Chapter 5 Continued Cash Flow Versus Accrual Accounting
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Primer on Accrual Accounting
GOVERNMENT ACCOUNTING STANDARDS ADVISORY BOARD PRIMER ON ACCRUAL ACCOUNTING Compiled by GASAB Secretariat O/o the Comptroller and Auditor general of India 10, Bahadur Shah Zafar Marg, New Delhi-110002 Accrual Accounting It is a system of accounting in which transaction are entered in the books of accounts, when they become due. The transactions are recognised as soon as a right to receive revenue and/or an obligation to pay a liability is created. The expenses are recognised when the resources are consumed and incomes are booked when they are earned. Therefore, the focus is on the recording of flow of resources i.e. labour, goods, services and capital., the related cash flow may take place after some time (of event) or it may or may not take place in the same accounting period. Cash Accounting In this system of accounting transactions are recorded when there is actual flow of cash. Revenue is recognised only when it is actually received. Expenditure is recognised only on the outflow of cash. No consideration is given to the “due” fact of the transaction. This system of accounting is simple to understand and as such needs less skill on the part of the accountant. Its whole focus is on cash management. The recognition trigger is simply the flow of cash. Budgetary and legislative compliance is easier under this system. Limitations of cash system of accounting The limitations of cash based accounting are: - It does not provide the complete picture of the financial position i.e. information on assets and liabilities are not available for fixed assets (land, building, machineries, defence, heritage assets etc.) - No information about capital work-in-progress like dams, power plants, roads and bridges etc. -
Accrual Vs. Cash Accounting
Accrual vs Cash One of the first steps in setting up an accurate accounting system is selecting a method of recording transactions. The two most common methods are the cash basis of accounting and the accrual basis of accounting. This article highlights the differences between these methods, and presents considerations when choosing which method is right for your organization. Cash Method Accrual Method The cash method is the simplest option, and replicates The more complex accrual method is what is required by checkbook accounting used in personal finances. Income Generally Accepted Accounting Principles (GAAP). If your and expenses are recognized when the cash is transferred. organization plans to go through a financial statement au- Revenue is recorded when funds are received and expens- dit or review, it is highly recommended that the organiza- es are recorded when bills are paid, regardless of when tion adopt the accrual method so that it is in conformance the transaction was entered into between the organiza- with GAAP. Lending and funding sources also often re- tion and the donor/customer or vendor. As a result, the quire financial information be submitted using the accrual balance sheet of a cash basis organization only contains method. This method records income when it is earned cash and net assets. Receivables, prepaid expenses, paya- and expenses when they are incurred. As a result, income bles and deferred revenue are all accrual concepts ignored and all of the costs incurred in the process of earning the when using the cash method. The benefits of this method revenue are matched and recorded in the same fiscal peri- are the simplicity and a clear sense of cash flow. -
Guide to Accrual Accounting for Ohio's Rural Transit Systems
Guide to Accrual Accounting for Ohio’s Rural Transit Systems March 2009 Prepared For The Ohio Department of Transportation (ODOT) Office of Transit Prepared By Table of Contents Page No. Section 1 – Why Accrual Accounting 1 Federal Transit Administration (FTA) Requirement 1 Ohio Department of Transportation (ODOT) Requirement 2 Cash vs. Accrual Accounting 3 Good Business Practice 6 Recap – Why the Accounting Method Matters 7 Section 2 – Basic Accounting Principles 8 Overview 8 Bookkeeping vs. Accounting 10 Accounting Equation (Assets = Liabilities + Owner’s Equity) 11 Revenue Recognition and Matching Principles 13 Chart of Accounts – Normal Balances 14 Debits and Credits 16 Accounting Cycle 18 o Record (Journalize) Transactions 18 o Post Journal Entries to Ledger Accounts 25 o Prepare a Trial Balance 28 o Make Adjusting Entries & Prepare Adjusted Trial Balance 29 o Prepare Financial Statements 32 o Journalize & Post Closing Entries & Prepare Closing Trial 40 Balance Section 3 – Ohio Rural Transit Systems & ODOT Quarterly 41 Invoice Report Revenue Transactions 41 o Transportation Revenues 41 o Non-Transportation Revenues 42 Expense Transactions 43 o Labor (Wages) 43 o Fringe Benefits 44 o Services 44 o Materials & Supplies 45 o Utilities 45 o Casualty & Liability Costs 46 o Taxes 46 o Purchased Transportation Services 46 o Miscellaneous Expenses 46 o Interest Expense 47 i o Leases & Rentals 47 o Depreciation 47 o Other Costs 47 Section 4 – Accrual Accounting Options 48 Manual Systems 48 Off-the-Shelf Software 48 Conversion of Cash Data to Accrual Format at End of Each 49 Quarter Professional Assistance 49 Section 5 – Exhibits & Samples 50 ODOT Chart of Accounts 50 Steps for Completing the ODOT Quarterly Invoice 50 Accrual Accounting - Class Exercise 58 ii Section One – Why Accrual Accounting Federal Transit Administration (FTA) Requirement For calendar year 2008 and beyond, the FTA began to require all transit systems (urban and rural) to report data using the accrual method of accounting. -
Chapter 5 Consolidation Following Acquisition Consolidation Following
Consolidation Following Acquisition Chapter 5 • The procedures used to prepare a consolidated balance sheet as of the date of acquisition were introduced in the preceding chapter, that is, Consolidation Chapter 4. Following Acquisition • More than a consolidated balance sheet, however, is needed to provide a comprehensive picture of the consolidated entity’s activities following acquisition. McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 5-2 Consolidation Following Acquisition Consolidation Following Acquisition • The purpose of this chapter is to present the procedures used in the preparation of a • As with a single company, the set of basic consolidated balance sheet, income statement, financial statements for a consolidated entity and retained earnings statement subsequent consists of a balance sheet, an income to the date of combination. statement, a statement of changes in retained earnings, and a statement of cash flows. • The preparation of a consolidated statement of cash flows is discussed in Chapter 10. 5-3 5-4 Consolidation Following Acquisition Consolidation Following Acquisition • This chapter first deals with the important concepts of consolidated net income and consolidated retained earnings. • Finally, the remainder of the chapter deals with the specific procedures used to • Thereafter, the chapter presents a description prepare consolidated financial statements of the workpaper format used to facilitate the subsequent to the date of combination. preparation of a full set of consolidated financial statements. 5-5 5-6 1 Consolidation Following Acquisition Consolidation Following Acquisition • The discussion in the chapter focuses on procedures for consolidation when the parent company accounts for its investment in • Regardless of the method used by the parent subsidiary stock using the equity method. -
Financial Management: Cash Vs. Accrual Accounting Danny Klinefelter, Dean Mccorkle and Steven Klose*
EAG- 036 February 2017 Risk Management Series Financial Management: Cash vs. Accrual Accounting Danny Klinefelter, Dean McCorkle and Steven Klose* Selecting a record-keeping system is an A business can be going broke and still generate important decision for agricultural producers. a positive cash basis income for several years The system should help with decision making in a by building accounts payable (accruing but not risky environment and calculate taxable income. paying expenses), selling assets, and not replacing Most producers keep their records with the cash capital assets as they wear out. receipts and disbursements method or with an However, most farmers and ranchers use accrual method. cash basis accounting because: 1) the accounting Either method should be acceptable for principles of an accrual system can be complex; calculating taxable income (except for corporate 2) given the cost of hiring accountants to keep taxpayers who have revenues exceeding their records, accrual accounting is more $25,000,000). However, it is not acceptable to keep expensive; and 3) cash basis accounting is more books throughout the year using one method flexible for tax planning. of accounting and then convert at year-end to another method, solely because the second Getting the Best of Both Systems method might compute taxable income more There is a process by which cash basis income favorably. and expense data can be adjusted to approximate The main difference between accrual basis and accrual income. This can be very beneficial to cash basis accounting is the time at which income producers, giving them the simplicity and tax and expenses are recognized and recorded. -
Budgeting 101
Budgeting 101 April 18, 2018 9:00-12:30pm San Francisco Public Library Investing in Main Branch, Latino/Hispanic Community Room Opportunity, 100 Larkin Street Together. San Francisco, CA Agenda Introductions Setting The Stage Building & Monitoring Your Budget Developing Grant Budgets Becoming A Financial Leader Wrap-up 2 Who’s here? …in 30 seconds… Organization and name What describes your budget situation? I don’t have a budget (yet) I think I have a budget, not sure where it is I have a “wild guess” budget, not sure it is realistic I have a solid budget, want to learn more about it 7 Setting The Stage 4 Budgeting, Programs & Accounts Programs (functional expenses) Youth Teen Summit Meet Ticket Sales Line Items Grants (natural expenses) Supplies Printing 5 Pop Quiz Which of these are programs? Finance Freaks – a 2017 season play Number Ninjas – a youth parkour class Excel-lent – training seniors on the computer Answer: Excel-lent 6 Pro Tip 1. Look for language Finance Freaks – a 2017 season play Number Ninjas – Friday parkour class Excel-lent – training seniors in Excel 7 Pro Tip 2. Look for time Finance Freaks – a 2017 season play Number Ninjas – Friday parkour class Excel-lent – training seniors in Excel 8 Pro Tip 3. Look for mission Finance Freaks – a 2017 season play Number Ninjas – Friday parkour class Excel-lent – training seniors in Excel 9 What is a Program? Programs have: Unique audiences (youth, homeless, prenatal) Unique missions (house the homeless) Unique staff (prenatal program director) 10 What -
Adjusting Entries and the Work Sheet Teacher Version
Teacher Version chapter College Accounting 11th Edition Adjusting Entries and the Work Sheet 4© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-1 You are Here © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-2 Learning Objective • A fiscal period is any period of time covering a complete accounting cycle. • A fiscal year is a fiscal period consisting of twelve consecutive months. • A fiscal year does not have to coincide with the calendar year. • For income tax purposes, any period of twelve consecutive months may be selected. However, you must be consistent from year to year. • The accounting cycle represents the sequence of steps in the accounting process completed during the fiscal period. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-3 The Work Sheet • The work sheet is a tool (working paper) used by accountants to record necessary adjustments and provide up-to-date account balances needed to help in preparing financial statements. • The heading consists of three lines: 1. The name of the company 2. The title of the working paper 3. The period of time covered © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-4 The Columns of the Work Sheet Trial Balance Columns • Assuming normal balances, the account classifications are listed in the Trial Balance Debit and Credit columns of the work sheet: Adjusted Trial Balance Columns • The adjusted trial balance columns are merely extensions of the Trial Balance Columns, plus or minus any adjustment amounts. -
Business Valuation Recasting the Financial Statements by Leonard M
BUSINESS VALUATION RECASTING THE FINANCIAL STATEMENTS BY LEONARD M. FRIEDMAN, CPA/ABV CBV When someone asks me why a forensic valuation of a company in a litigation setting costs so much money it is because very few litigants are going to be honest about their business operations in terms of unreported income, personal expenses, etc. It is understandable because the business owner has a motive to minimize the value of the business. Therefore, a fair amount of forensic digging needs to be performed. Whenever I hear from a non-titled spouse or their attorney that the business owner is doing this and that to cheat the government (or them) and cashing checks and not depositing them, etc., I always warn them that these types of investigations cost significantly more money than a straight valuation and that the costs relative to the value may be prohibitive. Unfortunately, reality sometimes hurts. Those attorneys that work with me know I try to avoid adding unnecessary costs to an assignment, but once we start down the path of looking for significant fraud, the costs start to mount. Very few active closely held businesses do not have expenses on the financial statements that are either non- recurring or non-operating and are for the benefit of the owners or their families. In other words, there is generally a significant amount of hidden compensation. The financial statements almost always need to be adjusted to reflect true owners’ income, without which a fair value cannot be estimated. This article is not designed to belabor the tax implications of some of the creative ways owners compensate themselves but rather adjust the financial statements to present them in a more normalized and comparative manner in order to determine the income that is used to value the company. -
Accrual and Deferral Handout
Name Principles of Financial Accounting I Adjusting the Accounts "Cash" Basis vs. "Accrual" Basis: Cash Accrual Revenue Expenses Generally Accepted Accounting Principles (GAAP) require using the basis. Why make Adjusting Journal Entries?____________________________________________________ _________________________________________________________________________________ Recall previous "promises." New Promise: Every adjusting entry will have ______________________ Balance Sheet and one_________________________________________________________ effect. INCOME STATEMENT attempts to accomplish: ____________________________________________ ESSENTIALS OF CONCEPT 1. 2. 3. I. Identifying accounts to be adjusted: Accruals and Deferrals A. Perhaps the best way to distinguish deferrals and accruals is the timing of cash changing hands: CA$H accruals deferrals cash AFTER event cash BEFORE event Deferrals have been recorded; accruals have not. B. Definitions An ACCRUAL is an expense or a revenue . Examples of accruals: Expense: Revenue: Copyright © 1999 by M. Ray Gregg. All Rights reserved. A DEFERRAL is a already paid or of a revenue . Examples of deferrals: Expense: Revenue: II. Accruals A. Expenses 1. Example Salaries increase as employees work each day, yet, for convenience, salaries are recorded when . Since the cash is paid the event, salaries are an example of . The adjusting entry necessary when payday and the end of the fiscal period are on different days would be: 2. Decision tree conclusion If this is the entry required for this , other accrued expense items must follow a similar format: B. Revenue 1. Example Your CPA firm is auditing a client's records; the engagement begins in mid-November and lasts through the end of February. Each day as work is being performed, revenue is earned. Since the cash will not be collected until completion of the engagement (after the event), this is an example of . -
Cash and Accrual Measures in Federal Budgeting
CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE Cash and Accrual Measures in Federal Budgeting Cash Accrual • Federal Most federal activities, including: employees’ • Interest on federal debt retirement • Capital investments • Federal credit programs benefits • Insurance programs • Capital leases and lease- • Social insurance programs purchase agreements Fair Value • Fannie Mae, Freddie Mac • Troubled Asset Relief Program • Contributions to the IMF JANUARY 2018 www.cbo.gov/publication/53461 Contents Summary 1 What Roles Do Cash and Accrual Measures Play in the Federal Budget Process? 1 What Are the Advantages and Disadvantages of Cash and Accrual Measures? 2 What Are the Criteria for Assessing Information Provided by Cash and Accrual Measures? 2 What Are Potential Approaches for Selectively Expanding the Use of Accrual and Other Long-Term Measures in the Federal Budget Process? 2 Overview of the Federal Budget Process 3 BOX 1. THE FEDERAL BUDGET PROCESS AND BUDGET ENFORCEMENT PROCEDURES 4 An Illustration of Cash Versus Accrual Measures 5 The Role of Cash and Accrual Measures in the Federal Budget Process 6 Accrual-Based Budgetary Treatment 6 BOX 2. ILLUSTRATING ALTERNATIVE BUDGETARY TREATMENTS: ESTIMATING THE SAVINGS FROM LIMITING FORGIVENESS OF GRADUATE STUDENT LOANS 10 BOX 3. ACCOUNTING FOR MARKET RISK IN ACCRUAL-BASED ESTIMATES 14 Other Measures Used in the Federal Budget Process 16 Advantages and Disadvantages of Cash and Accrual Measures 18 BOX 4. INTERNATIONAL EXPERIENCE WITH ACCRUAL BUDGETING: WHAT ARE THE LESSONS? 20 Expanding the Use of Accrual Measures in the Federal Budget and Budget Process 22 Criteria for Assessing Information Provided by Cash and Accrual Measures 22 Approaches to Expanding the Use of Accrual and Other Long-Term Measures in the Federal Budget Process 26 About This Document 29 Tables 1. -
FINANCIAL STATEMENTS by Michael J
CHAPTER 7 FINANCIAL STATEMENTS by Michael J. Buckle, PhD, James Seaton, PhD, and Stephen Thomas, PhD LEARNING OUTCOMES After completing this chapter, you should be able to do the following: a Describe the roles of standard setters, regulators, and auditors in finan- cial reporting; b Describe information provided by the balance sheet; c Compare types of assets, liabilities, and equity; d Describe information provided by the income statement; e Distinguish between profit and net cash flow; f Describe information provided by the cash flow statement; g Identify and compare cash flow classifications of operating, investing, and financing activities; h Explain links between the income statement, balance sheet, and cash flow statement; i Explain the usefulness of ratio analysis for financial statements; j Identify and interpret ratios used to analyse a company’s liquidity, profit- ability, financing, shareholder return, and shareholder value. Introduction 195 INTRODUCTION 1 The financial performance of a company matters to many different people. Management is interested in assessing the success of its plans relative to its past and forecasted performance and relative to its competitors’ performance. Employees care because the company’s financial success affects their job security and compensation. The company’s financial performance matters to investors because it affects the returns on their investments. Tax authorities are interested as well because they may tax the company’s profits. An investment analyst will scrutinise a company’s performance and then make recommendations to clients about whether to buy or sell the securities, such as shares of stocks and bonds, issued by that company. One way to begin to evaluate a company is to look at its past performance. -
Lecture 3 Adjusting the Accounts Time Period Assumption: an Assumption
Lecture 3 Adjusting the accounts Time period assumption: An assumption that the economic life of a business can be divided into artificial time period. The time period assumption is called the periodicity assumption. Fiscal year : An accounting time period that is one year in length is a fiscal year. A fiscal year usually begins with the first day of a month and ends twelve months later on the last day of a month Accounting time periods are generally a month, a quarter, or a year. Monthly and quarterly time periods are called interim periods. Most large companies must prepare both quarterly and annual financial statements. Calendar year: An accounting period that extends from January 1 to December 31 is called the calendar year Accrual basis accounting : Under the accrual basis, companies record transactions that change a company’s financial statements in the periods in which the events occur. Under the accrual basis, revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. This method is more commonly used than the cash method. Cash basis accounting: Under cash-basis accounting, companies record revenue when they receive cash. They record an expense when they pay out cash. The cash basis seems appealing due to its simplicity, but it often produces misleading financial statements. It fails to record revenue that a company has earned but for which it has not received the cash. Also, it does not match expenses with earned revenues. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).