Certified Public Accountant (CPA) Financial Accounting and Reporting (FAR) — Core Syllabus

What is Form 10-Q, and is it audited?

Form 10-Q is the quarterly report to the SEC containing unaudited (reviewed) interim financial statements; it is filed for each of the first three fiscal quarters.

What items qualify as cash equivalents?

Short-term, highly liquid investments readily convertible to known amounts of cash with original maturities of three months or less from the date of acquisition (e.g., T-bills, commercial paper, money market funds).

In a bank reconciliation, how are deposits in transit and outstanding checks treated on the bank side?

Add deposits in transit to the bank balance and subtract outstanding checks from the bank balance to reconcile to the adjusted (true) cash balance.

In a bank reconciliation, which items adjust the book (company) balance rather than the bank balance?

Bank service charges, NSF checks, interest earned, notes collected by the bank, and the company's own recording errors adjust the book balance.

Under the CECL model (ASC 326), how is the allowance for credit losses on financial assets measured?

Using current expected credit losses — a lifetime expected loss estimate recognized at origination based on historical experience, current conditions, and reasonable and supportable forecasts. No 'incurred loss' trigger is required.

What journal entry records the estimate of bad debt expense under the allowance method?

Debit Bad Debt (Credit Loss) Expense, Credit Allowance for Credit Losses. The allowance is a contra-asset reducing net accounts receivable.

How is net realizable value of accounts receivable computed?

$\text{NRV} = \text{Gross accounts receivable} - \text{Allowance for credit losses}$.

State the cost flow assumption results: under FIFO in a period of rising prices, are ending inventory and net income higher or lower than under LIFO?

Under FIFO in rising prices, ending inventory is higher and cost of goods sold is lower, so net income (and taxes) are higher than under LIFO.

What is the cost-of-goods-sold equation?

$\text{COGS} = \text{Beginning inventory} + \text{Purchases} - \text{Ending inventory}$.

Under U.S. GAAP, how is inventory measured subsequently for FIFO/average cost versus LIFO/retail methods?

FIFO and average cost: lower of cost or net realizable value (NRV). LIFO and retail inventory method: lower of cost or market (market = replacement cost bounded by ceiling NRV and floor NRV minus normal profit).

What costs are capitalized as part of property, plant, and equipment?

The purchase price plus all costs necessary to bring the asset to its location and condition for intended use — e.g., freight, installation, testing, sales tax, and capitalized interest during construction.

Write the formula for straight-line depreciation.

$\text{Depreciation expense} = \dfrac{\text{Cost} - \text{Salvage value}}{\text{Useful life}}$.

Write the double-declining-balance depreciation formula for a year.

$\text{Depreciation} = \text{Book value at beginning of year} \times \dfrac{2}{\text{Useful life}}$. Salvage value is ignored until book value reaches it.

How is a fixed asset tested for impairment under U.S. GAAP (held-and-used)?

A two-step recoverability test: if undiscounted expected future cash flows are less than carrying amount, the asset is impaired. The loss equals carrying amount minus fair value.

How are finite-life versus indefinite-life intangible assets accounted for after acquisition?

Finite-life intangibles are amortized over their useful life and tested for impairment when indicators exist. Indefinite-life intangibles are not amortized but tested for impairment at least annually.

Describe the quantitative goodwill impairment test under current U.S. GAAP (ASU 2017-04).

Compare the reporting unit's fair value to its carrying amount. If carrying amount exceeds fair value, recognize an impairment loss equal to that excess, limited to the goodwill balance. (Step 2 was eliminated.)

Under the equity method, how does the investor account for its share of investee earnings and dividends?

Increase the investment account by the investor's share of investee net income (and record it as income); decrease the investment account for dividends received. Dividends are a return of investment, not income.

What ownership level generally triggers use of the equity method, and what does it presume?

Generally 20% to 50% ownership of voting stock, which presumes significant influence over the investee (but not control).

How are equity investments (no significant influence) and trading debt securities measured under U.S. GAAP?

Equity investments with readily determinable fair values are measured at fair value with changes in net income. Trading debt securities are at fair value with unrealized gains/losses in net income.

Distinguish how unrealized holding gains/losses are reported for trading, available-for-sale, and held-to-maturity debt securities.

Trading: fair value, gains/losses in net income. Available-for-sale: fair value, unrealized gains/losses in OCI. Held-to-maturity: amortized cost, no unrealized gains/losses recognized.

What is the difference between an accrued liability and an account payable?

An account payable is an obligation for goods/services received and invoiced. An accrued liability is an expense incurred but not yet billed or paid (e.g., accrued wages, interest, or taxes), recorded by an adjusting entry.

List the five steps of the ASC 606 revenue recognition model in order.

1) Identify the contract; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price to performance obligations; 5) Recognize revenue when (or as) each performance obligation is satisfied.

Under ASC 606, when is revenue recognized over time rather than at a point in time?

Over time if: the customer simultaneously receives and consumes benefits as the entity performs; the entity creates/enhances an asset the customer controls; or the asset has no alternative use and the entity has an enforceable right to payment for performance to date.

Under ASC 842, how does a lessee account for a finance lease versus an operating lease on the balance sheet?

Both recognize a right-of-use asset and a lease liability. Finance lease: separate interest expense and amortization (front-loaded total expense). Operating lease: a single straight-line lease expense.

Under ASC 842, name two of the five criteria that classify a lease as a finance lease for a lessee.

Any of: transfer of ownership at end of term; a purchase option reasonably certain to be exercised; lease term is a major part of the asset's remaining life; present value of payments is substantially all of the asset's fair value; the asset is so specialized it has no alternative use to the lessor.

What is the difference between a permanent and a temporary difference in income tax accounting?

Permanent differences (e.g., municipal bond interest, fines) never reverse and do not create deferred taxes. Temporary differences reverse in future periods and create deferred tax assets or liabilities.

What gives rise to a deferred tax liability versus a deferred tax asset?

A deferred tax liability arises when book income exceeds taxable income now (future taxable amounts), e.g., accelerated tax depreciation. A deferred tax asset arises when taxable income exceeds book income now (future deductible amounts), e.g., warranty accruals or NOL carryforwards.

How is a deferred tax asset valued when realization is uncertain?

A valuation allowance reduces the deferred tax asset to the amount more likely than not (greater than 50% probability) to be realized.

When bonds are issued, what determines whether they sell at a discount or a premium?

If the stated (coupon) rate is below the market (effective) rate, bonds sell at a discount. If the stated rate exceeds the market rate, bonds sell at a premium. If equal, they sell at par.

Under the effective-interest method, how is periodic bond interest expense computed?

$\text{Interest expense} = \text{Carrying value of bond} \times \text{Market (effective) rate}$. The cash paid equals face value times the stated rate; the difference amortizes the discount or premium.

How are bond issuance (debt issuance) costs presented under current U.S. GAAP?

Debt issuance costs are presented as a direct deduction from the carrying amount of the related liability (like a discount) and amortized to interest expense over the life of the bond using the effective-interest method.