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™ Making Everything Easier! Financial Accounting Learn to: • Determine what each line of a financial statement tells you • Identify the various accounting concepts and methods that companies can employ • Recognize how investors and creditors use financial reports to make decisions Maire Loughran Adjunct Full Professor of Financial & Managerial Accounting Certified Public Accountant
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Financial Accounting For Dummies® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2011 by Wiley Publishing, Inc., Indianapolis, Indiana Published by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permit- ted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http:// www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/ or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book. LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITH- OUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE F OR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZA- TION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFORMATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. For general information on our other products and services, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. For technical support, please visit www.wiley.com/techsupport. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Control Number: 2011924129 ISBN: 978-0-470-93065-6 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1
About the Author Maire Loughran is a certified public accountant and a member of the American Institute of Certified Public Accountants. Her professional experi- ence includes four years of internal auditing for a publicly traded company in the aerospace industry, two years as an auditor in the not-for-profit sector, and even some experience as a U.S. federal agent! Her public accounting experience includes financial reporting and analysis, audits of private corpo- rations, accounting for e-commerce, and forensic accounting. Maire is a full adjunct professor who teaches graduate and undergradu- ate auditing, accounting, and taxation classes. Interested in many different business-related fields, she has written Auditing For Dummies (a Wiley pub- lication), a training manual for a Microsoft product, and a guide to starting a home-based business, as well as the Arts and Crafts Business Guide for About.com, a part of The New York Times Company.
Dedication To my much-loved son Joey, who serves his country aboard the USS Harry S. Truman: I am prouder of you than mere words can ever describe. And to my late husband Jeff, so long gone from our lives but never absent from our hearts. Author’s Acknowledgments To the Ursuline nuns and Jesuit priests who provided me with a stellar edu- cation, and to my parents, who selflessly footed the bill. To my agent, Barb Doyen, for all her hard work and support. And to the wonderful Joan Friedman, for all her fantastic advice, months of editing, and follow-through.
Publisher’s Acknowledgments We’re proud of this book; please send us your comments at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, out- side the U.S. at 317-572-3993, or fax 317-572-4002. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Composition Services Development Project Coordinator: Sheree Montgomery Project Editor: Joan Friedman Layout and Graphics: Melanee Habig, Acquisitions Editor: Tracy Boggier Corrie Socolovitch Assistant Editor: David Lutton Proofreaders: Laura L. Bowman, Technical Reviewers: Linda K. MacFarlane, CPA; John Greenough Karen Schuele, PhD, CPA Indexer: Broccoli Information Management Senior Editorial Manager: Jennifer Ehrlich Editorial Supervisor: Carmen Krikorian Editorial Assistant: Rachelle S. Amick Cover Photos: © iStockphoto.com / ArtmannWitte Cartoons: Rich Tennant (www.the5thwave.com) Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies Ensley Eikenburg, Associate Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Debbie Stailey, Director of Composition Services
Contents at a Glance Introduction ................................................................ 1 Part I: Getting a Financial Accounting Initiation ........... 7 Chapter 1: Seeing the Big Picture of Financial Accounting .......................................... 9 Chapter 2: Making Mom Proud: Financial Accounting Career Options .................... 23 Chapter 3: Introducing the Big Three Financial Statements ...................................... 37 Chapter 4: Acronym Alert! Setting the Standards for Financial Accounting............ 51 Part II: Reviewing Some Accounting Basics ................. 63 Chapter 5: Booking It: The Process behind Financial Accounting ............................ 65 Chapter 6: Focusing on Accounting Methods and Concepts ..................................... 87 Part III: Spending Quality Time with the Balance Sheet .............................................. 97 Chapter 7: Assessing the Balance Sheet’s Asset Section............................................ 99 Chapter 8: Digging for Debt in the Liabilities Section ............................................... 113 Chapter 9: Letting Owners Know Where They Stand: The Equity Section ............ 129 Part IV: Investigating Income and Cash Flow .............................................................. 141 Chapter 10: Searching for Profit or Loss on the Income Statement ........................ 143 Chapter 11: Following the Money by Studying Cash Flow........................................ 163 Chapter 12: Examining Depreciation Cost Flow Assumptions................................. 179 Chapter 13: Learning about Inventory Cost Flow Assumptions .............................. 193 Part V: Analyzing the Financial Statements ............... 205 Chapter 14: Using Ratios and Other Tools ................................................................. 207 Chapter 15: Got Your Dictionary Ready? Reading Explanatory Notes and Disclosures ................................................................................................ 221 Chapter 16: Studying the Report to the Shareholders.............................................. 237
Part VI: Feeling Brave? Tackling More Advanced Financial Accounting Topics ...................... 251 Chapter 17: Accounting for Business Combinations................................................. 253 Chapter 18: Accounting for Income Taxes ................................................................. 271 Chapter 19: Accounting for Leases.............................................................................. 283 Chapter 20: Reporting Changes in Methods and the Correction of Errors............ 293 Part VII: The Part of Tens......................................... 305 Chapter 21: Ten Financial Accounting Shenanigans ................................................. 307 Chapter 22: Ten Industries with Special Accounting Standards ............................. 315 Index ...................................................................... 321
Table of Contents Introduction ................................................................. 1 About This Book .............................................................................................. 1 Conventions Used in This Book..................................................................... 2 What You’re Not to Read................................................................................ 3 Foolish Assumptions....................................................................................... 3 How This Book Is Organized .......................................................................... 4 Part I: Getting a Financial Accounting Initiation ................................ 4 Part II: Reviewing Some Accounting Basics........................................ 4 Part III: Spending Quality Time with the Balance Sheet.................... 4 Part IV: Investigating Income and Cash Flow ..................................... 5 Part V: Analyzing the Financial Statements........................................ 5 Part VI: Feeling Brave? Tackling More Advanced Financial Accounting Topics ............................................................ 5 Part VII: The Part of Tens...................................................................... 5 Icons Used in This Book ................................................................................. 6 Where to Go from Here................................................................................... 6 Part I: Getting a Financial Accounting Initiation ............ 7 Chapter 1: Seeing the Big Picture of Financial Accounting. . . . . . . . . .9 Knowing the Purposes of Financial Accounting .......................................... 9 Preparing financial statements .......................................................... 10 Showing historic performance........................................................... 11 Providing results for the annual report ............................................ 12 Getting to Know Financial Accounting Users............................................. 12 Identifying the most likely users........................................................ 13 Recognizing their needs...................................................................... 13 Providing information for decision-making...................................... 14 Respecting the Key Characteristics of Financial Accounting Information ............................................................................ 15 Relevance.............................................................................................. 15 Reliability .............................................................................................. 16 Comparability....................................................................................... 16 Consistency .......................................................................................... 17 Accepting Financial Accounting Constraints............................................. 18
x Financial Accounting For Dummies Considering Your Ethical Responsibilities................................................. 19 Following the accountant’s code of conduct ................................... 20 Having integrity.................................................................................... 20 Maintaining objectivity ....................................................................... 21 Achieving independence..................................................................... 21 Introducing the Conceptual Framework of Financial Accounting........... 22 Chapter 2: Making Mom Proud: Financial Accounting Career Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 The Making of a Financial Accountant........................................................ 23 Getting educated.................................................................................. 24 Aiming for an MBA or a CPA (or both!)............................................. 25 Identifying other helpful licenses ...................................................... 26 Considering Your Employment Opportunities .......................................... 28 Public accounting: Working for yourself or a CPA firm .................. 29 Private accounting............................................................................... 30 Nonprofit and governmental accounting.......................................... 31 Crystal Ball Time: Looking into the Future of Financial Accounting............................................................................. 33 Examining the evolution of financial accounting............................. 33 Factoring in the changing nature of business .................................. 34 Chapter 3: Introducing the Big Three Financial Statements . . . . . . . .37 Gauging the Health of a Business through Its Financials ......................... 38 Reporting Assets and Claims: The Balance Sheet ..................................... 39 Realizing why the balance sheet is “classified” ............................... 39 Studying the balance sheet components.......................................... 40 Seeing an example of a classified balance sheet.............................. 43 Posting Profit or Loss: The Income Statement ........................................... 43 Keeping a scorecard for business activity ....................................... 44 Studying the income statement components................................... 45 Seeing an example of an income statement ..................................... 46 Showing the Money: The Statement of Cash Flows................................... 47 Tracking sources and uses of cash.................................................... 47 Studying sections of the cash flow statement.................................. 48 Seeing a short statement of cash flows............................................. 49 Chapter 4: Acronym Alert! Setting the Standards for Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 Walking through the Origins of Number Crunching ................................. 52 Knowing the Role of the American Institute of Certified Public Accountants (AICPA)................................................................................. 53 ASB audit and attestation standards................................................. 54 AICPA Code of Professional Conduct................................................ 55
Table of Contents xi Following Regulatory Issues......................................................................... 57 The U.S. Securities and Exchange Commission (SEC) .................... 57 The Sarbanes-Oxley Act of 2002 (SOX) ............................................. 58 The Public Company Accounting Oversight Board (PCAOB)........ 59 Getting to Know the Financial Accounting Standards Board (FASB) ..... 60 Understanding generally accepted accounting principles (GAAP) ............................................................................ 61 Looking online for the FASB’s standards.......................................... 62 Part II: Reviewing Some Accounting Basics.................. 63 Chapter 5: Booking It: The Process behind Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Shedding Some Light on Bookkeeping........................................................ 66 Analyzing the Effect of Business Transactions.......................................... 66 Working the fundamental accounting equation............................... 67 Getting familiar with accounts ........................................................... 68 Defining debits and credits................................................................. 70 Learning about the transaction methodology ................................. 70 Defining Journals ........................................................................................... 71 Using journals to record cash transactions ..................................... 71 Recording accrual transactions ......................................................... 75 Learning about other journals ........................................................... 77 Seeing examples of common journal entries.................................... 79 Bringing It All Together in the Ledger ........................................................ 81 Realizing what a ledger is ................................................................... 81 Posting to the ledgers ......................................................................... 82 Viewing an example of a general ledger............................................ 82 Recognizing the purpose of the trial balance .................................. 85 Chapter 6: Focusing on Accounting Methods and Concepts . . . . . . . .87 Distinguishing between Key Accounting Methods.................................... 88 The cash basis...................................................................................... 88 The accrual basis................................................................................. 89 Sorting through Standards for Other Types of Accounting..................... 90 Managerial accounting ........................................................................ 90 Not-for-profit accounting .................................................................... 91 Governmental accounting................................................................... 92 International accounting..................................................................... 93 Considering the Conceptual Framework of Financial Accounting .......... 93 The objective of financial reporting .................................................. 94 Characteristics of accounting information....................................... 95 Elements of the financial statements ................................................ 95 Financial statement measurements................................................... 96
xii Financial Accounting For Dummies Part III: Spending Quality Time with the Balance Sheet ............................................... 97 Chapter 7: Assessing the Balance Sheet’s Asset Section . . . . . . . . . .99 Homing in on Historic Cost ........................................................................ 100 Learning What Makes an Asset Current ................................................... 100 Cash ..................................................................................................... 100 Short-term investments .................................................................... 102 Accounts receivable .......................................................................... 103 Notes receivable ................................................................................ 105 Inventory............................................................................................. 105 Prepaid expenses............................................................................... 107 Keeping Track of Noncurrent (Long-Term) Assets ................................. 107 Meeting the tangibles: Property, plant, and equipment (PP&E) ......................................................................... 108 Investigating intangible assets ......................................................... 110 Studying the Asset Section of the Balance Sheet .................................... 111 Chapter 8: Digging for Debt in the Liabilities Section. . . . . . . . . . . . .113 Seeing How Businesses Account for Liabilities ....................................... 114 Keeping Current Liabilities under Control ............................................... 115 Accounts payable .............................................................................. 116 Payroll and taxes................................................................................ 117 Unearned revenue.............................................................................. 119 Other short-term liabilities............................................................... 120 Planning for Long-Term Obligations ......................................................... 122 Managing long-term debt .................................................................. 123 Anticipating contingent liabilities.................................................... 124 Accounting for Bond Issuances ................................................................. 125 Understanding bond basics.............................................................. 125 Accounting for bonds sold at face value ........................................ 126 Addressing interest payments ......................................................... 126 Getting and amortizing a premium.................................................. 126 Reporting a bond discount ............................................................... 127 Retiring and converting bonds......................................................... 128 Chapter 9: Letting Owners Know Where They Stand: The Equity Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Distinguishing Different Types of Business Entities ............................... 130 Sole proprietorship ........................................................................... 130 Partnership ......................................................................................... 131 Corporate............................................................................................ 132 Defining Paid-in Capital............................................................................... 133 Recording Retained Earnings..................................................................... 135
Table of Contents xiii Spotting Reductions to Stockholders’ Equity .......................................... 135 Paying dividends................................................................................ 136 Buying treasury stock ....................................................................... 138 Learning about Stock Splits........................................................................ 138 Accounting for Accumulated Other Comprehensive Income................ 139 Seeing a Sample Equity Section of the Balance Sheet............................. 139 Part IV: Investigating Income and Cash Flow ............. 141 Chapter 10: Searching for Profi t or Loss on the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143 Presenting the Income Statement in One of Two Ways.......................... 144 Recognizing the single-step format ................................................. 144 Breaking it out with the multiple-step format................................ 145 Defining Different Types of Businesses .................................................... 146 Providing a service ............................................................................ 146 Merchandising to the public ............................................................ 146 Manufacturing a product .................................................................. 147 Examining Income Statement Sections..................................................... 147 Two types of revenue........................................................................ 148 Contra revenue accounts.................................................................. 149 Cost of goods sold ............................................................................. 151 Gross profit......................................................................................... 154 Operating expenses ........................................................................... 154 Heading toward the bottom line ...................................................... 155 Earnings per share............................................................................. 157 Watching Out for Unusual Income Statement Items ............................... 158 Discontinued operations................................................................... 158 Extraordinary items........................................................................... 159 Arriving at the Final Product...................................................................... 160 Chapter 11: Following the Money by Studying Cash Flow . . . . . . . . .163 Understanding the Difference between Cash and Profit ........................ 164 Seeing how noncash transactions affect profit.............................. 164 Distinguishing costs from expenses................................................ 165 Realizing the Purpose of the Statement of Cash Flows........................... 165 Walking through the Cash Flow Sections ................................................. 167 Figuring cash operating results ....................................................... 167 Showing cash investing transactions .............................................. 170 Accounting for financing activities.................................................. 172 Recognizing Methods for Preparing the Statement of Cash Flows ....... 173 Using the direct method ................................................................... 174 Starting indirectly with net income ................................................. 174 Interpreting the Statement of Cash Flows ................................................ 175 Looking at Two Sample Statements of Cash Flows ................................. 176
xiv Financial Accounting For Dummies Chapter 12: Examining Depreciation Cost Flow Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179 Discovering How Depreciation Affects All Financial Statements .......... 180 Mastering Costs ........................................................................................... 181 Defining costs and expenses in the business world...................... 181 Satisfying the matching principle .................................................... 182 Identifying product and period costs.............................................. 183 Learning which costs are depreciated............................................ 183 Distinguishing among Depreciation Methods.......................................... 185 Walking through the straight-line method ..................................... 187 Accelerating by using declining balance ........................................ 187 Calculating sum-of-the-years’-digits ................................................ 188 Using the units-of-production method............................................ 188 Seeing how the methods compare .................................................. 189 Figuring partial year depreciation ................................................... 190 Preparing a Depreciation Schedule........................................................... 190 Chapter 13: Learning about Inventory Cost Flow Assumptions . . . . .193 Discovering How Inventory Valuation Affects the Financial Statements......................................................................... 194 Do Service Companies Have Inventory?................................................... 195 Classifying Inventory Types....................................................................... 196 Accounting for merchandising company inventory...................... 196 Accounting for manufacturing company inventory ...................... 198 Getting to Know Inventory Valuation Methods ....................................... 199 Specifi c identification ........................................................................ 200 Weighted average .............................................................................. 200 First-in, first out (FIFO)...................................................................... 200 Last-in, first-out (LIFO) ...................................................................... 201 Comparing inventory cost-flow assumptions ................................ 201 Preparing an Inventory Worksheet ........................................................... 204 Part V: Analyzing the Financial Statements................ 205 Chapter 14: Using Ratios and Other Tools . . . . . . . . . . . . . . . . . . . . . . .207 Learning about Liquidity Measurements ................................................. 208 Figuring the current ratio ................................................................. 208 Putting the acid test to work ............................................................ 209 Working with working capital .......................................................... 210
Table of Contents xv Measuring Profitability ............................................................................... 211 Explaining trend analysis.................................................................. 212 Focusing on return on investment................................................... 213 Homing in on return on equity......................................................... 214 Exploring Activity Measures ...................................................................... 214 Accounts receivable turnover.......................................................... 215 Inventory turnover ............................................................................ 216 Analyzing Financial Statements ................................................................. 216 Using horizontal analysis.................................................................. 217 Comparing with vertical analysis .................................................... 217 Using Common Size Financial Statements................................................ 218 Chapter 15: Got Your Dictionary Ready? Reading Explanatory Notes and Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .221 Realizing How Corporations Should Govern Themselves...................... 222 Identifying Corporate Characteristics ...................................................... 222 Reviewing Common Explanatory Notes ................................................... 225 Leveling the playing field among financial statements ................. 225 Explaining significant accounting policies ..................................... 226 Looking for important event disclosures ....................................... 229 Putting the Onus on the Preparer ............................................................. 233 Chapter 16: Studying the Report to the Shareholders . . . . . . . . . . . . .237 Why Private and Public Companies Treat Annual Reports Differently................................................................................... 238 Fulfi lling Three Purposes............................................................................ 239 Serving a marketing and PR function .............................................. 239 Stating financial performance and goals......................................... 240 Meeting regulatory requirements.................................................... 240 Reading the Annual Report to Shareholders ........................................... 241 Meeting the chair of the board of directors ................................... 241 Highlighting key financial data......................................................... 242 Touting company achievements...................................................... 244 Looking into the future...................................................................... 244 Getting to know key management and board members ............... 245 Walking through the Form 10-K ................................................................. 245 Facing page: Identifying the affected company.............................. 246 Part I: Learning more about the registrant..................................... 246 Part II: Revealing the company’s financial performance .............. 247 Part III: Identifying management and corporate governance....... 250 Part IV: Exhibits, financial statement schedules, and signature .............................................................. 250
xvi Financial Accounting For Dummies Part VI: Feeling Brave? Tackling More Advanced Financial Accounting Topics....................... 251 Chapter 17: Accounting for Business Combinations . . . . . . . . . . . . . .253 Explaining What Constitutes a Merger or Acquisition ........................... 254 Recognizing the Business Combination ................................................... 256 Before July 2001: The pooling of interest method......................... 256 Through 2008: The purchase method............................................. 257 Post 2008: The acquisition method ................................................. 257 Reviewing Issues Affecting Mergers and Acquisitions ........................... 259 Understanding contingent considerations ..................................... 260 Providing for golden parachute payments..................................... 260 Realizing valuation for the business combination ........................ 261 Accounting for acquisition-related costs........................................ 262 Identifying other issues..................................................................... 262 Defining Investments in Equities ............................................................... 265 Using the fair value method ............................................................. 265 Putting the equity method in play ................................................... 266 Consolidating financial statements ................................................. 266 Classifying Types of Reorganization Dispositions .................................. 269 Chapter 18: Accounting for Income Taxes. . . . . . . . . . . . . . . . . . . . . . .271 Identifying Financial Income versus Taxable Income............................. 272 Figuring out financial income ........................................................... 272 Taking a look at taxable income ...................................................... 273 Explaining why the two incomes differ........................................... 274 Taking Advantage of Net Operating Losses ............................................. 277 Identifying loss carrybacks............................................................... 278 Understanding loss carryforwards.................................................. 278 Presenting a Side-by-Side Comparison of Book and Tax Calculations....................................................................................... 279 Taking Deferred Tax Liabilities or Assets to the Balance Sheet............ 280 Chapter 19: Accounting for Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .283 Reviewing Lease Basics .............................................................................. 283 Identifying leasing advantages ......................................................... 284 Introducing the lessor and lessee.................................................... 285 Accounting for the Lessee.......................................................................... 286 Looking at operating leases.............................................................. 286 Walking through capital leases ........................................................ 287 Presenting a capital lease on the financial statements................. 289 Accounting for the Lessor .......................................................................... 290 Operating leases ................................................................................ 291 Direct financing leases ...................................................................... 291 Sales-type leases ................................................................................ 292
Table of Contents xvii Chapter 20: Reporting Changes in Methods and the Correction of Errors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .293 Coping with Accounting Changes.............................................................. 293 Reporting changes in accounting principles.................................. 294 Changing a company’s estimates..................................................... 298 Understanding changes in reporting entities................................. 300 Dealing with Errors...................................................................................... 301 Reviewing common types of errors................................................. 301 Letting counterbalancing errors lie................................................. 302 Restating the financial statements .................................................. 303 Part VII: The Part of Tens.......................................... 305 Chapter 21: Ten Financial Accounting Shenanigans. . . . . . . . . . . . . .307 Reporting Revenue in the Wrong Period.................................................. 307 Reporting Fictitious Income....................................................................... 308 Misclassifying Income Items ...................................................................... 309 Failing to Record Liabilities........................................................................ 309 Reporting Liabilities in the Wrong Period................................................ 310 Infl ating Asset Value.................................................................................... 311 Improperly Changing Accounting Methods ............................................. 312 Not Disclosing Related-Party Transactions.............................................. 312 Capitalizing Normal Operating Expenses ................................................. 313 Hiding Reportable Contingencies.............................................................. 313 Chapter 22: Ten Industries with Special Accounting Standards . . .315 Airlines.......................................................................................................... 315 Finance Companies ..................................................................................... 316 Franchisors................................................................................................... 317 Oil and Gas Companies............................................................................... 317 Government Contractors............................................................................ 318 Healthcare Entities ...................................................................................... 318 Motion Picture Companies......................................................................... 319 Not-for-Profit Organizations ....................................................................... 319 Real Estate Developers ............................................................................... 320 Computer Software...................................................................................... 320 Index ...................................................................... 321
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