JE
Realize in one period:
+Prepaid Interest xx
-Cash xx
Recognize in another period:
+Interest Expense xx
-Prepaid Interest xx
Revenue Principle
Revenues are expected cash inflows from a firm's ongoing primary activities. They must be [E=MC2]:
[1] earned, [2] measurable, and [3] collectible, too.
Earned means that:
1) an exchange has transpired and 2) the seller has either a) fulfilled all obligations related to that exchange or b) has made adequate provision in its accounts for such obligations
Direct foreign exchange rates
US Dollar is the numerator
Indirect foreign exchange rates
US Dollar is the denominator
Conversion from Foreign Currency (FX) to US Dollars:
Multiply FX by Direct Rate= $
Divide FX by Indirect Rate= $
Forward contract
is a derivative
Derivative
financial instrument, the value of which is based on the value of something else
Purpose of hedging
Exposure to foreign currency exchange rate fluctuations can be locked by purchasing a forward contract
Functional currency
depends on the nature of the affiliates operations
2 Conversion methods
remeasurement and translation
Credit on trial balance
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Debit on trial balance
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Segment reporting
required for public companies; private and not-for-profit entities are encouraged to make segment disclosures
Operating segment
a component of an enterprise regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance
External reporting of segments
must be consistent with internal reporting of segments
A segment is considered to be reportable if it satisfies ONE of the following 10% tests:
1) Revenue
2) Operating profit
3) Combined assets of all operating segments
Combined unaffiliated revenue of all reportable segments
must be at least 75% of the combined unaffiliated revenue of all operating segments
Segment direct operating expenses
are netted against segment sales to compute segment operating income
General corporate expenses, interest expense, and income taxes
are NOT allocated to segments and therefore do not affect segment income
Segments may be determined by
customer, region, product line, industry or company division; must be consistent with internal reporting
Interim reporting (quarterly financial statements) treatments:
defers, accrues, recognizes
Interim reporting: Defers
some items that may be incurred early in the year, are deferred, and allocated, and reported in the quarters benefited (ex. property taxes paid of $80,000 for the entire year, inventory losses expected to be temporary)
- If items are paid early in the yea
Interim reporting: Accrues
some items that may not be incurred until later in the year, are estimated, accrued, and reported in the quarters to which costs may apply (ex. year-end bonuses estimated at $200,000 for the year)
- If items of benefit paid late in the year can be estimat
Interim reporting: Recognizes
some items that are incurred in a particular quarter that do not relate to any other quarter may be recognized in the entirety in the quarter incurred (ex. LCM write-downs of $40,000 on inventory in the 2nd quarter)
-If items occur that clearly do not ben
Partnership:Exact Method
-Used when partnership agreement indicates "no goodwill or bonus is recorded"
-Don't Adjust
-"How much should the new partner contribute?
Exact Method
Old Net Assets/(1-new partners interest)=
New P/S Net Assets
Total Net Assets x New Partners %= New Partners Capital
Partnership: Goodwill Method
-Used whenever the partnership agreement indicates that "goodwill implied is recorded"
-New partners contribution is added to the old net assets to obtain the new net assets, and the new partner is given credit for the contributed amount
-new assets amoun
Goodwill Method
New partners contribution/new partners interest= total ending partnership capital
Total ending partnership capital - (old assets + new partners contribution)= goodwill
total net assets x new partners %= new partners capital amount
Partnership: Bonus Method
-Used whenever the partnership agreement indicates "the new partnership will begin with total capital of xx"
-Adjust to the right
Bonus Method
new total assets x new partners %= new partners capital
New partners capital - cash paid b the new partner = bonus
If bonus is negative then bonus goes to existing partners
If bonus is positive, subtract from existing partners accounts
Functional currency= US $
Remeasurement
Functional Currency= Foreign Currency
Translation
Functional currency indicators
Cash flows, sales prices, sales markets, expenses, financing, and inter company transactions
Translation
Component of comprehensive income (stockholders equity)
If LC=FC
Translate to USD
If LC does not = FC
Remeasure to FC
If FC=USD -no work needed
If FC not USD -translate to USD