Special Purpose Frameworks

Question 1

Describe a modified cash basis of accounting.

Answer 1

A modified cash basis of accounting results from adjustments made to cash basis accounting. Specifically, while most items continue to be accounted for using the cash basis, some items are accounted for using the accrual basis. As a consequence, the financial statements reflect accounts and amounts based on a combination of the cash basis and the accrual basis.

Question 2

Identify the other comprehensive basis of accounting (OCBOA).

Answer 2

1. Cash basis;
2. Modified cash basis;
3. Income tax basis;
4. Regulatory basis;
5. A definite set of accounting criteria that has substantial support in practice and which is applied to all material financial statement items (e.g., price level/inflation adjusted statements).

Question 3

When adjustments to income tax-based financial statements result from IRS determinations, all such adjustments are reported as current period income or expense.

Answer 3

FALSE

Question 4

In a pure cash basis of accounting, the only asset a balance sheet would report would be cash.

Answer 4

TRUE

Question 5

Amounts reported in income tax-based financial statements are subject to change as a result of IRS examination and determination.

Answer 5

TRUE

Question 6

When a firm uses a modified cash basis of accounting, it can modify the cash basis in any way it chooses.

Answer 6

FALSE

Question 7

Price level or inflation adjusted financial statements are based on an other comprehensive basis of accounting.

Answer 7

TRUE

Question 8

A set of financial statements based on an other comprehensive basis of accounting would require a Statement of Cash Flows.

Answer 8

FALSE

Question 9

If a firm uses a modified cash basis of accounting that capitalizes expenditures for long-term assets, it must also recognize depreciation on those assets.

Answer 9

TRUE

Question 10

When financial statements are prepared using an income tax basis of accounting, nontaxable and nondeductible items related to permanent differences must be recognized separately in revenues and expenses, respectively.

Answer 10

FALSE

Question 11

The cash basis of accounting will always result in greater revenue than the accrual basis of accounting.

Answer 11

FALSE

Question 12

A firm that uses a modified cash basis of accounting may capitalize and depreciate long-term assets.

Answer 12

TRUE

Question 13

When a firm prepares financial statements based on an other comprehensive basis of accounting, the notes to the financial statements must describe the basis of accounting used.

Answer 13

TRUE

Question 14

A modification to the cash basis of accounting must be consistent with the accrual basis of accounting.

Answer 14

TRUE

Question 15

In a pure cash basis of accounting, revenue will be recognized only when cash is received.

Answer 15

TRUE

Question 16

Non-public business entities may prepare financial statements based on a basis of accounting other than standard U.S. GAAP.

Answer 16

TRUE

Question 17

In a pure cash basis of accounting, the only liabilities a balance sheet would report would be long-term liabilities.

Answer 17

FALSE

Question 18

When financial statements are prepared using an income tax basis of accounting, nontaxable and nondeductible items are recognized.

Answer 18

TRUE

Question 19

In a pure cash basis of accounting, cash revenue may be recognized either before or after it would be earned under accrual basis accounting.

Answer 19

TRUE

Question 20

All business enterprises in the U.S. must prepare financial statements based on standard U.S. GAAP.

Answer 20

FALSE

Question 21

Identify the “entities” for whom personal financial statements are prepared.

Answer 21

Personal financial statements are prepared for: 1. An individual;
2. A husband and wife;

3. A family unit.

Question 22

Identify the statements included in a set of personal financial statements.

Answer 22

A set of personal financial statements would include: 1. A statement of financial condition (balance sheet);
2. A statement of changes in net worth.

Question 23

What accounting concepts underlie the preparation of personal financial statements?

Answer 23

Personal financial statements are prepared based on the use of accrual accounting and fair value measurement.

Question 24

Describe the basis for measuring assets for a personal statement of financial condition.

Answer 24

Assets in a personal statement of financial condition should be measured at estimated current (fair) value in an arms-length transaction, net of disposal costs, if any.

Question 25

How should a significant interest in a separate business be shown in a personal statement of financial condition?

Answer 25

As a single line item at the estimated current fair value of the net assets, separate from other assets.

Question 26

In what order should assets be shown in a personal statement of financial condition?

Answer 26

In the order of liquidity, with no distinction as to current/non-current classifications.

Question 27

In what order should liabilities be shown in a personal statement of financial condition?

Answer 27

In the order of maturity, with no distinction as to current/non-current classifications.

Question 28

What income tax-related liabilities should be shown in a personal statement of financial condition?

Answer 28

?Income Tax Payable: Known and estimated amounts payable for prior and current periods, less withholding and estimated tax payments made;
?Income Tax Provision: Estimated amount which would be due based on the difference between the estimated current value of net assets and their tax basis (computed as excess of current value of net assets over tax basis of net assets, multiplied by the current effective tax rate).

Question 29

Describe the basis for measuring liabilities for a personal statement of financial condition.

Answer 29

Liabilities in a personal statement of financial condition should be measured at estimated current amounts, which would be based on the lower of: ?The amount at which the liability could be settled currently (liquidation value), or
?The present value of cash to be paid in future settlement.

Question 30

Personal net worth as reported in personal financial statements is measured using current fair values.

Answer 30

TRUE

Question 31

Personal financial statements are prepared using accrual accounting.

Answer 31

TRUE

Question 32

Noncancelable commitments may be presented at their discounted amounts as liabilities on the statement of financial position.

Answer 32

TRUE

Question 33

Personal financial statements may be necessary to comply with certain legal requirements.

Answer 33

TRUE

Question 34

For personal financial statements, a sole proprietorship which constitutes a significant asset should be presented as a single amount at estimated current value.

Answer 34

TRUE

Question 35

Personal financial statements are prepared using historic cost valuations.

Answer 35

FALSE

Question 36

For personal financial statements, a liability should be recognized for an excess of fair value of net assets over their tax basis.

Answer 36

TRUE

Question 37

For personal financial statements, assets should be presented in current and non-current categories on the statement of financial condition.

Answer 37

FALSE

Question 38

For personal financial statements, liabilities should be reported at the lower of the present value or the current amount to settle.

Answer 38

TRUE

Question 39

Personal financial statements must include a statement of financial condition.

Answer 39

TRUE

Question 40

For personal financial statements, liabilities should be reported at book value.

Answer 40

FALSE

Question 41

For personal financial statements, only vested interests in a retirement plan should be included.

Answer 41

TRUE

Question 42

For personal financial statements, a parcel of real estate held for market appreciation should be valued at historical cost on the property.

Answer 42

FALSE

Question 43

For personal financial statements, assets should be reported net of any costs that would be incurred in disposing of them.

Answer 43

TRUE

Question 44

If, during a year, the estimated amount of liabilities increased and the estimated value of assets remains unchanged, personal net worth will decrease.

Answer 44

TRUE

Question 45

What does the Private Company Council (PCC) do?

Answer 45

Works with the FASB to set accounting standards for private companies.

Question 46

What is a private company?

Answer 46

A private company is one that is not a public company. The PCC provides a definition of a public company as one that is required to file or furnish financial statements with a regulatory agency related to any type of securities (debt and equity), whether those securities are traded on exchanges or over-the-counter.

Question 47

What modification is allowed for private companies related to accounting for goodwill?

Answer 47

The goodwill can be amortized over a period not to exceed 10 years.

Question 48

What modification is allowed for private companies related to accounting for interest rate swaps?

Answer 48

The hedge accounting for a receive variable / pay fixed interest rate swap is simplified. The private company can assume 100% effectiveness and can use settlement value as a practical expedient for fair market value.

Question 49

The purpose of the Private Company Council is to work with the FASB to set accounting standards for private companies.

Answer 49

TRUE

Question 50

The accounting for goodwill by a private company allows for goodwill to be amortized over a period not to exceed 10 years.

Answer 50

TRUE

Question 51

A private company can use settlement value versus cash value to as a surrogate for fair market value for all interest rate swaps.

Answer 51

FALSE

Question 52

Identify some bases of accounting that are not an “other comprehensive basis of accounting.”

Answer 52

1. Accounting based on U.S. Generally Accepted Accounting Principles (GAAP);
2. Accounting based on the unique provisions of a loan agreement;
3. Accounting based on the unique provisions of an acquisition agreement.