Accrual Accounting

Question 1

What does the composition of GAAP include?

Answer 1

Principles, methods and procedures that are generally accepted by the accounting profession.

Question 2

What is the sole source of authority of GAAP for nongovernmental entities?

Answer 2

FASB. All guidance carries the same level of authority (one level of GAAP) there is no longer a hierarchy of GAAP

Question 3

What is the codification of GAAP?

Answer 3

A newly structured electronic form. It does not change GAAP. It is a compilation and reorganization of existing GAAP with updates being added as they happen.

Question 4

How is the material organized in the codification of GAAP?

Answer 4

By major area and topic

Question 5

What does the codification not include?

Answer 5

1. ) other comprehensive basis of accounting
2. ) cash basis
3. ) income tax basis
4. ) regulatory accounting principles

Question 6

What if there is no guidance in the codification?

Answer 6

Authoritative GAAP for similar transactions should be considered before considering no authoritative.

Question 7

What sources are included in non-authoritative GAAP?

Answer 7

1. ) widely organized and prevalent practices
2. ) FASB concepts statements
3. ) AICPA issues papers
4. ) IFRS

No implied hierarchy

Question 8

What basis of accounting does GAAP cover?

Answer 8

Only accrual

Question 9

Why is the accrual basis preferred over cash basis

Answer 9

It reflects a better association of revenues and expenses with the appropriate accounting period

Question 10

What is created when cash is received before revenue earned?

Answer 10

Deferred revenue - liability

Examples: rent, subscriptions, gift certificates

Question 11

What type of account is created when cash is paid before expense is incurred?

Answer 11

Deferred expense - assets

Examples - prepaid insurance, supplies, rent

Question 12

The general purpose external financial report has what components?

Answer 12

1. ) income statement
2. ) statement of comprehensive income
3. ) balance sheet
4. ) statement of changes in shareholders equity
5. ) statement of cash flows
6. ) footnote disclosures and supplementary schedules
7. ) auditors opinion

Question 13

How to go from accrual to cash basis?

Answer 13

Increase in A/R - subtraction
Increase in unearned revenue - add
Decrease in accrued expense - subtract
Increase in prepaid expense - subtract

Signs will be opposite if you are asked to go from Cash to Accrual

Question 14

What is the accrual Basis of accounting?

Answer 14

Recognized and reports the economic activities of the firm in the period the activity was incurred, regardless of when the cash activity takes place.

Question 15

What type of account is created when an economic event occurs before cash is received?

Answer 15

An accrual account. You are accruing the cash to be received or to be paid)

Question 16

What is the formula to convert from accrual to cash basis?

Answer 16

Change in Cash=Change in Liabilities+Change in Equity minus Change in other assets. (Accounting equation with assets broken into two categories)

Question 17

What is the formula to convert from cash to accrual basis?

Answer 17

Change in Equity=Change in Assets minus Change in Liabilities