CPA Exam (FAR) - Financial Accounting & Reporting Standards Flashcards

Question 1

ASC 606: The 5-Step 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) the entity satisfies a performance obligation.

Question 2

ASC 606 Step 3: Estimating Variable Consideration

Accepted Answer

Estimated using either the **Expected Value** (sum of probability-weighted amounts) or the **Most Likely Amount** (single best estimate). Realign with the *constraint*: variable consideration is only included if it is *probable* that a significant reversal of cumulative revenue will not occur.

Question 3

ASC 842: Finance Lease Classification Criteria (Lessee)

Accepted Answer

A lease is classified as a finance lease if it meets **ANY** of the **'OWNES'** criteria:
- **O**wnership transfers at 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 $\ge 90\%$ of asset's fair value.
- **E**conomic life: Lease term is $\ge 75\%$ of asset's remaining economic life.
- **S**pecialized nature: Asset has no alternative use to the lessor.

Question 4

ASC 842: Operating vs. Finance Lease Income Statement Effect

Accepted Answer

- **Finance Lease:** Lessee recognizes two separate expenses: Amortization Expense (straight-line) + Interest Expense (effective interest method, front-loaded overall expense).
- **Operating Lease:** Lessee recognizes a **single lease expense** on a straight-line basis over the lease term.

Question 5

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

Accepted Answer

Mandatory for inventory under **FIFO**, **Average Cost**, or **IFRS**.
$$	ext{NRV} = 	ext{Estimated Selling Price} - 	ext{Costs of Completion and Disposal}$$
Inventory is reported at $\min(	ext{Cost}, 	ext{NRV})$.

Question 6

Inventory Valuation: Lower of Cost or Market (LIFO / Retail Method)

Accepted Answer

Used for inventory under **LIFO** or the **Retail Inventory Method**.
- **Market** = Replacement Cost, bounded by:
  - **Ceiling:** $	ext{NRV} = 	ext{Selling Price} - 	ext{Completion/Selling Costs}$
  - **Floor:** $	ext{NRV} - 	ext{Normal Profit Margin}$
$$	ext{Valuation} = \min(	ext{Cost}, 	ext{Designated Market Value})$$

Question 7

Inventory Methods: FIFO vs. LIFO in Periods of Rising Prices

Accepted Answer

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

Question 8

US GAAP vs. IFRS: LIFO Inventory Method

Accepted Answer

- **US GAAP:** Permits LIFO for financial reporting (subject to the LIFO conformity rule for tax).
- **IFRS:** **Prohibits** the use of LIFO entirely.

Question 9

US GAAP vs. IFRS: Reversal of Asset Impairment Losses

Accepted Answer

- **US GAAP:** Prohibits reversal of impairment losses for long-lived assets held for use and inventory (under LIFO/LCM).
- **IFRS:** Permits reversal of impairment losses for inventory and long-lived assets (excluding Goodwill) if specific recovery conditions are met.

Question 10

US GAAP vs. IFRS: Development Costs

Accepted Answer

- **US GAAP:** Expenses almost all Research & Development (R&D) costs as incurred (except certain internal-use software).
- **IFRS:** Research costs are expensed, but **Development costs must be capitalized** if strict technical and commercial feasibility criteria are satisfied.

Question 11

Financial Statement Reconciliation: Ending Retained Earnings

Accepted Answer

$$	ext{Ending Retained Earnings} = 	ext{Beginning Retained Earnings} + 	ext{Net Income} - 	ext{Declared Dividends} \pm 	ext{Prior Period Adjustments (net of tax)}$$

Question 12

Statement of Cash Flows: Indirect Method Operating Cash Flow Equation

Accepted Answer

$$	ext{CFO} = 	ext{Net Income} + 	ext{Non-Cash Expenses} - 	ext{Gains} + 	ext{Losses} - \Delta 	ext{Operating Assets} + \Delta 	ext{Operating Liabilities}$$

Question 13

Accounting for Debt Securities: Trading

Accepted Answer

- **Valuation:** Fair Value on Balance Sheet.
- **Unrealized Gains/Losses:** Reported in **Net Income** on the Income Statement.
- **Cash Flow Classification:** Operating Activities (typically).

Question 14

Accounting for Debt Securities: Available-for-Sale (AFS)

Accepted Answer

- **Valuation:** Fair Value on Balance Sheet.
- **Unrealized Gains/Losses:** Reported in **Other Comprehensive Income (OCI)**, net of tax.
- **Credit Losses:** Recorded through an Allowance account limited to the difference between Amortized Cost and Fair Value.

Question 15

Accounting for Debt Securities: Held-to-Maturity (HTM)

Accepted Answer

- **Valuation:** Amortized Cost on Balance Sheet.
- **Unrealized Gains/Losses:** **Not recognized** in financial statements (disclosed in footnotes only).
- **Requirement:** Positive intent and ability to hold until maturity.

Question 16

Subsequent Events: Type I vs. Type II

Accepted Answer

- **Type I (Recognized):** Provides additional evidence about conditions existing *at or before* the Balance Sheet date $\rightarrow$ **Adjust financial statements**.
- **Type II (Non-recognized):** Conditions arose *after* the Balance Sheet date $\rightarrow$ **Footnote disclosure only** (no financial statement adjustment).

Question 17

Comprehensive Income: Key Components (PUFI)

Accepted Answer

$$	ext{Comprehensive Income} = 	ext{Net Income} + 	ext{Other Comprehensive Income (OCI)}$$
Common OCI items (**PUFI**):
- **P**ension adjustments (funded status changes).
- **U**nrealized holding gains/losses on AFS debt securities.
- **F**oreign currency translation adjustments.
- **I**nstrument-specific credit risk changes for financial liabilities.

Question 18

Loss Contingencies: Accrual vs. Disclosure Criteria

Accepted Answer

- **Probable & Estimable:** **Accrue** (Record Liability & Expense) + Disclose.
- **Probable & Non-estimable:** **Disclose only** (accrue minimum in range if applicable).
- **Reasonably Possible:** **Disclose only**.
- **Remote:** No action required (except guarantee obligations).

Question 19

Monetary vs. Non-Monetary Assets & Liabilities

Accepted Answer

- **Monetary:** Assets/liabilities fixed in units of currency (e.g., Cash, Accounts Receivable, Accounts Payable, Bonds Payable).
- **Non-Monetary:** Assets/liabilities whose dollar amounts fluctuate with market conditions (e.g., Inventory, Fixed Assets, Prepaid Expenses, Common Stock).

Question 20

Consolidation Criteria (ASC 810)

Accepted Answer

- **Voting Interest Model:** Parent consolidates when owning $> 50\%$ of voting common stock of a subsidiary, unless control is temporary or lacks control.
- **Variable Interest Entity (VIE) Model:** Primary beneficiary consolidates if it has both the power to direct significant activities and the obligation/right to absorb significant losses/benefits.

CPA Exam (FAR) - Financial Accounting & Reporting Standards

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