4 ^>*? H-t+tf 3 A
The Complete CPA Reference
NICK A. DAUBER, MS, CPA
JAE K. SHIM, PhD
JOEL G. SIEGEL, PhD, CPA
WILEYJohn Wiley & Sons, Inc.
Contents
About the Authors xxi
Acknowledgments xxiii
Introduction xxv
PART I COMMONLY USED GENERALLY ACCEPTEDACCOUNTING PRINCIPLES
CHAPTER 1 Financial Statement Reporting: The Income Statement 3
Income Statement Format 4
Comprehensive Income 4Extraordinary Items 5Nonrecurring Items 6Discontinued Operations 6Revenue Recognition . 8
Realization 9
At the Completion of Production 9Requirements 9
During Production 9Cash Basis 12Recognition of Franchise Fee Revenue by the Franchisor 15
Other Revenue Considerations 18Multiple Deliverables 18Software Revenue Recognition 19Research and Development Costs 20
Advertising Costs 23Restructuring Charges 23
Other Expense Considerations J 23.Earnings per Share 23
Diluted Earnings per Share 26Antidilutive Securities •, 29
Contents
CHAPTER 2 Financial Statement Reporting: The Balance Sheet
Assets
Accounts Receivable
Inventory
Fixed Assets
Depreciation
Capitalized Interest
Nonmonetary Transactions
Impairment or Disposal of Long-Lived Assets
Involuntary Conversion
Asset Retirement Obligations
Disclosure
Intangibles
Financial Assets
Insurance
Liabilities
Bonds Payable
Extinguishment of Debt
Estimated Liabilities
Accounting for Compensated Absences
Accounting for Special Termination Benefitsto Employees
Refinancing of Short-Term Debt to Long-Term Debt
Callable Obligations by the Creditor
Disclosure of Long-Term Purchase Obligations
Exit or Disposal Activities
Fair Value Measurements
Fair Value Option for Financial Assets andFinancial Liabilities
Electing the Fair Value Option
Events
Instrument Application
Balance Sheet
Statement of Cash Flows
Disclosures
Eligible Items at Effective Date
Available-for-Sale and Held-to-Maturity Securities
Stockholders' Equity
Preferred Stock
Stock Retirement '
33
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Contents vii
Appropriation of Retained Earnings (Reserve) 80Treasury Stock N 80
Cost Method "~ 81Par Value Method 81
Quasi-Reorganization 82Dividends 84Stock Split 86
Stock Options 86Debt Issued with Stock Warrants 87
Fractional Share Warrants 88
Disclosure 89
CHAPTER 3 Financial Statement Reporting: Statement of Cash Flows andOther Disclosures 91
Statement of Cash Flows 91Interim Reporting 103
. Personal Financial Statements . 107
Incorporation of a Business 110Partnerships 110
Bonus Method 111Goodwill Method 112
CHAPTER 4 Accounting and Disclosures 113
Hierarchy of GAAP, 113
FASB Accounting Standards Codification 113Accounting Changes 114
Change in Accounting Principle 115Change in Accounting Estimate 118Change in Reporting Entity 119Correction of an Error 120
Prior-Period Adjustments 121Disclosure of Accounting Policies 122Development-Stage Companies 123Troubled Debt Restructuring 124
Debtor 125Creditor 126
Segmental Reporting 127Imputing Interest on Notes 133Accounting for Futures Contracts 135Oil- and Gas-Producing Companies 138
viii Contents
CHAPTER 5 Key Financial Accounting Areas
Consolidations
NoncontroUing Interests in Consolidated FinancialStatements
Business Combinations
Investments in Securities
Stock Investments
Market Value Adjusted
Equity Method
Leases
Lessee
Lessor
Sales-Leaseback Arrangement
Subleases and Similar Transactions
Leveraged Leases
Pension Plans
Defined Contribution Pension Plan
Defined Benefit Pension Plan
Trustee Reporting for a Defined Benefit Pension Plan
Balance Sheet
Other Postretirement Benefits
Income Tax Accounting
Temporary Differences
Permanent Differences
Financial Statement Presentation
Intraperiod Tax Allocation
Loss Carrybacks and Carryforwards
Deferred Tax Liability versus Deferred Tax Asset
Tax Rates
Indefinite Reversal
Foreign Currency Translation and Transactions
Translation Process
Balance Sheet
Income Statement
Translation Adjustments
Foreign Currency Transactions
Forward Exchange Contracts
Hedging
Derivative Products
Insurance Contracts
139
139
142
143148148148152
156157160
167167168170
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182182
183184
184
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185185185186
187188
189192
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197198198200
Contents ix
PART II
U.S. GAAP versus IFRSCash and Cash EquivalentsReceivablesInventoriesInvestments
Equity-Method InvestmentsProperty, Plant, and EquipmentRevaluations Involving Depreciable AssetsIntangible Assets and GoodwillContingent LiabilitiesDefined Benefit PlansIncome Tax DeferralsLease AccountingEquityRevenue Recognition
Sale of Goods
Bill-and-Hold TransactionsMultiple-Element Arrangements
Long-Term Construction ContractsCustomer Loyalty Programs
Discontinued OperationsShare-Based PaymentImpairment
Intangible ImpairmentProperty, Plant, and Equipment Impairment
Earnings per ShareSubsequent Events
ANALYZING FINANCIAL STATEMENTS)I
t
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CHAPTER 6 Financial Statement Analysis
Introduction
Industry Comparison
Trend Analysis- Horizontal and Vertical Analysis
Balance Sheet AnalysisAssets
CashAccounts ReceivableInventory
Investments
200202202202203203203205206207207208209209210210211211212212213213213214214214215
219
219220221221222222223223224226
Contents
Fixed Assets
Intangibles
Deferred Charges
Unrecorded Assets
Liabilities
Evaluation of Liquidity
Appraising Corporate Solvency
Income Statement Analysis
Cash Flow from Operations
Discretionary Costs
Accounting Policies
Degree of Certainty in Accounting Estimates
Residual Income
Taxable Income
Foreign Operations
Discontinued Operations
Stability of Earnings
Operating Leverage
Profitability Measures
Growth Rate
Market Value Measures
Bankruptcy Prediction
Liquidation Value
227229230231232234236239239240242243244245245245246247248248248249251
PART III MANAGERIAL ACCOUNTING APPLICATIONS
CHAPTER 7 Appraising Segmental Performance
The What and Why of Responsibility AccountingCost CenterProfit CenterInvestment Center
Cost Center Performance and Standard CostsMaterials Variances
Labor VariancesVariable Overhead VariancesFixed Overhead Variances
Mix and Yield VariancesFlexible Budgets and Performance ReportsProfit Centers and Segmented ReportingProfit Variance Analysis
Types of Standards in Profit Variance Analysis
255
255256256256258259261261264267276278281281
Contents xi
Single-Product Firms 282Multiproduct Firms 282Managerial Planning and Decision Making 287
Sales Mix Analysis 288Performance Reports 288
How to Measure the Performance of Investment Centers 288
Rate of Return on Investment 289Residual Income 291Residual Income and Economic Value Added 291
Investment Decisions under ROI and RI 292
More on Economic Value Added 293EVA and Value Creation 295
Corporate Balanced Scorecard 295How to Price Goods and Services Transferred 296Alternative Transfer Pricing Schemes 297Budgeting and Financial Planning 299
Computer-Based Budgeting 302
Case 1 302Case 2 302
Budgeting Software 305Budget Maestro 305Microsoft Business Solutions for Analytics—Forecaster 305Host Budget 306SAP BusinessObjects Budgeting and Consolidation 307
Latest Generation of Budgeting and Planning Software 307
CHAPTER 8 Analysis of Projects, Proposals, and Special Situations 309
Cost-Volume-Profit and Breakeven Analysis 309Contribution Margin 310Target Income Volume and Margin of Safety 313Sales'Mix Analysis 318
Short-Term, Nonroutine Decisions 320Theory of Constraints "̂ 327
Life-Cycle Costs and Target Costing 327
Activity-Based Costing 331Cost of Measurement 334Indirect Measures and the Degree of Correlation 334
Just-in-Time and Total Quality Management 334Taguchi Method of Quality Control 338
Backflush Costing 339Environmental Costs and Ecoefficiency 342
xii Contents
Time Value Fundamentals 346
Capital Budgeting , 350
Payback Period 352
Accounting (Simple) Rate of Return 353
Net Present Value 354
Internal Rate of Return (or Time-Adjusted Rate of Return) 355
Profitability Index (or Excess Present Value Index) 358
Limited Funds for Capital Spending 360
Effects of Income Tax Factors on Capital BudgetingDecisions 361
MACRS Rule 363
CHAPTER 9 Quantitative Applications and Modeling in Accounting 369
Statistical Analysis and Evaluation 369
Mean 369
Standard Deviation 372
Regression Analysis 374
Method of Least Squares 374
Use of a Spreadsheet Program for Regression 376
Trend Analysis 378
Regression Statistics 380
Quantitative Methods for Accounting 386
Decision Making 387
Decision Making under Certainty 387
Decision Making under Uncertainty 388
Decision Matrix 390
Expected Value of Perfect Information 391
Decision Tree 392
Linear Programming and Shadow Prices 394
Shadow Prices (Opportunity Costs) 397
Goal Programming and Multiple Goals 398
Learning Curve 402
Inventory Planning and Control 404
Economic Order Quantity 405
Reorder Point 408
Safety Stock and Reorder Point 410
Program Evaluation and Review Technique 411
Project Budgeting and Control Using Earned Value Analysis 416
Forecasting Project Parameters Using Earned Value
Methodology 420
Schedule Variance (SV) 420
Cost Variance (CV) 420
Contents xui
Schedule Performance Index (SPI)Cost Performance Index (CPI)Estimate at Completion (EAC)
420420421
PART IV AUDITING, COMPILING, AND REVIEWINGFINANCIAL STATEMENTS
CHAPTER 10 Auditing Procedures 425
Risk Assessment Procedures 425The Entity and Its Environment 426
Internal Control 426Substantive Procedures 442Audit Reports 451
Unqualified Opinion 453Qualified Opinion 455Disclaimer of Opinion 459Adverse Opinion 460
CHAPTER 11 Compilation, Review, and Other Reporting Services 463
Compilation of Financial Statements 463Review of Financial Statements 470Accountant's Consideration of Obtaining an Updating
Representation Letter from Management 480Documentation in a Review Engagement 481
Reports on Reviewed Financial Statements 481Departures from the Applicable Financial Reporting
Framework 484Supplementary Information 484
Emphasis of a Matter 485Restricting the Use of an Accountant's Compilation or
Review Report 485Consideration of an Entity's Ability to Continue as a
Going Concern 486Subsequent Events 486Subsequent Discovery of Facts Existing at the Date of
the Report 487Change in Engagement from Audit or Review to Compilation 487Reporting on Prescribed Forms 488Communication between Successor and Predecessor
Accountants 490Compilation of Specified Elements, Accounts, or Items of a
Financial Statement 490
xiv Contents
Compilation of Pro Forma Financial Information 494Communicating to Management and Others in a Compilation
or Review Engagement 498Reports on Prospective Financial Statements 499
Modification and Other Issues 506Range of Values 506Departure from AICPA Presentation Guidelines 506Significant Assumption Does Not Provide Reasonable
Basis 506Scope Limitation 507Emphasis of a Matter 507Division of Responsibility 507
Agreed-Upon Procedures 507Attest Engagements 511
Examination Engagements 512Review Engagements 514Engagements to Apply Agreed-Upon Procedures 517
Examination of an Entity's Internal Control over FinancialReporting That Is Integrated with an Audit of Its FinancialStatements (SSAE 15) 518
Integration with the Financial Statement Audit 534Reporting on Controls at a Service Organization 546Compliance Attestation 555Management's Discussion and Analysis 557Personal Financial Statements Included in Written Personal
Financial Plans 557Reporting on Comparative Statements 559
Same Level of Service 562Higher Level of Service 563
Guideline 563Lower Level of Service 563
Special Reports 564Specific Elements, Accounts, or Items in a Basic Set of
Financial Statements 567
Compliance with Contracts or Regulations Relating toAudited Financial Statements 569
Financial Information Included in Prescribed Forms 571
CHAPTER 12, Auditing Standards 573
SAS 1—Codification of Auditing Standards andProcedures 573
SAS 2—Reports on Audited Financial Statements 574
Contents xv
SAS 3—The Effects of EDP on the Auditor's Study andEvaluation of Internal Control 575
SAS 4—Quality Control Considerations for a Firm ofIndependent Auditors 575
SAS 5—The Meaning of "Present Fairly in Conformity withGenerally Accepted Accounting Principles" in theIndependent Auditor's Report 575
SAS 6—Related Party Transactions 575
SAS 7—Communication be tween Predecessor andSuccessor Auditor 575
SAS 8—Other Information in Documents Containing AuditedFinancial Statements 575
SAS 9—The Effect of an Internal Audit Function on the Scope
of the Independent Auditor's Examination 575
SAS 10—Limited Review of Interim Financial Information 575
SAS 11—Using the Work of a Specialist 575
SAS 12—Inquiry of a Client's Lawyer Concerning Litigation,.Claims, and Assessments , 576
SAS 13—Reports on a Limited Review of Interim Financial
Information 578
SAS 14—Special Reports 578
SAS 15—Reports on Comparative Financial Statements 578
SAS 16—The Independent Auditor's Responsibility for the
Detection of Errors or Irregularities 578
SAS 17—Illegal Acts by Clients 578
SAS 18—Unaudited Replacement Cost Information 578
SAS 19—Client Representations 578
SAS 20—Required Communication of Material Weaknesses in
Internal Accounting Control 579
SAS 21—Segment Information 579
SAS 22—Planning and Supervision 579
SAS 23—Analytical Review Procedures 579
SAS 24—Review of Interim Financial Information 579
SAS 25—The Relationship of Generally Accepted Auditing
Standards to Quality Control Standards 579
SAS 26—Association with Financial Statements 580
SAS 27—Supplementary Information Required by the FinancialAccounting Standards Board 580
SAS 28—Supplementary Information on the Effects ofChanging Prices 580
SAS 29—Reporting on Information Accompanying the BasicFinancial Statements in Auditor-Submitted Documents 580
SAS 30—Reporting on Internal Accounting Control 581
xvi Contents
SAS 31—Evidential Matter 581
SAS 32—Adequacy of Disclosure in Financial Statements 581
SAS 33—Supplementary Oil and Gas Reserve Information 581
SAS 34—The Auditor's Considerations When a Question Arises
about an Entity's Continued Existence 581
SAS 35—Special Reports: Applying Agreed-Upon Proceduresto Specified Elements, Accounts, or Items of a Financial
Statement 581
SAS 36—Review of Interim Financial Information 581
- SAS 37—Filings under Federal Securities Statutes 582
SAS 38—Letters for Underwriters 582
SAS 39—Audit Sampling 582
SAS 40—Supplementary Mineral Reserve Information 583
SAS 41—Working Papers 583
SAS 42—Reporting on Condensed Financial Statements and
Selected Financial Data 583
Condensed Financial Statements 583
Selected Financial Data ' 584
SAS 43—Omnibus Statement on Auditing Standards 585
SAS 44—Special-Purpose Reports on Internal Accounting
Control at Service Organizations 585
SAS 45—Omnibus Statement on Auditing Standards—1983 585
Related Parties 585
SAS 46—Consideration of Omitted Procedures after the
Report Date ., 586
SAS 47—Audit Risk and Materiality in Conducting an Audit 586
SAS 48—The Effects of Computer Processing on the Audit ofFinancial Statements 586
SAS 49—Letters for Underwriters 587
SAS 50—Reports on the Application of Accounting
Principles 587
SAS 51—Reporting on Financial Statements Prepared for Use
in Other Countries 589
SAS 52—Omnibus Statement on Auditing Standards—1987 590
SAS 53—The Auditor's Responsibility to Detect and Report
Errors and Irregularities 590
SAS 54—Illegal Acts by Clients 590
SAS 55—Consideration of Internal Control in a Financial
Statement Audit 591
SAS 56—Analytical Procedures 591
SAS 57—Auditing Accounting Estimates 591
SAS 58—Reports on Audited Financial Statements 592
Contents xvii
SAS 59—The Auditor's Consideration of an Entity's Ability toContinue as a Going Concern 592
SAS 60—Communication of Internal Control Related MattersNoted in an Audit 594
SAS 61—Communication with Audit Committees 594SAS 62—Special Reports 594SAS 63—Compliance Auditing Applicable to Governmental
Entities and Other Recipients of Governmental FinancialAssistance 594
SAS 64—Omnibus Statement on Auditing Standards 594
SAS 65—The Auditor's Consideration of the Internal AuditFunction in an Audit of Financial Statements 594
SAS 66—Communication of Matters about Interim FinancialInformation Filed or to Be Filed with Specified RegulatoryAgencies 595
SAS 67—The Confirmation Process 595
SAS 68—Compliance Auditing Applicable to GovernmentalEntities and Other Recipients of Governmental FinancialAssistance 597
SAS 69—The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles in theIndependent Auditor's Report 597
SAS 70—Service Organizations 597SAS 71—Interim Financial Information 598SAS 72—Letters for Underwriters and Certain Other Requesting
Parties / 598SAS 73—Using the Work of a Specialist 599
SAS 74—Compliance Auditing Considerations in Audits ofGovernmental Entities and Recipients of GovernmentalFinancial Assistance 600
SAS 75—Engagements to Apply Agreed-Upon Procedures toSpecified Elements, Accounts, or Items of a FinancialStatement 600
SAS 76—Amendments to Statement on Auditing StandardsNo. 72, Letters for Underwriters and Certain OtherRequesting Parties 600
SAS 77—Amendments to Statements on Auditing StandardsNo. 22, Planning and Supervision; No. 59, The Auditor'sConsideration of an Entity's Ability to Continue as a GoingConcern; and No. 62, Special Reports 600
•" SAS 78—Consideration of Internal Control in a FinancialStatement Audit: An Amendment to SAS 55 600
SAS 79—Amendment to Statement on Auditing StandardsNo. 58, Reports on Audited Financial Statements 600
xviii Contents
SAS 80—Amendment to Statement on Auditing StandardsNo. 31, Evidential Matter 601
SAS 81—Auditing Investments 601SAS 82—Consideration of Fraud in a Financial Statement Audit 601SAS 83—Establishing an Understanding with the Client 601SAS 84—Communications between Predecessor and Successor
Accountants 602SAS 85—Management Representations 603SAS 86—Amendment to Statement on Auditing Standards
No. 72, Letters for Underwriters and Certain OtherRequesting Parties 607
SAS 87—Restricting the Use of an Auditor's Report 607SAS 88—Service Organizations and Reporting on Consistency 608SAS 89—Audit Adjustments 608SAS 90—Audit Committee Communications 608SAS 91—Federal GAAP Hierarchy 608SAS 92—Auditing Derivative Instruments, Hedging Activities,
and Investments in Securities 609Existence or Occurrence 610Completeness 610Rights and Obligations 611Valuation 611Impairment Losses 612
SAS 93—Omnibus Statement on Auditing Standards—2000 614 .SAS 94—The Effect of Information Technology on the
Auditor's Consideration of Internal Control in a FinancialStatement Audit 6l4
SAS 95—Generally Accepted Auditing Standards 614SAS 96—Audit Documentation 614SAS 97—Amendment to Statement on Auditing Standards
No. 50, Reports on the Application of Accounting Principles 614SAS 98—Omnibus Statement on Auditing Standards—2002 614SAS 99—Consideration of Fraud in a Financial Statement Audit 615SAS 100—Interim Financial Information 623SAS 101—Auditing Fair Value Measurements and Disclosures 623SAS 102—Defining Professional Requirements in Statements
on Auditing Standards 625SAS 103—Audit Documentation 625SAS 104—Amendment to SAS 1, Codification of Auditing
Standards and Procedures ("Due Professional Care in thePerformance of Work") 629
SAS 105—Amendment to SAS 95—Generally AcceptedAuditing Standards 629
Contents xix
SAS 106—Audit Evidence 630SAS 107—Audit Risk and Materiality in Conducting an Audit 632SAS 108—Planning and Supervision 634
SAS 109—Understanding the Entity and Its Environment andAssessing the Risks of Material Misstatement 636
SAS 110—Performing Audit Procedures in Response toAssessed Risks and Evaluating the Audit Evidence Obtained 637
SAS 111—Amendment to Statement on Auditing StandardsNo. 39, Audit Sampling 640
SAS 112—Communication of Internal Control-Related MattersIdentified in an Audit 641
SAS 113—Omnibus 2006 641SAS 114—The Auditor's Communication with Those Charged
with Governance 641SAS 115—Communicating Internal Control Related Matters
Identified in an Audit 642SAS 116—Interim Financial Information 647SAS 117—Compliance Audits -, 648SAS 118—Other Information in Documents Containing
Audited Financial Statements 648SAS 119—Supplementary Information in Relation to the
Financial Statements as a Whole 650SAS 120—Required Supplementary Information 654SAS 121—Revised Applicability of Statement on Auditing
Standards No. 100, Interim Financial Information 655AS 1—References in Auditor's Reports to the Standards of the
Public Company Accounting Oversight Board 656
AS 2—An Audit of Internal Control over Financial ReportingPerformed in Conjunction with an Audit of FinancialStatements 656
AS 3—Audit Documentation 656AS 4—Reporting on Whether a Previously Reported Material
Weakness Continues to Exist 657AS 5—An Audit of Internal Control over Financial Reporting
That Is Integrated with an Audit of Financial Statements 662Definitions 664
AS 6—Evaluating Consistency of Financial Statements 670AS 7—Engagement Quality Review 671
. AS 8—Audit Risk 672•AS 9—Audit Planning 673AS 10—Supervision of the Audit Engagement 674AS 11—Consideration of Materiality in Planning and
Performing an Audit 675
XX Contents
AS 12—Identifying and Assessing Risks of Material
Misstatements
AS 13—The Auditor's Responses to the Risks of Material
Misstatement
AS 14—Evaluating Audit Results
AS 15—Audit Evidence
CHAPTER 13 Sarbanes-Oxley Act of 2002
Auditor Independence
Partner Rotation
Public Company Accounting Oversight Board
677
680681682
685
685686686
PARTY TAXATION
CHAPTER 14 Tax Research
Sources of Tax LawThe Court System
691
691692
PART VI OTHER PROFESSIONAL STANDARDS
CHAPTER 15 Consulting Services
CHAPTER 16 Quality Control
CHAPTER 17 Code of Professional Conduct
Rule 101—IndependenceRule 102—Integrity and ObjectivityRule 201—General StandardsRule 202—Compliance with StandardsRule 203—Accounting PrinciplesRule 301—Confidential Client InformationRule 302—Contingent FeesRule 501—Acts DiscreditableRule 502—Advertising and Other Forms of Solicitations
Rule 503—Commissions and Referral FeesRule 505—Form of Organization and Name
697
699
703
703
705
705
705
706
706
706
707
707
707
707
Index 709