Special Purpose Frameworks

Question 1

Hybrid Method of Accounting

Answer 1

• Combination of cash and accrual methods
  
  • Company using cash method must use the accrual method for accounts involved in computing costs of goods sold and gross profit if inventory is a material income-producing factor
  • Cash method can be used for all other accounts not related to cost of goods sold and gross profit
  • Modified cash - intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP
    Modified cash basis does not comply with GAAP unless there are no material differences within this method and GAAP

Question 2

Examples of Special Purpose Frameworks

Answer 2

• Cash basis
  
  • Tax basis
  • Regulatory basis - entity uses to comply with the requirements of financial reporting provisions of regulatory agency whose jurisdiction the entity is subject - ex insurance companies regulated by state insurance commission
  • Contractual basis - basis of accounting that entity uses to comply with an agreement between the entity and one or more third parties other than the auditor
    Modifications that do not have substantial support from financial accounting purposes do not qualify as a special purpose framework

Question 3

Cash Basis Accounting

Answer 3

• Not allowable method under GAAP unless there is no material difference from the accrual method
  
  • Acceptable method for the preparation of tax returns
  • Cash basis income is:
    ○ Higher when accounts receivable decreases
    ○ Lower when accrued expenses decrease
  • No current deduction for capital expenditures
    Expense for cap expenditures will be recognized in the form of depreciation, amortization, or depletion

Question 4

FRF for SME’s

Answer 4

• AICPA has developed reporting framework for small and medium sized entities
  
  • Prepared primarily using historical cost
  • Management can select the taxes payable method or deferred income taxes method to account for the income tax liability
  • Subsidiaries can be consolidated or accounted for under the equity method
    Goodwill may be amortized over 15 years

Question 5

Cash Surrender Value of Life Insurance

Answer 5

• Cash surrender value of policy is an asset to the enterprise
  
  • Amount charged to expense is Premium Amount - Increase in Cash Surrender value during the period
    Cash surrender value is reduced for the amount of any loans outstanding against the cash value