CPA Exam FAR - Financial Accounting & Reporting: US GAAP & Revenue Recognition 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 the performance obligations** in the contract.
3. **Determine the transaction price**.
4. **Allocate the transaction price** to performance obligations based on relative standalone selling prices.
5. **Recognize revenue** when (or as) performance obligations are satisfied.

Question 2

ASC 606: Criteria for identifying a valid contract with a customer

Accepted Answer

A contract exists under ASC 606 if all conditions are met:
- All parties approved and committed to perform.
- Rights of each party regarding goods/services are clear.
- Payment terms are identified.
- The contract has commercial substance.
- Collection of substantially all consideration is **probable**.

Question 3

ASC 606: Contract Asset vs. Trade Receivable

Accepted Answer

- **Receivable**: An unconditional right to consideration (only the passage of time is required before payment is due).
- **Contract Asset**: A conditional right to consideration dependent on satisfying another performance obligation before billing (e.g., delivering item B after item A).

Question 4

ASC 842: Lessee Lease Classification Criteria (OWNES)

Accepted Answer

A lessee classifies a lease as a **Finance Lease** if it meets **ANY** of the OWNES criteria (otherwise, it is an **Operating Lease**):
- **O**: Ownership transfers to lessee by end of term.
- **W**: Written option to purchase reasonably certain to be exercised.
- **N**: Net present value of lease payments $\ge 90\%$ of asset's fair value.
- **E**: Economic life—lease term is $\ge 75\%$ of asset's remaining economic life.
- **S**: Specialized asset with no alternative use to lessor.

Question 5

ASC 842: Lessee Income Statement Impact (Operating vs. Finance Lease)

Accepted Answer

- **Finance Lease**: Dual expense recognition—Interest Expense (on lease liability) + Amortization Expense (on ROU asset). Front-loaded total expense profile.
- **Operating Lease**: Single straight-line lease expense combining interest and amortization over the lease term.

Question 6

ASC 842: Lessor Lease Classifications

Accepted Answer

1. **Sales-Type Lease**: Meets at least one OWNES criterion.
2. **Direct Financing Lease**: Meets no OWNES criteria, but meets **both**: (a) PV of lease payments + guaranteed residual $\ge$ FV of asset, and (b) collection of lease payments is probable.
3. **Operating Lease**: Meets neither criteria set.

Question 7

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

Accepted Answer

Applies to inventory valued under **FIFO** or **Average Cost** methods.

$$	ext{NRV} = 	ext{Estimated Selling Price} - 	ext{Completion \& Disposal Costs}$$

Inventory is measured at $\min(	ext{Historical Cost}, 	ext{NRV})$. Write-downs are charged to COGS or a separate loss account.

Question 8

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

Accepted Answer

Applies to inventory valued under **LIFO** or **Retail** methods.

- **Market** = Designated Market Value (Middle value of: Replacement Cost, Ceiling, and Floor).
  - **Ceiling**: $	ext{NRV} = 	ext{Selling Price} - 	ext{Disposal Costs}$
  - **Floor**: $	ext{NRV} - 	ext{Normal Profit Margin}$

Inventory is reported at $\min(	ext{Cost}, 	ext{Designated Market Value})$.

Question 9

FIFO vs. LIFO: Financial Statement Effects during Inflation

Accepted Answer

- **FIFO**: Lower COGS, higher Ending Inventory, higher Net Income, higher Tax Liability.
- **LIFO**: Higher COGS, lower Ending Inventory, lower Net Income, lower Tax Liability (LIFO conformity rule requires LIFO for tax if used for GAAP).

Question 10

Periodic vs. Perpetual Inventory Systems

Accepted Answer

- **Perpetual**: Updates Inventory and COGS continuously with every sale/purchase.
- **Periodic**: Updates Inventory and COGS at period-end via physical count using:
$$	ext{COGS} = 	ext{Beginning Inventory} + 	ext{Net Purchases} - 	ext{Ending Inventory}$$

Question 11

Consolidated Financial Statements: Acquisition Method Accounting

Accepted Answer

At acquisition date ($100\%$ acquisition or controlling interest):
1. $100\%$ of subsidiary's assets and liabilities are recorded at **Fair Value**.
2. Subsidiary's equity accounts are eliminated.
3. Difference between acquisition consideration and net fair value of assets acquired is recognized as **Goodwill** (or Gain on Bargain Purchase).

Question 12

Consolidation Elimination Entry Framework (CAR IN BIG)

Accepted Answer

Mnemonic for consolidation elimination journal entry:
- **C**: Common Stock (Sub equity eliminated)
- **A**: APIC (Sub equity eliminated)
- **R**: Retained Earnings (Sub equity eliminated)
- **I**: Investment in Subsidiary (Parent asset eliminated)
- **N**: Noncontrolling Interest (Equity credited for sub fair value share)
- **B**: Balance Sheet adjustments of Sub to Fair Value
- **I**: Identifiable Intangibles adjusted to Fair Value
- **G**: Goodwill recognized (or Gain on Bargain Purchase)

Question 13

Noncontrolling Interest (NCI) Calculation

Accepted Answer

Represents equity in a subsidiary not attributable to the parent ($<100\%$ ownership):

$$	ext{NCI at Acquisition} = 	ext{Total Fair Value of Sub} 	imes (1 - 	ext{Parent \%})$$
$$	ext{Ending NCI} = 	ext{Beginning NCI} + (	ext{NCI \%} 	imes 	ext{Sub Net Income}) - (	ext{NCI \%} 	imes 	ext{Sub Dividends})$$

Question 14

Consolidation: Intercompany Transactions Treatment

Accepted Answer

**$100\%$ of intercompany balances and transactions must be eliminated** in consolidation (even if parent owns $< 100\%$):
- Intercompany Receivables/Payables
- Intercompany Sales/COGS
- Intercompany Gains/Losses on inventory or fixed asset transfers (until realized with third party).

Question 15

Variable Interest Entity (VIE) Consolidation Rule

Accepted Answer

A business entity is a VIE if equity investors lack controlling financial interest or sufficient equity at risk.

The **Primary Beneficiary** must consolidate the VIE if it has:
1. Power to direct activities that most significantly impact economic performance.
2. Obligation to absorb expected losses or right to receive expected residual returns.

Question 16

Subsequent Events (ASC 855): Recognized vs. Unrecognized

Accepted Answer

- **Recognized (Type 1)**: Conditions existed **on or before** the Balance Sheet date $\rightarrow$ Adjust financial statements (e.g., settlement of litigation existing at year-end).
- **Unrecognized (Type 2)**: Conditions arose **after** the Balance Sheet date $\rightarrow$ Disclosure only (e.g., loss of plant due to fire after year-end).

Question 17

Discontinued Operations Presentation Criteria

Accepted Answer

A component or group of components classified as held for sale or disposed of qualifies as a discontinued operation if it represents a **strategic shift** that has (or will have) a **major effect** on operations and financial results.

Reported net of tax **below** Income from Continuing Operations.

Question 18

ASC 606: Accounting for Variable Consideration

Accepted Answer

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

*Constraint*: Include variable consideration in transaction price only to the extent it is **probable** that a significant reversal in cumulative revenue recognized will **not** occur.

Question 19

ROU Asset Initial Measurement under ASC 842

Accepted Answer

Initial Right-of-Use (ROU) Asset measurement formula:
$$	ext{Initial ROU Asset} = 	ext{Initial Lease Liability} + 	ext{Initial Direct Costs} + 	ext{Prepaid Lease Payments} - 	ext{Lease Incentives Received}$$

Question 20

Subsequent Accounting for Goodwill under US GAAP

Accepted Answer

Goodwill is **not amortized**. It is tested for impairment at the **reporting unit level** at least annually, or more frequently if a triggering event occurs.

*Impairment Loss* = $\max(0, 	ext{Carrying Value} - 	ext{Fair Value of Reporting Unit})$, capped at total goodwill carrying value.

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

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