CPA Exam - Financial Accounting & Reporting (FAR) Flashcards

Question 1

What is the fundamental accounting equation?

Accepted Answer

Assets = Liabilities + Equity

Question 2

Journal entry to record cash sales revenue.

Accepted Answer

Debit: Cash
Credit: Sales Revenue

Question 3

Journal entry to record salaries expense.

Accepted Answer

Debit: Salaries Expense
Credit: Cash (or Salaries Payable)

Question 4

Journal entry to purchase equipment on credit.

Accepted Answer

Debit: Equipment
Credit: Accounts Payable (or Notes Payable)

Question 5

List the 5 steps of the ASC 606 Revenue Recognition Model.

Accepted Answer

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

Question 6

When is revenue recognized under ASC 606 if a performance obligation is satisfied *over time*?

Accepted Answer

Revenue is recognized over time if one of the following criteria is met:
1. The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs.
2. The entity's performance creates or enhances an asset (e.g., WIP) that the customer controls as the asset is created or enhanced.
3. The entity's performance does not create an asset with an alternative use to the entity, AND the entity has an enforceable right to payment for performance completed to date.

Question 7

How is inventory typically valued under US GAAP?

Accepted Answer

Inventory is valued at the lower of cost or net realizable value (LCNRV) for FIFO/Weighted-Average, and lower of cost or market (LCM) for LIFO/Retail methods. Cost flow assumptions include FIFO, LIFO, and Weighted-Average.

Question 8

What is Net Realizable Value (NRV) in inventory valuation?

Accepted Answer

NRV is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Question 9

How are Property, Plant, and Equipment (PP&E) initially valued?

Accepted Answer

PP&E is initially recorded at historical cost, which includes all costs necessary to acquire the asset and get it ready for its intended use (e.g., purchase price, shipping, installation, testing).

Question 10

What is the primary method for valuing intangible assets with finite lives?

Accepted Answer

Intangible assets with finite lives are amortized over their useful economic lives. They are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

Question 11

What is the "OWNS" test for classifying a lease as a Finance Lease under ASC 842 (Lessee perspective)?

Accepted Answer

A lease is classified as a Finance Lease if it meets *any one* of the following criteria:
**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 (90% or more) of the fair value of the underlying asset.
**S**pecialized asset such that it will have no alternative use to the lessor at the end of the lease term.
**T**erm of the lease is for a major part (75% or more) of the remaining economic life of the underlying asset. (Often referred to as "OWNS" or "OWNS-T")

Question 12

What is the financial statement impact of an Operating Lease for the lessee under ASC 842?

Accepted Answer

**Balance Sheet:** Right-of-Use (ROU) asset and Lease Liability are recognized.
**Income Statement:** A single lease expense (straight-line) is recognized, which includes both interest on the lease liability and amortization of the ROU asset.
**Cash Flow Statement:** Operating cash outflows for lease payments.

Question 13

What is the financial statement impact of a Finance Lease for the lessee under ASC 842?

Accepted Answer

**Balance Sheet:** Right-of-Use (ROU) asset and Lease Liability are recognized.
**Income Statement:** Two separate expenses are recognized: interest expense on the lease liability and amortization expense on the ROU asset.
**Cash Flow Statement:** Interest portion of lease payments is an operating cash outflow; principal portion is a financing cash outflow.

Question 14

What is the measurement focus for governmental funds?

Accepted Answer

The measurement focus for governmental funds is on **current financial resources**. This means the focus is on measuring the inflows and outflows of spendable resources.

Question 15

What is the basis of accounting for governmental funds?

Accepted Answer

Governmental funds use the **modified accrual basis of accounting**. Revenue is recognized when it is both measurable and available (i.e., collectible within the current period or soon enough thereafter to pay current liabilities). Expenditures are recognized when the liability is incurred.

Question 16

Name the five types of Governmental Funds.

Accepted Answer

1.  **General Fund:** The main operating fund of a government.
2.  **Special Revenue Funds:** Account for specific revenue sources that are legally restricted or committed to finance particular activities (e.g., gas tax for road maintenance).
3.  **Capital Projects Funds:** Account for financial resources to be used for the acquisition or construction of major capital facilities (e.g., new school, bridge).
4.  **Debt Service Funds:** Account for financial resources accumulated for paying principal and interest on general long-term debt.
5.  **Permanent Funds:** Account for resources that are legally restricted such that only earnings, not principal, may be used for purposes supporting the government's programs.

Question 17

How does the modified accrual basis differ from full accrual for revenue recognition?

Accepted Answer

Under modified accrual, revenue is recognized when it is *measurable and available*. Under full accrual, revenue is recognized when it is *earned*, regardless of when cash is received. "Available" is the key distinguishing factor.

Question 18

What is the journal entry for the issuance of general obligation bonds by a governmental entity (recorded in a Capital Projects Fund)?

Accepted Answer

Debit: Cash
Credit: Other Financing Sources - Bond Proceeds
(Note: The long-term liability itself is recorded in the government-wide financial statements, not in the fund.)

Question 19

What is the purpose of the General Fund in governmental accounting?

Accepted Answer

The General Fund is the primary operating fund of a government. It accounts for all financial resources and activities not accounted for in another fund. It typically includes general administrative and service functions.

Question 20

What is the difference in reporting between governmental funds and government-wide financial statements?

Accepted Answer

**Governmental Funds:** Use modified accrual basis and current financial resources measurement focus. Focus on short-term spendable resources.
**Government-Wide Financial Statements:** Use full accrual basis and economic resources measurement focus. Provide a long-term, entity-wide view, similar to a for-profit business, including all assets and liabilities.

Question 21

How are investments in equity securities generally valued under US GAAP (for non-controlling interests)?

Accepted Answer

**Fair Value Method (FVPL/FVOCI):** For investments where the investor has no significant influence (typically <20% ownership). Measured at fair value, with changes recognized in net income (FVPL) or OCI (FVOCI), depending on election.
**Equity Method:** For investments where the investor has significant influence (typically 20-50% ownership). Investment is initially recorded at cost and then adjusted for the investor's share of the investee's income/losses and dividends.

Question 22

What is the journal entry for depreciation expense on PP&E?

Accepted Answer

Debit: Depreciation Expense
Credit: Accumulated Depreciation

Question 23

When is an asset impairment loss recognized for PP&E under US GAAP?

Accepted Answer

An impairment loss is recognized when the carrying amount of an asset is not recoverable. This occurs if the sum of the undiscounted estimated future cash flows expected from the asset is less than its carrying amount. The loss is measured as the difference between the carrying amount and the asset's fair value.

Question 24

Explain the concept of "available" for revenue recognition under modified accrual.

Accepted Answer

"Available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Typically, this is defined as within 60 days after year-end for property taxes, but can vary for other revenue types.

Question 25

What is the primary characteristic that distinguishes proprietary funds from governmental funds?

Accepted Answer

Proprietary funds (Enterprise and Internal Service Funds) operate more like for-profit businesses. They use the **full accrual basis of accounting** and an **economic resources measurement focus**, accounting for all assets and liabilities, both current and noncurrent.

CPA Exam - Financial Accounting & Reporting (FAR)

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