CPA Exam - FAR (Financial Accounting and Reporting) flashcards

Under ASU 2017-04, goodwill impairment is recognized when the carrying amount of a reporting unit exceeds its fair value. The impairment loss is limited to the amount of goodwill allocated to that reporting unit.

• Replaced the two-step impairment test with a single-step approach.
• Impairment loss = Carrying amount of reporting unit - Fair value of reporting unit.
• Loss is capped at the goodwill carrying amount for that reporting unit.
• Tested at the reporting unit level, annually or when impairment indicators exist.

Memory trick: Unit's value down, goodwill's crown.

A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more alternatives (e.g., inventory methods).

• Generally accounted for retrospectively.
• Prior period financial statements are restated.
• Cumulative effect on periods prior to those presented adjusts beginning retained earnings of earliest period presented.
• Requires justification that the new principle is preferable.

Memory trick: Principle rewind, estimate forward finds, error adjust behind.

Under U.S. GAAP, research costs are expensed as incurred, while development costs are expensed until technological feasibility is established, after which they are capitalized and amortized.

• Research costs aim to discover new knowledge.
• Development costs apply research findings to a plan or design.
• Technological feasibility is the key capitalization trigger for development costs (for internal-use software, it's 'probable' that project will be completed and used).

Memory trick: Research out, development waits for tech point.

The indirect method for the operating activities section of the statement of cash flows starts with net income and adjusts it for non-cash items, non-operating gains/losses, and changes in current operating assets and liabilities.

• Starts with net income.
• Adds back non-cash expenses (e.g., depreciation, amortization).
• Subtracts non-operating gains; adds non-operating losses.
• Adjusts for changes in current operating assets and liabilities.

Memory trick: NI plus non-cash, less non-ops, then working cap dash.

Subsequent events are events occurring after the balance sheet date but before financial statements are issued. Type I events provide evidence of conditions existing at the balance sheet date and require adjustment. Type II events provide evidence of conditions arising after the balance sheet date and require disclosure.

• Type I: Adjust financial statements (e.g., litigation settlement, uncollectible receivables, inventory valuation).
• Type II: Disclose in notes (e.g., stock issuance, bond issuance, business combination, casualty losses).
• Management is responsible for identifying subsequent events.
• Period ends when financial statements are issued or available to be issued.

Memory trick: Conditions existing? Adjust. Conditions new? Disclose.

Capital expenditures provide future economic benefits by extending an asset's life, increasing its capacity, or improving its efficiency, and are capitalized. Revenue expenditures only maintain an asset's current condition and are expensed.

• Capitalized costs become part of the asset's cost and are depreciated.
• Expensed costs affect net income in the current period.
• Judgment required for borderline cases.
• Increases in asset value or economic benefits are key indicators for capitalization.

Memory trick: Life or capacity up? Capitalize. Same-old-same? Expense.

ASC 842 classifies leases for lessees as either finance leases or operating leases based on five criteria, determining the accounting treatment for the right-of-use asset and lease liability.

• Finance lease criteria: Transfer of ownership, purchase option 'reasonably certain', lease term 'major part' of useful life, PV of payments 'substantially all' of fair value, specialized asset.
• If any criterion is met, it's a finance lease; otherwise, it's an operating lease (unless short-term).
• Both types result in a ROU asset and lease liability on the balance sheet.

Memory trick: OTIS-S spells finance, if any shine.

The integral view of interim financial reporting considers each interim period as an integral part of the annual period, requiring allocation of expenses that benefit multiple periods.

• Aims to smooth income over the year.
• Revenues are recognized as earned.
• Expenses associated with revenue are matched.
• Expenses not associated with specific revenues are allocated if they benefit multiple periods.

Memory trick: Annual view, spread the due.

The portion of the transaction price that is contingent on future events or conditions, such as discounts, returns, rebates, or performance bonuses.

• Estimate variable consideration at contract inception.
• Constrain estimates to prevent overstatement of revenue.
• Update estimates at each reporting period.

Memory trick: Uncertainty's end, revenue's friend.

The issuance price of a bond is the present value of its future cash flows (principal and interest payments), discounted at the market (effective) interest rate at the time of issuance.

• Stated Rate > Market Rate = Premium.
• Stated Rate < Market Rate = Discount.
• Stated Rate = Market Rate = Face Value.
• Market rate determines the effective interest expense over the bond's life.

Memory trick: Coupon vs Market: Price's start, amortization's art.

Goodwill is an intangible asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.

• Calculated as (Consideration Transferred + Fair Value of NCI) - Fair Value of Identifiable Net Assets.
• Not amortized, but tested for impairment annually.
• Recognized only in a business combination.

Memory trick: Total value paid, minus net assets laid.

For equity investments where the investor does not have significant influence and has not elected the fair value option through OCI, an 'other-than-temporary' decline in fair value below cost is recognized as a realized loss in net income.

• Applies to equity investments measured at fair value through net income (FV-NI).
• All fair value changes, including impairments, flow through net income.
• Distinction between temporary and other-than-temporary impairment is less relevant post-ASU 2016-01 for FV-NI equity investments, as all fair value changes go to net income. However, the term 'other-than-temporary' implies a more permanent reduction, reinforcing the loss recognition.

Memory trick: Equity's deep dip, net income's slip.

To provide financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

• Focuses on external users.
• Aids in capital allocation decisions.
• Based on the FASB Conceptual Framework.

Memory trick: Resource providers decide with useful info.

A subsequent event that provides evidence about conditions that did not exist at the balance sheet date but arose after that date. These events require disclosure in the financial statements if material, but no adjustment to the financial statements themselves.

• Conditions arose after balance sheet date
• Requires disclosure in notes if material
• No adjustment to financial statements

Memory trick: After the balance sheet, if it's new news, just disclose; if it confirms old clues, adjust and show.

Under ASC 842, a lessee classifies a lease as a finance lease if any of the 'OWNS' criteria are met; otherwise, it's an operating lease.

• O: Ownership transfers.
• W: Written purchase option reasonably certain to exercise.
• N: Net PV of payments is substantially all of fair value (>=90%).
• S: Specialized asset with no alternative use.

Memory trick: OWNS a Tiny asset, then it's finance; otherwise, just operate and dance.

Starts with net income and adjusts for non-cash items (depreciation, gains/losses) and changes in non-cash working capital accounts to arrive at operating cash flow.

• Adds back non-cash expenses (e.g., depreciation).
• Subtracts non-cash revenues and adds back non-cash losses.
• Adjusts for changes in current assets and liabilities (e.g., AR, AP, Inventory).

Memory trick: Net income's journey to cash flow, through non-cash adjustments, watch it grow!

Debt and equity securities that are not classified as trading securities or held-to-maturity securities. Unrealized gains and losses are reported in other comprehensive income (OCI).

• Residual category for investments
• Unrealized gains/losses go to OCI
• Can be debt or equity securities

Memory trick: Investments: Trading for quick cash, Held-to-Maturity for steady bonds, and AFS for everything else that's not Equity Method.

Under ASC 280 (Segment Reporting), an operating segment is considered reportable if it meets any of three 10% quantitative thresholds: revenue, profit/loss, or assets. Additionally, the combined external revenue of all reportable segments must be at least 75% of the entity's total external revenue.

• Three 10% tests: Revenue, Profit/Loss, Assets
• Meet any one test to be reportable
• 75% external revenue coverage rule

Memory trick: To be a 'Reportable Star,' you need 10% of Revenue, Profit/Loss, or Assets, and 75% external coverage.

Correcting an error involves adjusting the financial statements to reflect what should have been recorded, impacting prior or current period net income and balance sheet accounts.

• Prior period errors are usually corrected retrospectively.
• Current period errors are corrected by adjusting the current period's accounts.
• The impact on net income is the difference between the incorrect and correct expense/revenue recognition.

Memory trick: Fixing mistakes makes financials right, like a puzzle piece fitting just so.

Unrealized gains and losses on available-for-sale debt securities are recognized in other comprehensive income (OCI) and accumulated in accumulated other comprehensive income (AOCI).

• Not included in net income until realized.
• Part of comprehensive income.
• Impacts equity but not earnings until sale.

Memory trick: AFS gains hide in OCI's vault, awaiting the sale to complete the assault.

A change from one generally accepted accounting principle to another. Under U.S. GAAP, most changes in accounting principle are accounted for retrospectively, meaning prior financial statements are restated, and the cumulative effect is adjusted to the beginning retained earnings of the earliest period presented.

• Most changes are retrospective
• Restate prior period financial statements
• Adjust beginning retained earnings of earliest period presented
• Exception: change to LIFO is prospective

Memory trick: Principles are Retro, Estimates are Pro, and Entity changes are like a new show.

Under the net method, accounts receivable and sales revenue are initially recorded at the sales price less any available cash discount. If the customer does not take the discount, the discount forfeited is recorded as 'Sales Discount Forfeited' or 'Interest Revenue'. This method assumes the customer will take the discount.

• Assumes customer will take discount
• Record A/R and Revenue at net amount
• If discount is not taken, record discount forfeited (e.g., Interest Revenue)
• Matches expected cash inflow

Memory trick: Gross is full price, Net is discounted, but then you might find it's forfeited.

Discontinued operations represent activities of a component of an entity that either has been disposed of or is classified as held for sale, and that represents a strategic shift. They are reported separately on the income statement, net of tax, after income from continuing operations.

• Component disposed of or held for sale
• Represents a strategic shift
• Reported net of tax
• Appears after income from continuing operations

Memory trick: Income's tiers: Continuing first, then Discontinued's net, and OCI for what's not yet met.

When a contingent liability is probable and a range of outcomes exists, if no amount within the range is a better estimate than any other, and probabilities are estimable, U.S. GAAP generally requires recognition at the expected value (sum of each potential outcome multiplied by its probability).

• Liability is probable and estimable
• Range of outcomes with probabilities
• Recognize at expected value
• If no amount is better estimate, and probabilities not estimable, use minimum of range

Memory trick: Probable and Estimable? Book it! If a range, use expected value; if not, use the minimum.

Subsequent events that provide additional evidence about conditions that existed at the balance sheet date; these events require adjustment of the financial statements.

• Conditions existed at year-end.
• Provides new information about year-end estimates.
• Examples: lawsuit settlements, uncollectible receivables, inventory realization.

Memory trick: Balance date's secrets, if revealed later, demand adjustment, not just a narrator.

Under U.S. GAAP, costs to develop software for sale or lease are expensed until technological feasibility is established, then capitalized until the product is available for general release.

• Research costs are always expensed.
• Development costs after technological feasibility are capitalized.
• Post-release costs are expensed or capitalized based on specific criteria.

Memory trick: Feasibility's line divides expense from capital's climb.

An operating segment is reportable if its reported revenue (including both sales to external customers and intersegment sales) is 10% or more of the combined revenue of all operating segments.

• Based on combined revenue of all operating segments (not total entity revenue).
• Includes both external and intersegment sales.
• One of three 10% quantitative thresholds for reportable segments.

Memory trick: Segments must pass a 'ten percent' hurdle to show their true colors.

Under ASC 606, variable consideration is included in the transaction price only if it's highly probable that a significant revenue reversal won't occur when the uncertainty is resolved.

• Prevents overstating revenue upfront.
• Requires judgment and estimation.
• Reversals can negatively impact financial statements.

Memory trick: Five steps to revenue's door, but variable pay needs a safe floor.

A depreciation method that allocates an equal amount of an asset's depreciable cost to each accounting period over its useful life.

• Formula: (Cost - Salvage Value) / Useful Life.
• Results in consistent depreciation expense each period.
• Often used for assets whose economic benefits are consumed evenly over time.

Memory trick: STRAIGHT-line means EVEN steps down, from cost to salvage.

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

• Comprehensive income = Net Income + Other Comprehensive Income (OCI).
• OCI includes items like unrealized gains/losses on AFS securities and foreign currency translation adjustments.
• It represents a broader measure of financial performance than net income alone.

Memory trick: Net Income is the base, OCI adds the rest of the race.

The funded status of a defined benefit pension plan is the difference between the Projected Benefit Obligation (PBO) and the fair value of the plan assets. This amount is reported as a net asset or net liability on the balance sheet.

• Funded status = Fair Value of Plan Assets - Projected Benefit Obligation (PBO).
• A PBO greater than plan assets results in a net liability.
• AOCI components (like prior service costs) are not part of the funded status calculation, but affect equity.

Memory trick: PBO vs. ASSETS: The difference is the funded STATUS.

Under the allowance method, bad debt expense is recognized based on an estimate of uncollectible accounts. The expense amount is the adjustment needed to bring the Allowance for Doubtful Accounts to its desired ending balance.

• Estimated uncollectible amount is the target ending balance for the allowance.
• Bad Debt Expense = Target Allowance Balance - Existing Allowance Balance (credit).
• If existing allowance has a debit balance, it is added to the target balance.

Memory trick: ALLOWANCE is the TARGET, EXPENSE is the ADJUSTMENT.

Amortization of intangible assets with finite lives involves systematically allocating their cost over their useful economic life, typically the shorter of legal or estimated useful life.

• Applies to intangibles with finite useful lives.
• Amortized over the shorter of legal or estimated useful life.
• Straight-line method is commonly used.

Memory trick: Invisible assets, visible cost spread: shorter life, straight line ahead.

The equity method is used when an investor has significant influence over an investee's operating and financial policies, typically with 20-50% ownership, or demonstrated influence at lower percentages.

• Investor records its share of investee's net income as investment income.
• Dividends received from investee reduce the investment account, not income.
• Investment is initially recorded at cost and adjusted for income/losses and dividends.

Memory trick: Influence determines the method, control means consolidation.

A deferred tax asset arises from temporary differences that will result in deductible amounts in future years when the carrying amount of an asset or liability is recovered or settled, leading to lower future tax payments.

• Recognized when financial income > taxable income (initially).
• Results in lower future tax payments.
• Common examples: warranty expense, bad debt expense (accrual vs. cash basis).

Memory trick: Future tax savings are assets, future tax bills are liabilities.

A contingent liability is a potential obligation arising from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's control.

• Accrued if probable and estimable.
• If a range is estimable and no amount is better, accrue the minimum.
• If a range is estimable and an amount is better, accrue that amount.

Memory trick: PROBABLE & ESTIMABLE? Then ACCRUE, otherwise just DISCLOSE.

The integral view treats each interim period as an integral part of an annual period, meaning that financial results for interim periods should reflect allocations and estimates that anticipate the full annual period's results.

• Aims to smooth earnings across interim periods for annual predictability.
• Annual expenses (e.g., property taxes, depreciation) are allocated.
• Temporary fluctuations in inventory or other costs may be deferred if expected to reverse.

Memory trick: INTEGRAL means a PIECE of the YEAR, DISCRETE is just a MOMENT.

Under the cost method, treasury stock is recorded at the cost of its acquisition and is presented as a contra-equity account, reducing total stockholders' equity.

• Recorded at acquisition cost.
• Contra-equity account on the balance sheet.
• Reduces total stockholders' equity.

Memory trick: Cost method's simple: record what you paid, equity shrinks, no par value parade.

Costs incurred to acquire or create intangible assets are capitalized if they provide future economic benefits and meet specific criteria, while R&D costs are generally expensed.

• Legal fees to obtain a patent are capitalized.
• Costs to successfully defend a patent are capitalized.
• Research and development costs are generally expensed as incurred.

Memory trick: INTangible assets have a CAPitalized value, but R&D is an EXPENSE.

In governmental funds using modified accrual accounting, the premium on bonds issued is recorded as an 'Other Financing Source' at the time of issuance, along with the face value of the bonds.

• Applies to governmental funds (e.g., Capital Projects Fund).
• Premium is part of 'Other Financing Sources'.
• No amortization of premium in governmental funds.
• Premium may be transferred to the Debt Service Fund.

Memory trick: Bonds bring cash in, premium just adds to the 'other' sources.

A contribution with a donor-imposed time restriction must be recognized as an increase in net assets with donor restrictions until the specified time period has elapsed or the purpose is fulfilled.

• Donor specifies a period for use or display.
• Classified as 'net assets with donor restrictions'.
• Released to 'net assets without donor restrictions' over time or when purpose met.

Memory trick: Time restrictions mean the asset is 'locked' in restricted assets until time 'runs out'.

The process of reclassifying net assets with donor restrictions to net assets without donor restrictions when donor-imposed conditions or time restrictions have been met.

• Occurs when donor stipulations are satisfied.
• Impacts the Statement of Activities.
• Results in an increase in net assets without donor restrictions and a decrease in net assets with donor restrictions.

Memory trick: First it's locked, then it's used, then it's free.

A contribution that depends on the occurrence of a specified future and uncertain event to establish entitlement to the assets. It is recognized as a 'Refundable Advance' (liability) until the condition is substantially met.

• Barrier to entitlement exists.
• Right of return to donor if condition not met.
• Recognized as Refundable Advance (liability) until condition met.

Memory trick: Is it a gift, or a 'MAYBE' gift? Conditions make it a 'MAYBE'.

Under the purchases method (used by governmental funds under modified accrual accounting), the entire cost of supplies acquired during the fiscal period is recorded as an expenditure. No adjustment is made at year-end for unused supplies in the operating statement.

• Used for supplies in governmental funds
• Entire cost of purchases is expensed
• No year-end adjustment for unused supplies in the operating statement
• Unused supplies may be shown as nonspendable fund balance.

Memory trick: P-M = Purchases Method for Modified Accrual

Transfers of financial resources between different funds within the same government. On government-wide statements, transfers between governmental activities and business-type activities are reported as transfers in the Statement of Activities.

• Reported as transfers in the Statement of Activities (government-wide).
• Not eliminated if between governmental and business-type activities.
• Distinguished from interfund loans, which create internal balances.

Memory trick: Government-Wide Transfers: Between types, they show up; within types, they vanish.

A fiduciary fund used to account for the assets, liabilities, net position, and changes in net position for a government's external investment pool, where the government acts as a sponsor and trustee.

• Fiduciary fund type.
• Accounts for external investment pools.
• Government acts as trustee/sponsor.
• Uses full accrual accounting.

Memory trick: Fiduciary funds hold money for others, like a trusted guardian.

Fiduciary funds (e.g., pension trust funds, private-purpose trust funds, agency funds) account for resources held by the government in a trustee or agency capacity for others. They use the economic resources measurement focus and the full accrual basis of accounting.

• Accounts for resources held for external parties.
• Uses full accrual accounting.
• Uses economic resources measurement focus.
• Not included in government-wide statements.

Memory trick: Fiduciary: Full Accrual, Economic Resources for Others' Money.

A contribution where the donor stipulates that the principal must be maintained permanently or for a specified period, with only the income available for spending.

• Always increases net assets with donor restrictions.
• The restriction applies to the principal, not necessarily the income.
• Can be permanent or term endowments.

Memory trick: Endowment's main trunk is always locked by the donor.

Donated non-depreciable assets, such as land, are recorded at fair value at the date of contribution. Any donor-imposed restrictions (e.g., purpose, time) dictate their classification as 'net assets with donor restrictions'.

• Recorded at fair value.
• Non-depreciable assets (e.g., land) are not depreciated.
• Donor restrictions classify as 'net assets with donor restrictions'.

Memory trick: Donated 'Land' for a 'Dorm' is 'Restricted', 'L'ocked up for a 'L'ong-term purpose.

For governmental funds using modified accrual, revenue from expenditure-driven grants is recognized only when the qualifying expenditures are incurred. Unspent amounts are recorded as Deferred Inflows of Resources.

• Revenue recognition tied to incurring expenditures.
• Unspent funds are 'Deferred Inflows of Resources'.
• Reflects the current financial resources measurement focus.

Memory trick: Grant funds: Spend first, then earn, or defer.

For governmental funds using modified accrual accounting, revenue from expenditure-driven (reimbursement) grants is recognized when eligible expenditures are incurred by the recipient government.

• Applies to governmental funds
• Revenue recognized upon incurring eligible expenditures
• Cash receipt is not the trigger for revenue recognition

Memory trick: E-D-G = Expenditure-Driven Grants

In governmental fund accounting (modified accrual), deferred inflows of resources represent an acquisition of net assets by the government that is applicable to a future reporting period.

• Used for unearned revenues, often from grants.
• Revenue recognition criteria (measurable and available) not yet met.
• Similar to unearned revenue but a specific GASB classification.

Memory trick: Future money, not yet ours to spend or count.

An endowment contribution, where the principal must be maintained in perpetuity by donor stipulation, is classified as an increase in net assets with donor restrictions.

• Principal is permanently restricted by donor.
• Income may be unrestricted or restricted.
• Initial contribution is entirely 'with donor restrictions'.

Memory trick: Endowment's main 'gist' is that the principal is always 'restricted'.

Proceeds from issuing general obligation bonds to finance major capital facility construction or acquisition are recorded as 'Other Financing Sources' in the Capital Projects Fund.

• Used for major capital outlays.
• Bond proceeds are 'Other Financing Sources'.
• Not considered 'Revenue'.

Memory trick: Capital projects get special treatment, funding 'sourced' not 'earned'.

A conditional contribution depends on the occurrence of a specified future event (a barrier to entitlement) and/or the right of return of assets. It is not recognized as revenue until the conditions are substantially met. A restricted contribution has donor-imposed stipulations on its use but is not conditional.

• Conditional grants are initially recorded as a liability (refundable advance).
• Restricted grants are recorded as 'revenue with donor restrictions'.
• A grant can be both conditional and restricted; revenue is recognized only after conditions are met.

Memory trick: Grants: Conditional (Liability) or Restricted (Revenue with Strings).

Under full accrual accounting for government-wide statements, pension expense is recognized based on the actuarially determined cost of benefits earned by employees during the period, rather than the cash contribution.

• Uses full accrual accounting.
• Based on actuarial valuations.
• Differences between expense and cash contributions adjust Net Pension Liability.

Memory trick: Government-Wide: Think of it like a business, full picture, not just cash.

Includes cash flows from all transactions and other events that are not defined as investing or financing activities, encompassing both unrestricted and certain donor-restricted contributions.

• Both unrestricted and donor-restricted (for current use) contributions are operating inflows.
• Investment income and expenses are typically operating activities.
• Can use direct or indirect method, direct is preferred.

Memory trick: Operating cash is everything not investing or financing, even restricted if for current use.

An unconditional promise to give (pledge) to a not-for-profit organization that includes a donor-imposed purpose or time restriction. It is recognized as revenue with donor restrictions when the pledge is made.

• Recognized as a receivable and revenue immediately.
• Classified as 'Revenue with Donor Restrictions'.
• Distinct from conditional pledges, which are not recognized until conditions are met.

Memory trick: Pledge: If unconditional, it's revenue, but check for donor's rules.

The net increase in a Pension Trust Fund's net position is calculated by subtracting total deductions (e.g., benefits paid, administrative expenses) from total additions (e.g., contributions, investment income).

• Fiduciary fund, full accrual basis.
• Additions: contributions, investment income.
• Deductions: benefits paid, administrative expenses.

Memory trick: Fiduciary funds are 'TRUSTed' to manage money, so track incoming 'ADDITIONS' and outgoing 'DEDUCTIONS'.

A proprietary fund used to account for the financing of goods or services provided by one department or agency of a primary government to other departments or agencies, or to other component units, on a cost-reimbursement basis.

• Proprietary fund type (full accrual)
• Provides services primarily to other internal government departments
• Operates on a cost-reimbursement basis (cost recovery)
• Examples: central motor pool, print shop, IT services

Memory trick: IE (Internal Service, Enterprise)