CPA Exam - FAR (Financial Accounting and Reporting) flashcards

Debt securities not classified as held-to-maturity or trading, reported at fair value with unrealized gains/losses in OCI.

• Reported at fair value on the balance sheet.
• Unrealized gains/losses are recognized in Other Comprehensive Income (OCI).
• Realized gains/losses (from sale) are recognized in net income.

Memory trick: AFS: OCI's Fair Value Friend.

An inventory valuation method used with LIFO/retail, where inventory is reported at the lower of its historical cost or its market value.

• Market value is constrained by a 'ceiling' (NRV) and a 'floor' (NRV minus normal profit).
• Market value is the middle of replacement cost, ceiling, and floor.
• If market is lower than cost, inventory is written down, and a loss is recognized.

Memory trick: LIFO's Low Cost Market Check.

Costs directly attributable to issuing new shares of stock, such as legal, accounting, and underwriting fees.

• Reduce the net proceeds received from the stock issuance.
• Debited to Additional Paid-in Capital (APIC).
• Do not appear as an expense on the income statement.

Memory trick: Shareholder's Cash, Costs Cut Capital

An exchange of nonmonetary assets where the economic substance of the transaction changes due to the assets having different uses or values for the entities involved.

• Fair value is used to measure the assets exchanged.
• All gains and losses are recognized immediately.
• The new asset is recorded at its fair value.

Memory trick: Different Machines, Different Gains.

When the foreign subsidiary's functional currency is its local currency, assets (including PPE) are translated to the parent's reporting currency using the current exchange rate.

• Applicable when the functional currency is the local currency.
• All assets and liabilities are translated at the current (year-end) rate.
• Equity accounts (except retained earnings) are translated at historical rates.
• Translation adjustments go to Other Comprehensive Income (OCI).

Memory trick: Current Rate: Balance Sheet Now, Income Average.

For general obligation bonds issued at a premium in governmental funds, the premium is typically recorded as an 'Other Financing Source' in the fund receiving the proceeds (e.g., Capital Projects Fund) and then transferred to the Debt Service Fund to amortize over the life of the debt, reducing future interest payments.

• Applies to general long-term debt (e.g., general obligation bonds).
• Recorded as an 'Other Financing Source'.
• Generally transferred to the Debt Service Fund.
• Reduces the effective interest cost over the bond's life.

Memory trick: Bond 'Premium' is extra cash, so 'Pass' it to the Debt Service Fund to pay off the 'Principal' eventually.

The reclassification of net assets from temporarily restricted to unrestricted when the NFP expends resources for the donor-specified purpose.

• Occurs when the purpose restriction is satisfied.
• Increases unrestricted net assets and decreases temporarily restricted net assets.
• Reported as 'net assets released from restriction' on the Statement of Activities.

Memory trick: Restriction fulfilled, freedom found, assets unbound.

Amounts of unrestricted net assets that the NFP's governing board has set aside for a specific purpose.

• Are not donor-imposed restrictions.
• Remain classified as unrestricted net assets.
• The board can modify or remove these designations at its discretion.

Memory trick: Board's choice, not donor's voice, keeps assets free.

Net assets resulting from contributions whose principal must be maintained in perpetuity, with the income often available for use.

• Donor-imposed restriction never expires.
• Typically involves endowments where the corpus must remain intact.
• Income generated from the principal may be unrestricted or temporarily restricted, depending on donor intent.

Memory trick: Forever funds find permanent places.

A contribution where the donor specifies that the resources are not available for use until a future period or after a specific date.

• Classified as temporarily restricted net assets.
• Released from restriction when the specified time period begins or the date passes.
• Often used for future operating expenses or capital projects.

Memory trick: Time's ticking, so it's temporary treasure!

Under the modified accrual basis for governmental funds, the purchases method records the entire cost of supplies or other current assets as an expenditure when purchased. Inventory balances are typically maintained for control purposes but do not affect reported expenditures.

• Used for governmental funds
• Entire cost expensed upon purchase
• Inventory changes do not affect expenditures

Memory trick: Modified accrual expenses when due, and supplies are 'purchased' or 'consumed'.

A conditional contribution depends on the occurrence of a specified future event or action by the recipient, or on overcoming a barrier, and a right of return to the donor or a right of release of the donor from an obligation. It is not recognized as revenue until the conditions are substantially met.

• Depends on future event/action or overcoming a barrier.
• Includes a right of return or release.
• Initially recorded as a refundable advance (liability).
• Recognized as revenue when conditions are met.

Memory trick: Conditions mean caution; revenue waits for fulfillment.

When a foreign subsidiary operates in a highly inflationary economy, its financial statements must be remeasured into the parent's currency (U.S. dollar) using the temporal method.

• Highly inflationary: cumulative inflation >= 100% over 3 years.
• Functional currency is deemed to be the parent's currency (USD).
• Uses the temporal method (remeasurement).
• Remeasurement gains/losses are recognized in net income.

Memory trick: Inflation's too high, temporal's the way, otherwise current rates save the day.

A contribution where the donor specifies a particular use for the funds or assets, limiting the NFP's discretion over how they are spent. These are classified as net assets with donor restrictions.

• Donor specifies how funds must be used.
• Limits NFP's flexibility in spending.
• Classified as net assets with donor restrictions.
• Released when the specified purpose is fulfilled.

Memory trick: Purposeful funds mean temporary bounds.

The amount of income tax payable to the government for the current period, based on taxable income.

• Calculated using taxable income, not pretax financial income.
• Affected by permanent differences between financial and tax accounting.
• Does not include deferred tax effects.

Memory trick: Current Tax: What the IRS Sees, Not Just the Books.

An accounting election that allows companies to report certain financial assets and liabilities at fair value, with changes in fair value recognized in earnings.

• Election is irrevocable for the specified item.
• Changes in fair value are recognized in net income.
• Simplifies accounting by eliminating complex hedge accounting or impairment rules.

Memory trick: Fair Value Option: All Roads Lead to Income.

A conditional contribution to an NFP depends on the occurrence of a specified future event (a barrier) and a right of return or release from obligation. Such contributions are not recognized as revenue or receivables until the conditions are substantially met.

• Recognition depends on specific conditions (barriers)
• Includes a right of return or release from obligation
• No revenue/receivable until conditions are met

Memory trick: NFP's gifts are either unconditional (now) or conditional (later).

Investment Trust Funds account for the external portion of an investment pool. Changes in the fair value of investments (both realized and unrealized gains/losses) are reported as 'Additions' or 'Deductions' (as investment earnings/losses) in the Statement of Changes in Fiduciary Net Position.

• Accounts for external investment pools
• Fair value changes are reported
• Reported as 'Additions' (gains) or 'Deductions' (losses)

Memory trick: Fiduciary funds manage assets for others, showing changes in net position.

A legal obligation associated with the retirement of a tangible long-lived asset, recognized as a liability at fair value in the period in which it is incurred.

• Recognized when incurred, not when settled.
• Initial measurement at fair value (present value of estimated future costs).
• Corresponding increase in the carrying amount of the related asset.
• The liability is subsequently increased for accretion expense, and the asset is depreciated.

Memory trick: Decommissioning duties, discounted present value, asset's future beauty.

When donor-restricted contributions of supplies are received and consumed in the same reporting period, an NFP can elect a policy to either report the contribution initially as 'with donor restrictions' and then release the restriction, or directly report it as 'without donor restrictions' if the restriction is met immediately.

• Donor-restricted supplies for immediate use.
• Consumed in the same reporting period.
• NFP can elect a policy for recognition.
• Option 1: Record as restricted, then release.

Memory trick: Supplies used fast, restriction passed, report it transparent.

A change in accounting estimate is an adjustment to the carrying amount of an asset or liability, or to the amount of the periodic consumption of an asset, resulting from the reassessment of the expected future benefits and obligations associated with assets and liabilities.

• Accounted for prospectively (in current and future periods).
• Does not require restatement of prior financial statements.
• Common examples include changes in useful lives, salvage values, or bad debt estimates.

Memory trick: Estimates are 'EASY' to change, just adjust 'EXPECTED' future periods.

Revenues, expenses, gains, and losses that are excluded from net income but are included in comprehensive income and accumulated in a separate component of equity.

• Includes unrealized gains/losses on AFS debt securities.
• Includes foreign currency translation adjustments.
• Includes certain pension adjustments (prior service costs, actuarial gains/losses).
• Includes effective portion of cash flow hedges.

Memory trick: OCI: P.U.F.E.R. - Pension, Unrealized, Foreign, Effective.

A method of preparing the statement of cash flows that begins with net income and adjusts it for non-cash items and changes in working capital accounts to arrive at net cash flow from operating activities.

• Starts with net income.
• Adds back non-cash expenses (e.g., depreciation, amortization).
• Subtracts non-cash gains and adds non-cash losses (e.g., gain/loss on sale of assets).
• Adjusts for changes in current assets and liabilities (working capital accounts).

Memory trick: Net income's journey to cash, adjust for non-cash and working capital changes fast.

Net assets whose use is limited by donor-imposed stipulations that either expire with the passage of time or can be satisfied by the actions of the organization.

• Result from donor-imposed purpose or time restrictions.
• Released when restrictions are met or expire.
• Reported separately from net assets without donor restrictions.
• Can be temporary or permanently restricted.

Memory trick: NFP net assets: free, fleeting, forever.

Gains or losses arising from changes in exchange rates between the transaction date and the settlement date for transactions denominated in a foreign currency.

• Recognized in net income in the period the exchange rate changes.
• Monetary assets and liabilities denominated in foreign currency are revalued at each balance sheet date.
• Non-monetary assets and liabilities are generally not revalued after initial recognition.

Memory trick: Fluctuating Euros mean gains or losses for your books.

In governmental funds, proceeds from the issuance of general long-term debt, such as bonds, are recorded as 'Other Financing Sources' rather than liabilities, reflecting the modified accrual basis of accounting.

• Recorded as 'Other Financing Sources'
• Typically in Capital Projects Fund
• Reflects modified accrual accounting

Memory trick: Modified accrual means bond proceeds are 'Other Financing' for big projects.

Legal fees and other costs incurred to successfully defend an intangible asset (e.g., patent, trademark) are capitalized and amortized over the asset's remaining useful life.

• Only *successfully* defended costs are capitalized; unsuccessful defense costs are expensed.
• These costs extend or preserve the economic benefits of the existing intangible asset.
• Amortization period is the shorter of the remaining useful life or remaining legal life of the asset.

Memory trick: Defend Success, Capitalize Progress, Amortize Life.

An unconditional promise to give (pledge) is recognized as contribution revenue in the period the promise is made. If the pledge is due in a future period, it is considered time-restricted and recorded at its present value.

• Recognized as revenue when made if unconditional.
• Pledges due in future periods are time-restricted.
• Recorded at present value for future pledges.
• Discount is amortized over the collection period.

Memory trick: Pledge now, discount future, restrict by time.

Not-for-profit organizations must classify expenses by their functional purpose, primarily into program services and supporting services (management and general, fundraising).

• Program services relate to the NFP's mission.
• Supporting services facilitate the NFP's operations.
• Management and general are for overall administration.
• Fundraising is for soliciting contributions.

Memory trick: Program costs are direct mission, supporting costs are indirect assist.

The rules for recognizing research and development expenditures, generally requiring most to be expensed as incurred.

• Most R&D costs are expensed as incurred.
• Costs to obtain patents are capitalized.
• Costs of materials, equipment, and facilities that have alternative future uses are capitalized.

Memory trick: R&D: Expensed Except for Future Use or Patent Proof.

The estimated amount of cash a company expects to collect from its accounts receivable, after factoring in uncollectible accounts and sales discounts.

• Accounts Receivable is presented at NRV on the balance sheet.
• Requires estimating uncollectible accounts (bad debt) and sales discounts.
• Allowance for Doubtful Accounts and Allowance for Sales Discounts reduce gross receivables to NRV.

Memory trick: NRV: Gross Minus Bad Debt Minus Discounts.

Rules for classifying a short-term obligation as noncurrent if the company intends to refinance it and demonstrates the ability to do so on a long-term basis.

• Requires both intent and ability to refinance.
• Ability is demonstrated by actual refinancing or a noncancelable refinancing agreement.
• This must occur between the balance sheet date and the date financial statements are issued.

Memory trick: Refinance: Intent and Ability Before Issuance.