CPA Exam - Financial Accounting & Reporting (FAR) Core Principles Flashcards

Question 1

ASC 606 Revenue Recognition: What are the 5 core steps?

Accepted Answer

1. **Identify the contract** with a customer.
2. **Identify the separate performance obligations** in the contract.
3. **Determine the transaction price**.
4. **Allocate the transaction price** to the performance obligations.
5. **Recognize revenue** when (or as) the entity satisfies a performance obligation.

Question 2

ASC 606: How is variable consideration estimated and constrained?

Accepted Answer

Estimated using either the **Expected Value** (sum of probability-weighted amounts) or the **Most Likely Amount** method.

**Constraint Rule:** Variable consideration is included in the transaction price only if it is *probable* that a significant reversal in cumulative revenue recognized will *not* occur when the uncertainty is resolved.

Question 3

ASC 842: What are the 5 criteria for a Lessee Finance Lease (OWNES)?

Accepted Answer

A lessee classifies a lease as a **Finance Lease** if it meets ANY of the following criteria:
- **O**wnership transfers to the lessee by the end of the term.
- **W**ritten option to purchase that the lessee is *reasonably certain* to exercise.
- **N**et present value of lease payments is $\ge 90\%$ of asset fair value.
- **E**conomic life: Lease term is $\ge 75\%$ of the remaining economic life.
- **S**pecialized asset with no alternative use to the lessor at the end of the term.

Question 4

Basic vs. Diluted Earnings Per Share (EPS) Formulas

Accepted Answer

$$	ext{Basic EPS} = \frac{	ext{Net Income} - 	ext{Preferred Dividends}}{	ext{Weighted Average Common Shares Outstanding (WACSO)}}$$

$$	ext{Diluted EPS} = \frac{	ext{Net Income} - 	ext{Pref. Divs} + 	ext{Dilutive Adjustments}}{	ext{WACSO} + 	ext{Dilutive Shares from Options/Convertibles}}$$

Question 5

ASC 842: Balance Sheet & Income Statement differences (Finance vs. Operating Lease)

Accepted Answer

Both place a **Right-of-Use (ROU) Asset** and **Lease Liability** on the Balance Sheet.

- **Finance Lease:** Income Statement shows front-loaded total expense consisting of separate **Amortization Expense** (ROU Asset) and **Interest Expense** (Lease Liability).
- **Operating Lease:** Income Statement shows a single, straight-line **Lease Expense** combining interest and amortization.

Question 6

Inventory Valuation: Lower of Cost and Net Realizable Value (NRV)

Accepted Answer

Applies to inventory methods **other than LIFO and Retail** (e.g., FIFO, Weighted Average).

$$	ext{NRV} = 	ext{Estimated Selling Price} - 	ext{Costs of Completion/Disposal}$$

If $	ext{NRV} < 	ext{Historical Cost}$, write down inventory to NRV. Loss is recognized in current period income.

Question 7

Inventory Valuation: Lower of Cost or Market (LOM)

Accepted Answer

Applies exclusively to **LIFO** and **Retail** inventory methods.

1. **Ceiling:** $	ext{NRV} = 	ext{Selling Price} - 	ext{Disposal Costs}$
2. **Floor:** $	ext{NRV} - 	ext{Normal Profit Margin}$
3. **Designated Market Value:** The middle value among Replacement Cost, Ceiling, and Floor.

Compare historical cost to the Designated Market Value; record inventory at the lower amount.

Question 8

Inventory Valuation: FIFO vs. LIFO in Inflationary Environment

Accepted Answer

When prices are **rising**:

- **FIFO:** Results in lower Cost of Goods Sold (COGS), higher Net Income, higher Ending Inventory, and higher Income Tax expense.
- **LIFO:** Results in higher COGS, lower Net Income (tax savings), and lower Ending Inventory (reflects older costs).

Question 9

Inventory Valuation: Weighted Average Cost Formula (Periodic)

Accepted Answer

Calculated at period-end to assign cost to units sold and remaining inventory:

$$	ext{Weighted Average Cost per Unit} = \frac{	ext{Cost of Goods Available for Sale}}{	ext{Total Units Available for Sale}}$$

$$	ext{Ending Inventory} = 	ext{Units on Hand} 	imes 	ext{Weighted Average Cost per Unit}$$

Question 10

Bond Amortization: Effective Interest Method Formulas

Accepted Answer

US GAAP required method for amortizing bond discounts or premiums:

$$	ext{Interest Expense} = 	ext{Carrying Value at Beg. of Period} 	imes 	ext{Effective (Market) Rate}$$

$$	ext{Cash Interest Paid} = 	ext{Face Value of Bond} 	imes 	ext{Stated (Coupon) Rate}$$

$$	ext{Amortization Amount} = |	ext{Interest Expense} - 	ext{Cash Interest Paid}|$$

Question 11

Bond Accounting: Discount vs. Premium Dynamics

Accepted Answer

- **Discount (Stated Rate < Market Rate):** Issued below face value. Carrying value increases over time toward face value. $ ext{Interest Expense} > ext{Cash Paid}$. - **Premium (Stated Rate > Market Rate):** Issued above face value. Carrying value decreases over time toward face value. $ ext{Interest Expense} < ext{Cash Paid}$.

Question 12

Consolidation: Acquisition Method Elimination Entry (CAR IN BIG)

Accepted Answer

Acquisition date entry to eliminate equity of sub and record fair values:

- **C**ommon Stock (Sub) - *Dr*
- **A**PIC (Sub) - *Dr*
- **R**etained Earnings (Sub) - *Dr*
- **I**nvestment in Subsidiary - *Cr* (at Fair Value)
- **N**oncontrolling Interest (NCI) - *Cr* (if $<100\%$)
- **B**alance Sheet adjustments to Sub assets/liabilities - *Dr/Cr* (to Fair Value)
- **I**ntangibles (Identified at Fair Value) - *Dr*
- **G**oodwill (Plug for debit excess) or Gain on Bargain Purchase (*Cr* plug).

Question 13

Consolidation: Noncontrolling Interest (NCI) Calculation & Presentation

Accepted Answer

Represents ownership interest in a subsidiary not owned by the parent company:

$$	ext{NCI at Acquisition} = 	ext{Total Subsidiary Fair Value} 	imes \% 	ext{ NCI Ownership}$$

Reported on the Consolidated Balance Sheet within **Equity**, completely separate from the parent company's equity.

Question 14

Other Comprehensive Income (OCI): What items are included (PUFIER)?

Accepted Answer

OCI includes revenues, expenses, gains, and losses that bypass Net Income:
- **P**ension plan actuarial gains/losses & prior service costs
- **U**nrealized gains/losses on Available-for-Sale (AFS) debt securities
- **F**oreign currency translation adjustments
- **I**nstrument-specific credit risk changes for financial liabilities
- **E**ffective portion of cash flow hedges
- **R**evaluation surplus (IFRS only)

Question 15

Statement of Cash Flows: Direct vs. Indirect Operating Method

Accepted Answer

- **Indirect Method:** Starts with Net Income and adjusts for non-cash expenses (e.g., depreciation) and changes in operating working capital accounts.
- **Direct Method:** Reports gross cash receipts (customers) and cash payments (suppliers, employees). Under US GAAP, direct method **requires** a supplemental reconciliation to Net Income.

Question 16

Subsequent Events (ASC 855): Recognized vs. Nonrecognized Events

Accepted Answer

- **Recognized (Type 1):** Conditions existed *on or before* the Balance Sheet date. Requires adjustment to financial statement numbers.
- **Nonrecognized (Type 2):** Conditions arose *after* the Balance Sheet date. Does not alter financial statement numbers; requires disclosure only if material.

Question 17

Impairment of Long-Lived Assets (ASC 360): 2-Step Test

Accepted Answer

Applied to assets held for use:

1. **Step 1 (Recoverability Test):** Impaired if $	ext{Undiscounted Future Cash Flows} < 	ext{Carrying Value}$.
2. **Step 2 (Measurement):** 
$$	ext{Impairment Loss} = 	ext{Carrying Value} - 	ext{Fair Value}$$

*Note:* Reversal of impairment losses for assets held for use is **prohibited** under US GAAP.

Question 18

Balance Sheet Classification of Deferred Tax Assets and Liabilities (ASC 740)

Accepted Answer

Under US GAAP (ASU 2015-17):

- **All** Deferred Tax Assets (DTAs) and Deferred Tax Liabilities (DTLs) are classified as **noncurrent** on the Balance Sheet.
- DTAs and DTLs within the same tax jurisdiction are netted together and presented as a single net noncurrent DTA or net noncurrent DTL.

Question 19

Investment Accounting (ASC 320): HTM, Trading, and AFS Debt Securities

Accepted Answer

- **Held-to-Maturity (HTM):** Carried at **Amortized Cost** on Balance Sheet.
- **Trading:** Carried at **Fair Value**; unrealized gains/losses reported in **Net Income**.
- **Available-for-Sale (AFS):** Carried at **Fair Value**; unrealized gains/losses reported in **OCI** (net of tax).

Question 20

Treasury Stock Accounting: Cost Method vs. Par Value Method

Accepted Answer

- **Cost Method:** Purchase of treasury stock recorded at total reacquisition cost in a single contra-equity account (*Treasury Stock*). Gains on reissue credit *APIC - Treasury Stock*; losses debit *APIC - Treasury Stock* then *Retained Earnings*.
- **Par Value Method:** Purchase recorded by directly reducing Common Stock and related original APIC at original issuance par value.

CPA Exam - Financial Accounting & Reporting (FAR) Core Principles

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