CPA Exam - FAR (Financial Accounting and Reporting) flashcards

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'.

Permanent endowments, where the principal must be invested in perpetuity, are classified as Restricted Net Position in the government-wide Statement of Net Position due to the externally imposed restriction on the asset's use.

• Principal held in perpetuity.
• Income may be restricted or unrestricted.
• Classified as Restricted Net Position.

Memory trick: Net position shows what's invested, what's locked, and what's free.

A component of Net Position on the government-wide Statement of Net Position, representing resources for which constraints on their use are externally imposed by creditors, grantors, or laws/regulations, or imposed by law through constitutional provisions or enabling legislation.

• Part of government-wide Statement of Net Position
• Constraints on use are external or legally mandated
• Distinguished from internal designations by management

Memory trick: RUN (Restricted, Unrestricted, Net Investment in Capital Assets)

When an NFP receives a contribution restricted for the acquisition of a long-lived asset, the contribution is initially recorded as Net Assets With Donor Restrictions and then reclassified to Net Assets Without Donor Restrictions when the asset is placed in service.

• Initially increases Net Assets With Donor Restrictions.
• Restriction is met when the asset is acquired/placed in service.
• Reclassification to Net Assets Without Donor Restrictions occurs upon restriction satisfaction.

Memory trick: Restricted gifts are locked until their purpose is fulfilled.

When a not-for-profit receives a long-term asset with a donor-imposed time restriction on its use, the asset is initially recorded as net assets with donor restrictions.

• The restriction is released over the asset's useful life or the specified period.
• Release typically mirrors depreciation, increasing unrestricted net assets.
• Initial recognition is at fair value.

Memory trick: Building's restricted, but restriction 'depreciates' over time.

Financial statements of a state or local government prepared using the economic resources measurement focus and the full accrual basis of accounting, presenting a comprehensive overview of the government's financial position and activities.

• Include Statement of Net Position and Statement of Activities.
• Report all assets and liabilities, both current and long-term.
• Recognize depreciation expense for capital assets.

Memory trick: Government-Wide: A Full Economic Picture, Depreciated.

Not-for-profit organizations may elect not to capitalize collections if they meet specific criteria related to public exhibition, preservation, and reinvestment policy for sale proceeds.

• Optional non-capitalization if criteria met.
• Items held for public exhibition, education, or research.
• Protected, cared for, and preserved.
• Sale proceeds reinvested in collections.

Memory trick: Collections are 'special' assets, sometimes just a 'note' in the book.

When an NFP provides its own goods or services as part of a contribution arrangement, it generally recognizes the full contribution revenue and a corresponding expense for the fair value of the goods/services provided.

• Full contribution revenue is recognized.
• Corresponding expense is recorded (e.g., program or fundraising).
• Differs from quid pro quo, where revenue is reduced by value of goods/services.

Memory trick: Full contribution in, full expense out for NFP's own show.

A component of Net Position in government-wide financial statements, representing the capital assets of the government, net of accumulated depreciation, less any outstanding debt attributable to the acquisition, construction, or improvement of those assets.

• Calculated at the government-wide level (full accrual).
• Includes all capital assets, regardless of funding source.
• Reduced by outstanding debt directly associated with the assets.

Memory trick: Assets minus debt equals net investment, a true picture of ownership.

Expenses categorized by their purpose or function within a not-for-profit organization, typically program services, management and general, and fundraising.

• Required disclosure for NFPs.
• Presented on the Statement of Activities or in notes.
• Helps users assess how resources are used.

Memory trick: P-M-F: Program, Management, Fundraising – the NFP expense core.

Contributions that have donor-imposed stipulations on their use, which must be reported as increases in net assets with donor restrictions until the conditions are met.

• Donor-imposed restrictions dictate how funds are used.
• Reported as 'net assets with donor restrictions'.
• Released to 'net assets without donor restrictions' when restrictions are met.

Memory trick: Donors' wishes dictate where the gifts go on the financial statements.

Net assets whose use is limited by donor-imposed stipulations that do not expire over time and cannot be removed by the organization.

• Typically includes permanent endowments and land/art to be held in perpetuity.
• Must be reported separately from other net asset classes.
• Donor's intent dictates classification.

Memory trick: Donor's word is law: no restriction, temporary, or forever.

Contributions to a not-for-profit organization that are subject to donor-imposed stipulations on their use. These restrictions can be temporary (e.g., for a specific program, time, or purpose) or permanent (e.g., endowment funds).

• Initially recorded as 'net assets with donor restrictions'.
• Released from restriction when donor stipulations are met.
• Release typically reclassifies to 'net assets without donor restrictions'.

Memory trick: Restricted Funds: Received, Then Released When Purpose Achieved.

In governmental funds using modified accrual, a deferred inflow of resources is recognized when assets are received (or measurable and available) but the corresponding revenue recognition criteria (e.g., incurring eligible expenditures, meeting time restrictions) have not yet been met.

• Result of modified accrual accounting.
• Recognized when assets are available but revenue recognition criteria not met.
• Represents an acquisition of net assets by the government that is applicable to a future reporting period.
• Not a liability, but a separate financial statement element.

Memory trick: M-A-D = Measurable, Available, Deferred (if not earned)

The change in net position for an Enterprise Fund (a proprietary fund) is calculated by taking operating revenues minus operating expenses, plus non-operating revenues (and expenses), plus capital contributions, less transfers out.

• Proprietary fund, full accrual basis.
• Calculated like a business's net income.
• Transfers are not revenues/expenses but affect net position.

Memory trick: Enterprise funds run like a 'BUSINESS': 'REVENUES' - 'EXPENSES' + 'OTHER' - 'TRANSFERS'.

Donated supplies intended for immediate use are often recognized as an expense and corresponding unrestricted contribution revenue at the time of receipt, especially if the NFP's policy is to expense such items upon consumption.

• Intended for immediate patient care/program use.
• NFP policy to expense supplies when consumed.
• Recognized as expense and unrestricted contribution revenue upon receipt.

Memory trick: Donated 'Supplies' for 'S'hort-term use are 'S'imply expensed.

Non-reciprocal flows of assets between funds are reported as 'Other Financing Sources' in the receiving fund and 'Other Financing Uses' in the transferring fund in the Statement of Revenues, Expenditures, and Changes in Fund Balances.

• Non-reciprocal (not for goods/services).
• Affects 'Other Financing Sources/Uses'.
• Reported in operating statement.

Memory trick: Transfers are 'Other' ways funds 'Source' or 'Use' resources, not 'Earn' or 'Spend'.

Volunteer services that are recorded as contributions and expenses by a not-for-profit organization because they meet specific criteria.

• Must create or enhance nonfinancial assets.
• OR require specialized skills (e.g., accounting, legal, medical).
• AND would typically be purchased if not donated.

Memory trick: Skills or Stuff: if it's either, it's recorded.

Under modified accrual accounting, revenues are recognized when they are both measurable and available. 'Available' generally means collectible within the current period or soon enough thereafter to pay current period liabilities (e.g., within 60 days after year-end).

• Revenues must be measurable and available.
• Availability typically means collectible within 60 days of fiscal year-end for property taxes.
• Unavailable revenues are deferred.

Memory trick: Modified Revenues: Measurable AND Available (60-day Rule).

A component of net position under GASB standards that represents amounts that cannot be spent because they are either not in spendable form (e.g., inventories, prepaid items) or are legally or contractually required to be maintained intact (e.g., permanent endowments).

• Part of government-wide Statement of Net Position.
• Includes permanent endowments.
• Principal cannot be spent.

Memory trick: Net Position is like a 'NICE' cake: 'N'onspendable, 'I'nvested in Capital Assets, 'C'apable (Restricted), 'E'verything Else (Unrestricted).

For a not-for-profit or governmental component unit, the principal of a permanent endowment (where the donor stipulates it must be held in perpetuity) is classified as 'Restricted Net Position - Nonexpendable' in the Statement of Net Position.

• Principal held in perpetuity (permanent restriction).
• Classified as 'Restricted Net Position - Nonexpendable'.
• Earnings may be expendable (restricted or unrestricted).
• Applies to government-wide statements for component units and NFP statements.

Memory trick: R-N-E = Restricted Nonexpendable Endowment

Nonreciprocal flows of assets between funds. They are reported as 'Other Financing Sources' (for the receiving fund) or 'Other Financing Uses' (for the disbursing fund) in governmental funds, and as 'Transfers In' or 'Transfers Out' in proprietary funds.

• Do not represent loans, reimbursements, or services.
• Affect fund balance in governmental funds.
• Are eliminated in government-wide statements.

Memory trick: Interfund: Loans, Reimbursements, Services, or Transfers.

A governmental fund financial statement element representing an acquisition of net assets by the government that is applicable to a future reporting period. For grants, this often occurs when funds are received but not yet 'available' under modified accrual.

• Used in governmental funds.
• Modified accrual accounting.
• Represents resources received but not yet recognized as revenue.

Memory trick: Money comes 'IN' but is 'DEFERRED' if it's not 'READY' for this year's bills.

Net assets of a not-for-profit organization whose use is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization. Typically applies to endowment principal.

• Donor-imposed restriction on principal in perpetuity.
• Only investment earnings may be spent.
• Reported separately on the Statement of Financial Position.

Memory trick: NFP Net Assets: Without, With (Temporary), Permanently Locked.

Under modified accrual, property tax revenues are recognized when they are measurable and 'available' to finance expenditures of the current period. 'Available' typically means collected within the current period or within 60 days after year-end.

• Measurable and Available criteria.
• Available generally means 60 days post-year-end.
• Uncollectible amounts and those beyond 60 days are deferred.

Memory trick: Revenues are counted if they're 'MEASURABLE and NEAR' (N-ear = 60 days).

A governmental fund type used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds or trust funds).

• Accounts for major capital expenditures.
• Examples include buildings, roads, bridges.
• Uses modified accrual accounting.

Memory trick: Governments Can't Speak Properly Forever.

A conditional contribution's recognition as revenue is deferred until the conditions specified by the donor are substantially met. Until then, it is recorded as a refundable advance (liability).

• Donor specifies conditions for receipt (e.g., performance, specific outcomes).
• Not recognized as revenue until conditions are met.
• Recorded as a refundable advance (liability) until conditions are satisfied.

Memory trick: A 'Conditional' grant is like a promise, held as 'liability' until conditions are met.

A contribution that depends on the occurrence of a specified future and uncertain event, typically involving a barrier that must be overcome and a right of return to the donor if the condition is not met.

• Not recognized as revenue until the condition is substantially met.
• Initially recorded as a refundable advance (liability).
• Often includes measurable milestones or performance requirements.

Memory trick: Conditions are barriers; if they exist, it's a liability first.

Basic EPS measures the portion of a company's net income allocated to each outstanding share of common stock, reflecting profitability on a per-share basis.

• Formula: (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding.
• For cumulative preferred stock, dividends are subtracted even if not declared.
• For non-cumulative preferred stock, dividends are subtracted only if declared.

Memory trick: EPS: How much EARNINGS per SHARE, BASIC or DILUTED, matters to investors.

The issuance of common stock involves recording the par value in the Common Stock account and any amount received above par in Additional Paid-in Capital.

• Common Stock is credited at par value.
• Additional Paid-in Capital (or Paid-in Capital in Excess of Par) is credited for the amount received above par.
• Cash is debited for the total consideration received.

Memory trick: Equity is the OWNERS' slice, showing their INVESTMENT and the company's EARNINGS.

A deferred tax liability arises when taxable income in the future will be higher than current taxable income due to temporary differences between financial and tax reporting.

• Caused by temporary differences (e.g., accelerated depreciation for tax).
• Represents future tax payments.
• Calculated as temporary difference x enacted future tax rate.

Memory trick: TAXES have TEMPORARY and PERMANENT differences, leading to DEFERRED ASSETS or LIABILITIES.

When a customer has a right of return, an entity recognizes revenue for the amount of consideration it expects to be entitled to, net of estimated returns.

• Estimate returns based on historical data or other evidence.
• Recognize a refund liability for the estimated returns.
• Recognize an asset for the right to recover goods from customers.

Memory trick: FIVE steps to RECOGNIZE the REVENUE, especially when returns are in play!

Net periodic pension cost (pension expense) is comprised of several components: service cost, interest cost, expected return on plan assets, and amortization of prior service cost and actuarial gains/losses.

• Service Cost: Increase in PBO for employee service in current period.
• Interest Cost: Interest on the PBO.
• Expected Return on Plan Assets: Reduces pension expense.
• Amortization of Prior Service Cost/Actuarial G/L: Recognized over time.

Memory trick: PENSION plans have many moving parts: PBO, Assets, and the 5-component EXPENSE.

Under ASC 842, a lessee classifies a lease as either a finance lease or an operating lease based on five criteria (OWNS test).

• Finance lease if any OWNS criteria are met.
• Operating lease if none of the OWNS criteria are met.
• OWNS: Ownership transfer, Written option to purchase, Net present value, Service life, Specialized asset.

Memory trick: Leases are tricky, remember OWNS to decide if it's FINANCE or OPERATING.

The difference between the Projected Benefit Obligation (PBO) and the fair value of plan assets, representing the funded status of a defined benefit pension plan.

• Reported directly on the balance sheet as a liability or asset.
• Equals PBO minus Fair Value of Plan Assets.
• Unrecognized prior service costs, gains, and losses affect AOCI, not this net amount.

Memory trick: Pension's Balance: PBO vs. Assets, a simple net glance.

An inventory valuation rule that requires inventory to be reported at the lower of its historical cost or its net realizable value (estimated selling price less costs to complete and sell).

• Used for inventory valued under FIFO or weighted-average methods.
• Net realizable value (NRV) is the ceiling (upper limit) for valuation.
• Losses are recognized in the period the value decline occurs.

Memory trick: Inventory's Low: LCNRV for FIFO, LCM for LIFO's flow.

A liability recognized for the estimated costs of cleaning up environmental contamination, often arising from legal mandates or constructive obligations.

• Recognized when an obligating event occurs, the obligation is probable, and the amount can be reasonably estimated.
• Measured at its estimated fair value (present value of future cash flows).
• Often associated with asset retirement obligations or loss contingencies.

Memory trick: Contingency's Call: Probable and Estimable, then a Journal Entry's Due.

The systematic expensing of the cost of an intangible asset over its useful life, similar to depreciation for tangible assets.

• Amortized over the shorter of legal life or economic useful life.
• Goodwill is not amortized but tested for impairment annually.
• Straight-line method is typically used unless another method is more appropriate.

Memory trick: Intangible's Value: Life's shorter path, then amortize fast.

The allowance method estimates uncollectible accounts receivable and records bad debt expense in the same period as the related revenue, ensuring proper matching.

• Estimates uncollectible accounts.
• Creates an Allowance for Doubtful Accounts (contra-asset).
• Recognizes Bad Debt Expense through an adjusting entry.

Memory trick: Receivables are a PROMISE, but sometimes the PROMISE is BROKEN.

Fees received from customers at the start of a contract that are not distinct performance obligations themselves but relate to future goods or services, requiring deferral and recognition over time.

• Assessed as to whether they represent a distinct performance obligation.
• If not distinct, defer and recognize over the period the customer receives the benefit.
• Often related to setup, initiation, or access to future goods/services.

Memory trick: Revenue's 5 Steps: Contract, Obligations, Price, Allocate, Recognize's Wise.

Equity investments for which a fair value is not readily available, typically private company stock or certain limited partnership interests.

• Initially measured at cost.
• Subsequent measurement is cost less impairment, plus or minus observable price changes.
• Gains/losses recognized in earnings only upon sale or impairment.

Memory trick: Equity's Path: Influence, Market, or Just Hold Fast.

The correction of a material error in prior period's financial statements by restating affected prior period financial statements and adjusting the opening balance of retained earnings.

• Applies to material errors from prior periods.
• Restates prior financial statements presented.
• Adjusts beginning retained earnings for cumulative effect (net of tax).

Memory trick: Error's Past: Restate, Adjust, and Get it Right at Last.

The amount of shareholders' equity that results from the issuance of stock at a price higher than its par value.

• Represents the excess of issue price over par value.
• Credited when stock is issued for more than par.
• Separate APIC accounts typically maintained for common and preferred stock.

Memory trick: Stock's Debut: Par to Capital, Excess to APIC's Vault.

A type of hedge that aims to mitigate exposure to changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment.

• Both the derivative and the hedged item are marked to market through earnings.
• Reduces income volatility by offsetting gains/losses in net income.
• Effectiveness is crucial; ineffectiveness is recognized in earnings.

Memory trick: Hedge's Purpose: Fair Value to Income, Cash Flow to OCI's Dome.

The gain or loss on the sale of a depreciable asset is the difference between the selling price and the asset's book value at the date of sale.

• Book value = Cost - Accumulated Depreciation.
• Gain if Selling Price > Book Value.
• Loss if Selling Price < Book Value.

Memory trick: PPE is a long-term ASSET, with a life that DEPRECIATES, and eventually you SELL it.

A method of amortizing bond discounts or premiums that results in a constant interest rate (the effective rate) over the life of the bond when applied to the bond's carrying value.

• Interest expense = Carrying Value x Market (Effective) Interest Rate.
• Cash interest paid = Face Value x Stated (Coupon) Interest Rate.
• Difference between interest expense and cash interest amortizes the discount/premium.

Memory trick: Bond's Interest: Effective Rate on Carrying keeps the balance flowing.

The gain or loss resulting from converting a foreign subsidiary's financial statements from its functional currency to the parent company's reporting currency, reported in OCI.

• Applies when the foreign entity's functional currency is its local currency.
• Assets/liabilities translated at current rate; equity at historical rates.
• Translation adjustments are reported in Accumulated Other Comprehensive Income (AOCI).

Memory trick: Foreign Funds: Functional is Local, OCI's Call; Functional is Parent, Income for All.

A method of accounting for sales discounts where revenue is initially recorded net of the maximum possible discount, assuming the customer will take the discount.

• Revenue initially recorded at sales price less discount.
• If customer takes discount, no further entry is needed for the discount.
• If customer does NOT take discount, an additional revenue (or 'Sales Discount Forfeited') is recognized.

Memory trick: Sales Discount: Gross or Net, How Much Will You Get?

A revenue recognition method for long-term contracts where revenue and expenses are recognized as work progresses, based on the proportion of completion.

• Recognizes revenue and profit over the life of the contract.
• Requires reliable estimates of costs to complete and progress.
• Used when the outcome of the contract can be reliably estimated.

Memory trick: Progressive Revenue: Build by Build, Profit's in the Yield.

For equity investments without a readily determinable fair value, an entity may elect a practical expedient to measure them at cost, less any impairment, plus or minus changes resulting from observable price changes of identical or similar investments. Impairment losses are recognized in net income.

• Applies to equity investments where fair value cannot be readily determined.
• Practical expedient: cost minus impairment, adjusted for observable price changes.
• Impairment losses are recognized in net income.
• No subsequent reversals of impairment losses are permitted.

Memory trick: No FV, No OCI – Impairment goes straight to the Income Statement, no detours!

When a foreign subsidiary's functional currency is its local currency, assets and liabilities are translated at the current exchange rate, and equity accounts (like common stock) are translated at historical rates.

• Used when functional currency is the foreign entity's local currency.
• Assets and liabilities translated at current exchange rate.
• Equity accounts translated at historical exchange rates.
• Revenues and expenses translated at average exchange rate.

Memory trick: Current Rate Method: C.A.L.M. - Current for Assets/Liabilities, Average for Income, Historical for Equity, OCI for Translation.

Under the net method, sales revenue and accounts receivable are initially recorded at the amount of the sale less any cash discount available. If the customer does not take the discount, the foregone discount is recorded as 'Sales Discount Forfeited' revenue.

• Records A/R and Sales Revenue assuming customer takes the discount.
• Discount amount is subtracted from the gross sale price.
• If discount is not taken, additional revenue (Sales Discount Forfeited) is recognized.
• Considered more conservative as it records revenue at the lower expected collection amount.

Memory trick: NET means NO DISCOUNT on the books initially – you record what you expect to get.

The difference between the Projected Benefit Obligation (PBO) and the fair value of plan assets, reported on the balance sheet.

• PBO represents the present value of future benefits earned by employees.
• Plan assets are funds set aside to pay benefits.
• If PBO > Plan Assets, it's a net liability; if PBO < Plan Assets, it's a net asset.

Memory trick: PBO Minus Assets: The Balance Sheet's Net.

Revenue is recognized over time when a performance obligation is satisfied continuously, typically measured by progress towards completion.

• Used when the customer simultaneously receives and consumes the benefits.
• Common in long-term contracts like construction.
• Progress is often measured using cost-to-cost or output methods.

Memory trick: Progressive Pay for Prolonged Projects

The impact on the Cumulative Translation Adjustment (CTA) from changes in a foreign subsidiary's net assets when its functional currency is not the parent's reporting currency.

• Assets and Liabilities translated at current (year-end) rate.
• Equity accounts (except Retained Earnings) translated at historical rates.
• Income Statement items translated at average rate.
• The CTA balances the balance sheet after translation and is reported in OCI.

Memory trick: Current Rate: Assets Now, Income Average, Equity Historical.