📒 Accounting II

What you’ll learn

1. Profit Is An OpinionSee why accrual accounting necessarily requires judgment — and set the course's through-line.Accounting I gave you double-entry, the three statements and accruals. But 'record revenue when earned' and 'costs when incurred' pose questions with no observable answers: when is a three-year contract earned? How long will a machine last? Accrual accounting buys a truer picture than cash accounting at the price of estimates. Hence the course's spine: profit is an opinion, cash is a fact — and the places accounting asks rather than dictates are exactly the places worth reading.
2. When Is It Revenue?Apply the ASC 606 / IFRS 15 five-step model and locate the judgments inside it.Jointly issued by FASB and IASB in May 2014, ASC 606 recognises revenue to depict the transfer of promised goods or services in the amount the entity expects to be entitled to. Five steps: identify the contract, identify performance obligations, determine the transaction price, allocate it on standalone selling prices, recognise as each obligation is satisfied. A $100,000 licence-plus-support deal yields $87,500 of year-one revenue and $12,500 of deferred revenue — but judging the promises to be one obligation instead of two would yield $50,000.
3. Matching's Harder ChildrenDistinguish accrual adjustments that fix timing from those that require a forecast.Deferred revenue and prepaid expenses fix timing for events that certainly happened; accrued revenue and expenses do the same in reverse. Provisions are different: a warranty cost is booked before any product fails, reducing this year's profit by a modelled number — and that is correct, because the cost belongs to the revenue that created it. Contingencies are sorted by likelihood: probable and estimable is recognised, reasonably possible is disclosed, remote is silent — so huge exposures can properly sit in footnotes.
4. Depreciation: Allocating A Cost Nobody Can ObserveCompare depreciation methods and see how method, useful life and salvage each move profit.A $100,000 machine with $10,000 salvage over 5 years gives year-one expense of $18,000 (straight-line), $40,000 (double-declining) or $30,000 (units of production) — same total, $22,000 of profit apart, all legitimate. Underneath sit quieter judgments: doubling the useful life halves the annual charge, and raising assumed salvage shrinks what gets allocated at all. Larger still is the prior question: expense it, or capitalise it?
5. Inventory: The Same Goods, Different ProfitWork FIFO, LIFO and weighted average, and understand why a convention moves real tax cash.Identical widgets bought at $10, $12 and $14: selling 150 for $3,000 gives gross profit of $1,400 (FIFO), $1,200 (weighted average) or $1,000 (LIFO) — a 40% spread, with the lowest-profit method also reporting the lowest inventory. LIFO's appeal is tax: at 21% it saves $84 of real cash here, and the US conformity rule then forces the same method into the financial statements. IFRS bans LIFO, so cross-border comparison requires the disclosed LIFO reserve.
6. Deferred Tax: Two Sets Of Books, Both LegalExplain why tax expense never matches tax paid, and build a deferred tax liability from scratch.Financial reporting serves investors; tax accounting computes what's legally owed. They disagree by design — governments accelerate deductions to encourage investment. Permanent differences never reconcile; temporary ones reverse, and therefore create real obligations. Book depreciation of $20,000 against tax depreciation of $50,000 gives a $30,000 temporary difference and, at 21%, a $6,300 deferred tax liability that unwinds over the asset's life.
7. Consolidation: Control, Not OwnershipApply the control test and place an investment on the spectrum from fair value to full consolidation.The test is control — power to direct the activities that most affect returns, plus exposure to them — not an ownership percentage. Under ~20%: an investment at fair value. 20–50%: the equity method, one line. Control: consolidate 100% of revenue, assets and debt, even at 80% ownership, because you direct all of it. The exceptions matter in both directions, and the old percentage-based rules are precisely what Enron's SPEs exploited — which is why the rules now test control.
8. Goodwill, And The Part You Don't OwnCompute goodwill and non-controlling interest two ways, and read an impairment correctly.Goodwill is the excess of price over identifiable net assets — the one moment a price is put on brand, workforce and synergies that accounting won't otherwise record. $500m for 80% of a company with $550m of fair-value net assets gives goodwill of $60m (IFRS partial) or $75m (US GAAP full). Goodwill is never amortised, only impaired — a one-way ratchet toward bad news, where the write-off isn't the loss but the admission that the loss happened at the acquisition.
9. Building The Cash Flow StatementConstruct operating cash flow by the indirect method and read what each adjustment reveals.Cash is observable, which makes this statement the check on every judgment in the course. The indirect method starts at net income and undoes the accruals in public: add back non-cash charges, undo working-capital movements, remove non-operating items. $100m of net income + $40m depreciation − $30m receivables − $25m inventory + $15m payables = $100m of operating cash flow — and the individual lines, not the total, are where the story is.
10. Quality Of EarningsUse the profit-to-cash gap as a diagnostic — and know exactly what it can't tell you.The gap between profit and operating cash flow is, definitionally, the accruals — the sum of every judgment in this course. Because accruals reverse, a persistent widening gap means something is being assumed. But fast growth, poor collection, unsold inventory, optimism and fraud all look identical in that gap: the technique locates the question and the line to interrogate, and does not render a verdict. Claiming more would be exactly the false confidence this course dismantles.
11. When Judgment Becomes FraudSee the course's judgments pushed past honesty — and recognise where they would show up.WorldCom recorded line costs — the operating cost of leasing other carriers' networks — as capital expenditure: $3.8bn disclosed in June 2002, principally by capitalizing $3.5bn of line costs in violation of its own policy, with the wider fraud put around $11bn. That single substitution raised profit, flattered operating cash flow and inflated capex, widening the accruals gap. Enron's mark-to-market valuations and off-balance-sheet SPEs exploited the other judgments — when is it revenue, and whose company is it — and the rules moved to control-based tests afterwards.

Questions this course answers

Grounded in trusted sources

• FASB / IASB, Revenue from Contracts with Customers (ASC 606 / IFRS 15), issued May 2014 — five-step model as summarised in PwC Viewpoint, "3.2 ASC 606 five-step model" — https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/health-care/health_care_guide/chapter_3_revenue/3_2_asc_606.html
• BDO, "5 Steps for Revenue Recognition Under ASC 606" — https://www.bdo.com/insights/assurance/revenue-recognition-under-asc-606
• Report of Investigation by the Special Investigative Committee of the Board of Directors of WorldCom, Inc. (filed with the SEC, 2003) — https://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm
• MCI Inc. (formerly WorldCom), Form 10-K for FY2003 — https://www.sec.gov/Archives/edgar/data/0000723527/000119312504074088/d10k.htm
• IFRS 10, Consolidated Financial Statements (control-based consolidation); US GAAP variable interest entity guidance (ASC 810)
• IAS 2, Inventories (which prohibits LIFO); IAS 12 / ASC 740, Income Taxes; IFRS 3 / ASC 805, Business Combinations
• All worked figures in this course are computed in-session from stated hypothetical assumptions; the WorldCom amounts are from the sources above.

Every Wunder lesson is built from real, reputable sources — never invented.

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