CPA FAR - Financial Accounting & Reporting: US GAAP vs IFRS & Revenue Recognition Flashcards

Question 1

Primary Standard-Setting Bodies: US GAAP vs IFRS

Accepted Answer

US GAAP: Financial Accounting Standards Board (FASB). IFRS: International Accounting Standards Board (IASB).

Question 2

Weighted-Average Inventory Method

Accepted Answer

Calculates the average cost of all goods available for sale (beginning inventory + purchases) and applies that average cost to both COGS and Ending Inventory. It smooths out cost fluctuations.

Question 3

LIFO (Last-In, First-Out) Inventory Method (US GAAP)

Accepted Answer

Assumes the last goods purchased are the first ones sold. In periods of rising costs, LIFO results in a higher Cost of Goods Sold (COGS) and a lower Ending Inventory, leading to lower net income and lower taxes (tax benefit).

Question 4

Conceptual Framework: Prudence/Conservatism (US GAAP vs IFRS)

Accepted Answer

US GAAP: Emphasizes conservatism, recognizing losses sooner than gains. IFRS: Emphasizes neutrality, with prudence being a qualitative characteristic but not overriding neutrality.

Question 5

Inventory Valuation Methods: LIFO (US GAAP vs IFRS)

Accepted Answer

US GAAP: Allows FIFO, LIFO, and Weighted-Average. IFRS: Prohibits LIFO; allows FIFO and Weighted-Average.

Question 6

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

Accepted Answer

US GAAP: Prohibits revaluation to fair value above historical cost (cost model only). IFRS: Allows revaluation model (upward revaluation to fair value) or cost model.

Question 7

Impairment Reversal for PPE: US GAAP vs IFRS

Accepted Answer

US GAAP: Prohibits reversal of impairment losses for assets held for use. IFRS: Allows reversal of impairment losses up to the original carrying amount (less depreciation).

Question 8

Research & Development (R&D) Costs: US GAAP vs IFRS

Accepted Answer

US GAAP: Generally expenses R&D costs as incurred, except for certain software development costs. IFRS: Research costs are expensed; development costs are capitalized if specific criteria are met.

Question 9

Core Principle of ASC 606 (Revenue Recognition)

Accepted Answer

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.

Question 10

ASC 606 - Step 1

Accepted Answer

Identify the contract(s) with a customer. A contract exists if it has commercial substance, parties are committed, rights are identifiable, payment terms are identifiable, and collection is probable.

Question 11

ASC 606 - Step 2

Accepted Answer

Identify the separate performance obligations in the contract. A performance obligation is a promise to transfer a distinct good or service to the customer.

Question 12

ASC 606 - Step 3

Accepted Answer

Determine the transaction price. This is the amount of consideration an entity expects to receive in exchange for transferring promised goods or services. Includes variable consideration estimates.

Question 13

ASC 606 - Step 4

Accepted Answer

Allocate the transaction price to the separate performance obligations. Allocation is based on the relative standalone selling prices of each distinct good or service.

Question 14

ASC 606 - Step 5

Accepted Answer

Recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. This occurs when the customer obtains control of the asset.

Question 15

Core Principle of ASC 842 (Lessee Accounting)

Accepted Answer

Lessees must recognize a Right-of-Use (ROU) asset and a corresponding lease liability on the balance sheet for virtually all leases longer than 12 months, regardless of classification.

Question 16

Lease Classification under ASC 842 (Lessee)

Accepted Answer

Leases are classified as either Finance Leases or Operating Leases. The classification determines the pattern of expense recognition (front-loaded for finance, straight-line for operating) and balance sheet presentation.

Question 17

Lease Capitalization Criteria for a Finance Lease (ASC 842)

Accepted Answer

A lease is a Finance Lease if any one of the following five criteria is met (mnemonic: "OWNS"):
*   **O**wnership transfer at end of lease.
*   **W**ritten option to purchase the asset that the lessee is reasonably certain to exercise.
*   **N**et present value of lease payments equals or exceeds substantially all of the fair value of the underlying asset (typically $\ge 90\%$).
*   **S**pecialized asset with no alternative use to the lessor.
*   Lease term is for the **S**ubstantial part of the economic life of the underlying asset (typically $\ge 75\%$).

Question 18

Initial Measurement of ROU Asset and Lease Liability (ASC 842)

Accepted Answer

Both the ROU asset and lease liability are initially measured at the present value of the lease payments. The discount rate used is the rate implicit in the lease, or if not readily determinable, the lessee's incremental borrowing rate.

Question 19

FIFO (First-In, First-Out) Inventory Method

Accepted Answer

Assumes the first goods purchased are the first ones sold. In periods of rising costs, FIFO results in a lower Cost of Goods Sold (COGS) and a higher Ending Inventory, leading to higher net income.

Question 20

LIFO Reserve (US GAAP)

Accepted Answer

The difference between the inventory amount reported using FIFO (or current cost) and the inventory amount reported using LIFO. Companies using LIFO must disclose this reserve, allowing for comparison with FIFO companies.

Question 21

Converting Accrual Net Income to Cash Basis Net Income (General)

Accepted Answer

Start with Accrual Net Income. Adjust for non-cash items (e.g., depreciation). Add back decreases in current assets and increases in current liabilities. Subtract increases in current assets and decreases in current liabilities.

Question 22

Accrual to Cash Adjustment: Revenue

Accepted Answer

To convert accrual revenue to cash collected from customers:
Cash Collected = Accrual Revenue
$+$ Beginning Accounts Receivable
$-$ Ending Accounts Receivable
$+$ Ending Unearned Revenue
$-$ Beginning Unearned Revenue

Question 23

Accrual to Cash Adjustment: Expenses

Accepted Answer

To convert accrual expenses to cash paid for expenses:
Cash Paid = Accrual Expense
$+$ Ending Prepaid Expenses
$-$ Beginning Prepaid Expenses
$+$ Beginning Accrued Liabilities
$-$ Ending Accrued Liabilities

Question 24

Balance Sheet Valuation: Fair Value vs. Historical Cost

Accepted Answer

Historical Cost: Assets are recorded at their original cost. Fair Value: Assets and liabilities are recorded at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. US GAAP uses a mix, with historical cost being the primary basis for many assets (e.g., PPE).

Question 25

Inventory Valuation Rule: Lower of Cost or Market (LCM) / Lower of Cost or Net Realizable Value (LCNRV)

Accepted Answer

US GAAP (for FIFO/Weighted-Average): Inventory is reported at the Lower of Cost or Net Realizable Value (LCNRV). IFRS and US GAAP (for LIFO/Retail): Inventory is reported at the Lower of Cost or Market (LCM), where "Market" is typically replacement cost, bounded by NRV and NRV less a normal profit margin.

CPA FAR - Financial Accounting & Reporting: US GAAP vs IFRS & Revenue Recognition

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