Certified Public Accountant (CPA) Business Analysis and Reporting (BAR) — Discipline Flashcards

24 sample cards from the Business Analysis and Reporting (BAR) — Discipline deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is the difference between systematic (market) risk and unsystematic (firm-specific) risk?

   Systematic risk affects the entire market and cannot be diversified away (measured by beta); unsystematic risk is specific to a company or industry and can be reduced through diversification.

2. What does beta ($\beta$) measure in the CAPM, and how is required return computed?

   Beta measures a security's sensitivity to market movements (systematic risk). CAPM: $r = r_f + \beta (r_m - r_f)$, where $r_f$ is the risk-free rate and $(r_m - r_f)$ is the market risk premium.

3. Name common techniques to hedge foreign currency (financial) risk.

   Forward contracts, futures contracts, currency options, currency swaps, and natural hedges (matching foreign-currency revenues with foreign-currency costs).

4. What is the weighted average cost of capital (WACC) formula?

   $\text{WACC} = \frac{E}{V} r_e + \frac{D}{V} r_d (1 - T)$, where $E$ = equity, $D$ = debt, $V = E + D$, $r_e$ = cost of equity, $r_d$ = pretax cost of debt, and $T$ = tax rate.

5. Why is the cost of debt multiplied by $(1-T)$ in WACC, but the cost of equity is not?

   Interest on debt is tax-deductible, creating a tax shield that lowers its effective cost; dividends and equity returns are not tax-deductible, so the cost of equity needs no after-tax adjustment.

6. Using the dividend growth (Gordon) model, how is the cost of equity estimated?

   $r_e = \frac{D_1}{P_0} + g$, where $D_1$ is next year's dividend, $P_0$ is the current stock price, and $g$ is the constant dividend growth rate.

7. What is the net present value (NPV) formula, and what decision rule applies?

   $\text{NPV} = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t}$. Accept the project if $\text{NPV} > 0$; reject if $\text{NPV} < 0$. NPV measures value created in present-dollar terms.

8. How is the internal rate of return (IRR) defined relative to NPV?

   IRR is the discount rate $r$ that makes $\text{NPV} = 0$: $\sum_{t=0}^{n} \frac{CF_t}{(1+\text{IRR})^t} = 0$. Accept a project when $\text{IRR} > $ the required rate (hurdle rate).

9. In a discounted cash flow valuation using the Gordon growth model, what is the value of a perpetuity with growth?

   $V_0 = \frac{CF_1}{r - g}$, valid only when the discount rate $r$ exceeds the constant growth rate $g$. It values a cash flow stream growing at a constant rate forever.

10. Under ASC 606, what are the five steps of revenue recognition?

    (1) Identify the contract, (2) identify performance obligations, (3) determine the transaction price, (4) allocate the transaction price to performance obligations, and (5) recognize revenue as/when each obligation is satisfied.

11. Under ASC 606, how is variable consideration estimated and constrained?

    It is estimated using the expected value (probability-weighted) or most-likely-amount method, then constrained so that it is included only to the extent a significant revenue reversal is not probable.

12. Under ASC 842, how does a lessee classify a finance lease versus an operating lease?

    A lease is a finance lease if it meets any of: transfer of ownership, a purchase option reasonably certain to be exercised, lease term for the major part of the asset's life, present value of payments substantially all of fair value, or a specialized asset with no alternative use. Otherwise it is an operating lease.

13. How does a lessee's income statement expense pattern differ between finance and operating leases under ASC 842?

    A finance lease reports separate amortization of the right-of-use asset and interest expense (front-loaded total expense); an operating lease reports a single straight-line lease expense over the term.

14. How is stock compensation expense for an equity-classified award measured and recognized?

    It is measured at the grant-date fair value of the award and recognized as compensation expense over the requisite service (vesting) period, with no remeasurement for equity-classified awards.

15. What distinguishes liability-classified from equity-classified share-based payment awards?

    Liability-classified awards (e.g., cash-settled SARs) are remeasured to fair value each reporting period until settlement, with changes in expense; equity-classified awards are fixed at grant-date fair value.

16. In an acquisition-method business combination, how is goodwill calculated?

    $\text{Goodwill} = (\text{Consideration transferred} + \text{NCI fair value} + \text{FV of previously held interest}) - \text{FV of identifiable net assets acquired}$.

17. When consolidating, what happens to intercompany transactions and the parent's investment account?

    Intercompany receivables/payables, sales, and unrealized profits are eliminated; the parent's investment account and the subsidiary's equity are eliminated against each other, and any noncontrolling interest is presented within consolidated equity.

18. For a derivative designated as a cash flow hedge, where is the effective portion of the gain or loss reported?

    The effective portion is deferred in other comprehensive income (OCI) and reclassified to earnings when the hedged forecasted transaction affects earnings; the ineffective portion is recognized currently in earnings.

19. How does fair value hedge accounting affect the hedged item and the derivative?

    Both the derivative and the hedged item's change in fair value (attributable to the hedged risk) are recognized currently in earnings, so the offsetting gains and losses largely net to zero in net income.

20. Under U.S. GAAP, how are research and development costs generally treated?

    R&D costs are generally expensed as incurred. Exceptions include intangibles/equipment with alternative future uses (capitalized and depreciated) and in-process R&D acquired in a business combination (capitalized as an indefinite-lived asset).

21. How are costs of software developed for internal use treated across the three stages?

    Preliminary project stage costs are expensed; application development stage costs are capitalized; post-implementation/operation stage costs are expensed. Capitalized costs are amortized over the software's useful life.

22. For software to be sold, when does capitalization of development costs begin under ASC 985-20?

    Costs are expensed until technological feasibility is established (e.g., a working model or detailed program design); thereafter, costs are capitalized until the product is available for general release, then amortized.

23. What is the key difference between the government-wide and fund financial statements' measurement focus and basis of accounting?

    Government-wide statements use the economic resources measurement focus and full accrual basis; governmental funds use the current financial resources focus and modified accrual basis, requiring conversion entries to consolidate.

24. What types of conversion (reconciliation) entries are needed to move from governmental fund statements to government-wide statements?

    Adjustments to: capitalize and depreciate capital assets, record long-term debt and related interest, convert revenues to full accrual (e.g., recognize deferred/unavailable revenue), and eliminate other financing sources/uses related to debt issuance.

What this deck covers

Business Analysis and Reporting (BAR) — Discipline flashcards FAQ