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Flashcards in Cash, Modified Cash, Income Tax Deck (12):
1

When can financial statements be prepared on an "Other Comprehensive Basis of Accounting" (OCBOA)?

Can be used by non-public companies to avoid the time-consuming and costly application of GAAP

2

What are the categories of "Other Comprehensive Basis of Accounting" Financial Statements?

1.) Cash basis
2.) Modified Cash Basis
3.) Income Tax Basis
4.) Regulatory Basis
5.) Other Basis with Substantial Support

3

What are the characteristics of a Cash Basis Financial Statement?

1.) Based solely on cash receipts and cash disbursements. Accrual accounting is ignored.
2.) Since cash received is recognized as a revenue and cash paid as a expense, the balance sheet would only show cash and equity.

4

When may a Cash basis Financial Statement be appropriate?

For small, very closely held businesses where the business depends on cash flows.

5

Conceptually, what is the modified cash basis for financial statement purposes?

Any point on the continuum between pure cash basis at one end and accrual basis on the other. The greater the number of accrual basis elements adopted, the greater the modification of the cash basis.

6

What substantial support is needed for modified cash basis to be acceptable as an "Other Comprehensive Basis Accounting"?

1.) The modification is equivalent to an element of accrual basis accounting and
2.) The modification is logical and consistent with GAAP

7

What are the most common and acceptable modifications to cash basis accounting?

1.) Recognizing the acquisition of PP&E and Inventory as assets (rather than expenses), and depreciating, amortizing in a regular manner
2.) Recognizing A/R when revenues are earned and A/P when obligations are incurred, rather than deferring recognition until collections are received or payments are made
3.) Recognizing income taxes when they become payable, rather than when paid.

When modifications to cash basis accounting are made, all related accounts must be reported using the same basis of accounting

8

What are the guidelines for Income Tax Basis Financial Statements?

Based on income tax regulations, not GAAP
Taxable Amount=Revenue
Deductible Amount=Expense

9

How are nondeductible (Perm) Items treated when using the Income Tax Basis Financial Statements?

They are reported in one of 3 ways
1.) Separate line items in the revenue/expense sections of the statement of revenues and expenses (Most Common)
2.) As separate line items shown as additions or deduction from the net revenues and expenses
3.) Nature and amounts disclosed in the notes to the financials

10

What disclosure should be included for Financial Statements prepared on the Income Tax Basis?

The notes should indicate not only the basis on which the statements were prepared, but also that they are subject to change as a result of IRS determinations

11

When should the Regulatory Basis be used to prepare financial statements?

To comply with regulatory agencies that have jurisdiction over the reporting entity. I.E., financial statements filed with state insurance or public utility agencies

12

When can other basis' of accounting be used besides the General OCBOA (Income tax basis, cash basis, modified cash basis, regulatory basis)?

1.) Must be prepared using a basis with a definite set of accounting and reporting criteria
2.) Must be applied to all material items

I.E., Private Bank/Lender requested financial statements

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