CPA FAR - Financial Accounting & Reporting Standards Flashcards

Question 1

ASC 606: What are the 5 steps of the Revenue Recognition Model?

Accepted Answer

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

Question 2

ASC 606: Step 2 - Criteria for a 'Distinct' Good or Service

Accepted Answer

A good or service is distinct if **both** criteria are met:
1. **Capable of being distinct:** Customer can benefit from it on its own or with readily available resources.
2. **Distinct within the contract:** Promised good/service is separately identifiable from other promises in the contract.

Question 3

ASC 606: Step 4 - Allocating Transaction Price

Accepted Answer

Allocate the transaction price to each performance obligation based on relative **Standalone Selling Prices (SSP)** at contract inception.

$$	ext{Allocation} = 	ext{Transaction Price} 	imes \left( \frac{	ext{SSP of Specific Obligation}}{	ext{Total SSP of All Obligations}} ight)$$

Question 4

ASC 842: Lessee Lease Classification Test (OWNES Criteria)

Accepted Answer

A lease is classified as a **Finance Lease** (lessee) if it meets **ANY** of the 5 criteria (otherwise, it is an **Operating Lease**):
- **O**wnership transfers at the end of term.
- **W**ritten option to purchase that is reasonably certain to be exercised.
- **N**et present value of lease payments $\ge 90\%$ of asset's fair value.
- **E**conomic life: Lease term is $\ge 75\%$ of remaining economic life.
- **S**pecialized nature: Asset has no alternative use to lessor.

Question 5

ASC 842: Initial Measurement of Right-of-Use (ROU) Asset

Accepted Answer

$$	ext{ROU Asset} = 	ext{Initial Lease Liability} + 	ext{Initial Direct Costs Paid} + 	ext{Prepaid Lease Payments} - 	ext{Lease Incentives Received}$$

Question 6

Inventory Costing: FIFO vs. LIFO Impact in an Inflationary Environment

Accepted Answer

When prices are rising (inflation):
- **FIFO:** Lower COGS, Higher Net Income, Higher Ending Inventory.
- **LIFO:** Higher COGS, Lower Net Income, Lower Ending Inventory.
- **LIFO Conformity Rule:** If LIFO is used for tax purposes, it must also be used for financial reporting.

Question 7

Inventory Valuation: LCNRV vs. LCM Rules (US GAAP)

Accepted Answer

- **Lower of Cost or Net Realizable Value (LCNRV):** Used for FIFO, Weighted Average, and all IFRS inventory. $	ext{NRV} = 	ext{Selling Price} - 	ext{Completion/Disposal Costs}$.
- **Lower of Cost or Market (LCM):** Used strictly for LIFO and Retail methods under US GAAP. 'Market' is designated replacement cost bounded by Ceiling (NRV) and Floor (NRV minus normal profit margin).

Question 8

Bond Amortization: Effective Interest Method Formula

Accepted Answer

- **Interest Expense** (Income Statement) = $	ext{Carrying Amount at Beginning} 	imes 	ext{Effective Interest Rate}$
- **Cash Interest Paid** = $	ext{Face Value} 	imes 	ext{Stated Coupon Rate}$
- **Amortization Amount** = $|	ext{Interest Expense} - 	ext{Cash Paid}|$

Question 9

Bond Accounting: Amortization of Premium vs. Discount

Accepted Answer

- **Discount Bond:** Carrying value increases over time toward face value; Interest expense > Cash paid.
- **Premium Bond:** Carrying value decreases over time toward face value; Interest expense < Cash paid.
- Under the effective interest method, periodic amortization **increases** every period for both premiums and discounts.

Question 10

US GAAP vs. IFRS: Inventory LIFO Method

Accepted Answer

- **US GAAP:** Permits the use of LIFO (Last-In, First-Out).
- **IFRS (IAS 2):** Prohibits the use of LIFO. Only FIFO and Weighted Average cost methods are allowed.

Question 11

US GAAP vs. IFRS: Revaluation of Property, Plant & Equipment (PPE)

Accepted Answer

- **US GAAP:** Uses the Cost Model only ($	ext{Cost} - 	ext{Accumulated Depreciation} - 	ext{Impairment}$). Revaluation to fair value is prohibited.
- **IFRS (IAS 16):** Allows either the Cost Model or the **Revaluation Model**. Under revaluation, assets are carried at Fair Value; gains go to OCI, losses go to Profit/Loss.

Question 12

US GAAP vs. IFRS: Research and Development Costs

Accepted Answer

- **US GAAP:** Expense all Research AND Development costs as incurred (with minor exceptions like internal-use software).
- **IFRS (IAS 38):** Expense **Research** costs as incurred. Capitalize **Development** costs once technological and economic feasibility (PIRATE criteria) is demonstrated.

Question 13

Statement of Cash Flows: Indirect Method Operating Adjustments

Accepted Answer

Start with Net Income and adjust:
- **Add back:** Non-cash expenses (Depreciation, Amortization, Impairments, Losses on sale of assets).
- **Subtract:** Non-cash gains (Gains on sale of assets).
- **Working Capital Changes:**
  - Operating Assets: $\uparrow$ Subtract, $\downarrow$ Add.
  - Operating Liabilities: $\uparrow$ Add, $\downarrow$ Subtract.

Question 14

Accumulated Other Comprehensive Income (AOCI): Key Components (PUFER)

Accepted Answer

Other Comprehensive Income components bypass Net Income and accumulate in Equity:
- **P**ension adjustments (unrealized prior service costs/gains).
- **U**nrealized gains/losses on Available-For-Sale (AFS) debt securities.
- **F**oreign currency translation adjustments.
- **E**ffective portion of cash flow hedges.
- **R**emeasurement gains/losses (IFRS revaluation surplus).

Question 15

Balance Sheet Reconciliation: Bank Reconciliation Mechanics

Accepted Answer

- **Bank Balance Adjustments:**
  - Add: Deposits in Transit (DIT)
  - Deduct: Outstanding Checks (O/S Checks)
  - Add/Deduct: Bank Errors
- **Book Balance Adjustments:**
  - Add: Bank Collections, Interest Income
  - Deduct: Service Charges, NSF Checks
  - Add/Deduct: Book Errors

Question 16

Subsequent Events: Type 1 (Recognized) vs. Type 2 (Non-Recognized)

Accepted Answer

- **Type 1 (Recognized):** Conditions existed on or before the Balance Sheet date. Requires financial statement **adjustment** (e.g., settlement of litigation existing at BS date).
- **Type 2 (Non-Recognized):** Conditions arose AFTER the Balance Sheet date. Requires **disclosure only** if material (e.g., natural disaster damaging plant after BS date).

Question 17

US GAAP Impairment Test for Long-Lived Assets Held for Use

Accepted Answer

A 2-step process evaluated when indicators of impairment exist:
1. **Step 1: Recoverability Test** — Impaired if $\sum 	ext{Undiscounted Future Cash Flows} < 	ext{Carrying Value}$.
2. **Step 2: Impairment Measurement** — $	ext{Impairment Loss} = 	ext{Carrying Value} - 	ext{Fair Value}$ (or Present Value of Cash Flows).

Question 18

Inventory Costing: Weighted Average vs. Moving Average Systems

Accepted Answer

- **Weighted Average Method (Periodic):** Calculates a single average cost at the end of the period.
  $$	ext{Average Unit Cost} = \frac{	ext{Total Cost of Goods Available}}{	ext{Total Units Available}}$$
- **Moving Average Method (Perpetual):** Recalculates a new weighted average unit cost after **every single purchase**.

Question 19

Discontinued Operations: Presentation & Criteria

Accepted Answer

Reported on the Income Statement **net of tax**, below Continuing Operations.
- **Criteria:** Represents a disposal of a component or group of components that represents a **strategic shift** that has (or will have) a **major effect** on an entity's operations and financial results.

Question 20

Troubled Debt Restructuring (TDR): Debtor Accounting for Settlement

Accepted Answer

When a debtor settles a debt by transferring assets or equity:
1. **Asset Gain/Loss:** $	ext{Fair Value of Asset} - 	ext{Carrying Value of Asset}$ (Recognized in Net Income).
2. **Debt Restructuring Gain:** $	ext{Carrying Amount of Debt} - 	ext{Fair Value of Asset Transferred}$ (Recognized in Net Income).

CPA FAR - Financial Accounting & Reporting Standards

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