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FASB codification: Liabilities, Equity, Revenue, Expenses

The goal of this research assignment is to become more familiar with the FASB Accounting Standards Codification website, as you will be using it in future chapters to find the answers to Research Exercises and Cases that reflect situations often arising in practice. Please answer the following 3 multi-part questions that are distributed throughout the narrative below.

First, log into the Codification website using the instructions in D2L on the Content page under the link for the "Research Exercise 1." Within the Codification, you will note on the left-hand side of the screen that the Codification is arranged topically. If you allow your cursor to hover over Assets, you will see that all Asset topics are numbered in a 300 series.

1. What number series is used for all
a. Liabilities?
b. Equity?
c. Revenue?
d. Expenses?

When you use the Codification to find GAAP guidance for any question, you must be able to cite where you obtained the information. When citing a reference from the Codification, the number is given as Topic-Subtopic-Section, so for example the reference FASB ASC 305-10-20 would direct you to the Topic "Cash and Cash Equivalents," the Subtopic "Overall" and the Section "Glossary." Use the links in the Codification to find FASB ASC 305-10-20 (first click on Cash and Cash Equivalents under Assets, then Overall, then Glossary).

2. According to the glossary, what is the definition of
a. Cash?
b. Cash Equivalents?

When a question arises in practice that requires research, the Search function of the Codification is usually the most efficient way to narrow down the breadth of information that you must read through to find the answer. A basic "Search" function is found in the far upper right-hand corner of the website. However, the "Advanced Search" (link located directly below the Search box) is more useful in reducing the number of results that are received. To complete this assignment, you will use the Advanced Search function to find the appropriate guidance to determine how an investment should be classified.

Tiny Manufacturing Company has just purchased its first investment - a bond that was issued by Microsoft. Tiny Co's controller, Jim Small, does not know how to account for this security on Tiny Co's books. However, he knows that Investments are Assets, and looking in the 300 section he sees that Investments are covered in section 32X. Specifically, bonds (which are debt instruments) fall under Topic 320, "Debt and Equity Securities."

If you click on Topic 320, you will see that there are 8 Subtopics listed. Subtopic 10 is "Overall" and Subtopics 940-965 are specific to industries that have additional regulation requirements (such as banks or insurance companies). Since Tiny Co is a manufacturer, none of these special Subtopics apply to it. Therefore, Mr. Small knows he must search for answers in Topic 320, Subtopic 10 (Investments - Debt and Equity Securities, Overall).

Mr. Small therefore uses the Advanced Search feature to begin by figuring out how to classify the new investment. Mr. Small types "Classification of Investment Securities" into the Text/Keyword box, and types 320 as the Topic and 10 as the Subtopic.

3. Using the results of this search
a. What are the three categories listed from which Mr. Small must choose how to classify the investment?
b. What is the reference for this guidance (FASB ASC XXX-XX-XX-XX)?
c. Mr. Small expects that interest rates will fall over the next 2 years and therefore the bond will increase in value. If this happens, in a year or two he will sell the bond for a gain when its price has increased. However, if the bond price does not increase Mr. Small will hold the bond in Tiny Co's portfolio and continue to receive and record the interest payments. Given this information, how do you think this bond should be classified in Tiny Co's financial statements?

Solution Preview

1. What number series is used for all
a. Liabilities? 4xx
b. Equity? 5xx
c. Revenue? 6xx
d. Expenses? 7xx

2. According to the glossary, what is the definition of
a. Cash?
• Glossary Term UsageSee Topic(s)210, 230, 305, 860, 942
Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank's granting of a loan by crediting the proceeds to a customer's demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made.

b. Cash Equivalents?

Cash Equivalents
• Glossary Term UsageSee Topic(s)210, 230, 305, 958
Cash equivalents are short-term, highly liquid investments that have both of the following characteristics:
o a. Readily convertible to known amounts of cash
o b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates.
Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three ...

Solution Summary

Your tutorial includes cut and pasted sections from the codification to show the results of the search and the full section applicable to Mr. Small.