FAR
Financial Accounting and Reporting section of the CPA Exam.
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CPA Exam - FAR (Financial Accounting and Reporting) — key terms, tricks & tips
Everything from the course in one searchable place: 255 entries. Use it to review before a practice test or look up a word you forgot.
255 results
GAAP
Generally Accepted Accounting Principles, the standard framework.
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AICPA
American Institute of Certified Public Accountants.
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NASBA
National Association of State Boards of Accountancy.
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MCQ
Multiple-Choice Question, a type of exam question.
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TBS
Task-Based Simulation, a type of exam question.
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Scaled Score
A score adjusted for question difficulty, not raw percentage.
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18-Month Window
Timeframe to pass all 4 CPA Exam sections.
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CPA Exam Structure & FAR Section Overview
To remember the Core sections: F-A-R, A-U-D, R-E-G. Think 'FAR AUD REG' – like you're far away, listening to an audio recording, and then registering it.
Getting Started: How the Exam Works
CPA Exam Structure & FAR Section Overview
The California Board of Accountancy (CBA) requires candidates to pass all four sections of the CPA Exam within an 18-month rolling period, starting from the date the first section is passed. This rule is consistent across most jurisdictions, so '18-month rolling window' is a key phrase to remember.
Getting Started: How the Exam Works
CPA Exam Structure & FAR Section Overview
Underestimating the breadth and depth of the FAR section's content.
Getting Started: How the Exam Works
CPA Exam Structure & FAR Section Overview
Not understanding the 18-month rolling window rule and letting sections expire.
Getting Started: How the Exam Works
CPA Exam Structure & FAR Section Overview
Failing to practice enough Task-Based Simulations (TBSs), which are critical for FAR.
Getting Started: How the Exam Works
Active Learning
Engaging with material through practice, summarizing, or teaching.
Getting Started: How the Exam Works
Passive Learning
Absorbing information without direct engagement, e.g., re-reading.
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AICPA Blueprints
Official outlines detailing CPA Exam content, skill levels, and tasks.
Getting Started: How the Exam Works
Task-Based Simulations (TBSs)
Complex, real-world scenarios requiring multiple steps to solve.
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Spaced Repetition
Reviewing material at increasing intervals to improve retention.
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Metacognition
Awareness and understanding of one's own thought processes.
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Effective CPA Exam Study Strategies
To 'ACE' the CPA Exam, remember: A - Active Learning, C - Consistent Practice, E - Effective Review!
Getting Started: How the Exam Works
Effective CPA Exam Study Strategies
The CPA Exam Blueprints are updated periodically. Always consult the most current version available on the AICPA website to ensure your study plan aligns with the latest exam specifications. Pay close attention to 'Skill Levels' (e.g., Remembering & Understanding, Application, Analysis, Evaluation) as they dictate the depth of knowledge required.
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Effective CPA Exam Study Strategies
Only reviewing correct answers without understanding why incorrect options are wrong.
Getting Started: How the Exam Works
Effective CPA Exam Study Strategies
Studying for long, unbroken periods without breaks, leading to burnout and reduced retention.
Getting Started: How the Exam Works
Effective CPA Exam Study Strategies
Neglecting Task-Based Simulations (TBSs) until the last minute, underestimating their complexity and time commitment.
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Conceptual Framework
FASB's guide for setting standards and interpreting financial reporting.
Financial Reporting Fundamentals
Relevance
Information capable of making a difference in user decisions.
Financial Reporting Fundamentals
Faithful Representation
Information that is complete, neutral, and free from error.
Financial Reporting Fundamentals
Accrual Basis Accounting
Recognizes revenues when earned and expenses when incurred.
Financial Reporting Fundamentals
Cash Basis Accounting
Recognizes revenues when cash is received and expenses when paid.
Financial Reporting Fundamentals
Materiality
The magnitude of an omission or misstatement that influences decisions.
Financial Reporting Fundamentals
Conceptual Framework, Standards & Financial Statements
To remember the Fundamental Characteristics: 'Really Faithful' (Relevance, Faithful Representation). For Enhancing: 'Compare Very Timely Understanding' (Comparability, Verifiability, Timeliness, Understandability).
Financial Reporting Fundamentals
Conceptual Framework, Standards & Financial Statements
The CPA Exam often tests the hierarchy and components of the Conceptual Framework. Memorize the fundamental and enhancing qualitative characteristics and their definitions. Also, be prepared to distinguish between accrual and cash basis accounting and identify which financial statements are prepared under GAAP.
Financial Reporting Fundamentals
Conceptual Framework, Standards & Financial Statements
Confusing the Conceptual Framework as a GAAP standard itself; it's a guide, not a rule.
Financial Reporting Fundamentals
Conceptual Framework, Standards & Financial Statements
Mixing up the definitions of relevance and faithful representation, or their components.
Financial Reporting Fundamentals
Conceptual Framework, Standards & Financial Statements
Incorrectly applying cash basis accounting principles when accrual basis is required for GAAP financial statements.
Financial Reporting Fundamentals
Revenue Recognition
Depicting transfer of goods/services for expected consideration.
Financial Reporting Fundamentals
Performance Obligation
Promise to transfer distinct goods/services to a customer.
Financial Reporting Fundamentals
Matching Principle
Expenses recognized when incurred to generate revenue.
Financial Reporting Fundamentals
Cash Equivalents
Short-term, highly liquid investments (maturity <= 3 months).
Financial Reporting Fundamentals
Accounts Receivable
Amounts owed by customers for goods/services on credit.
Financial Reporting Fundamentals
Allowance Method
Estimates uncollectible accounts, matching bad debt expense.
Financial Reporting Fundamentals
Revenue, Expense Recognition & Cash/Receivables
For the five revenue steps, remember 'I Can't Determine A Right Answer': Identify contract, Identify obligations, Determine price, Allocate price, Recognize revenue.
Financial Reporting Fundamentals
Revenue, Expense Recognition & Cash/Receivables
Memorize the five steps of the revenue recognition model in order. The exam frequently tests your ability to apply these steps to complex contracts, especially identifying distinct performance obligations and allocating transaction price.
Financial Reporting Fundamentals
Revenue, Expense Recognition & Cash/Receivables
Recognizing revenue based solely on cash receipt rather than satisfaction of performance obligations.
Financial Reporting Fundamentals
Revenue, Expense Recognition & Cash/Receivables
Failing to estimate and record bad debt expense, overstating net receivables and income.
Financial Reporting Fundamentals
Revenue, Expense Recognition & Cash/Receivables
Incorrectly classifying restricted cash or short-term investments as unrestricted cash or cash equivalents.
Financial Reporting Fundamentals
FIFO
First-In, First-Out inventory costing method.
Financial Reporting Fundamentals
LIFO
Last-In, First-Out inventory costing method (GAAP only).
Financial Reporting Fundamentals
PPE
Property, Plant, and Equipment; long-term tangible assets.
Financial Reporting Fundamentals
Depreciation
Allocating PPE cost over its useful life.
Financial Reporting Fundamentals
Goodwill
Intangible asset from business combination excess.
Financial Reporting Fundamentals
Acquisition Method
Accounting for business combinations at fair value.
Financial Reporting Fundamentals
Equity Method
Accounting for significant influence investments.
Financial Reporting Fundamentals
Consolidation
Combining financial statements for control (>50%).
Financial Reporting Fundamentals
Inventory, PPE, Investments & Business Combinations
To remember the order of investment methods by influence: 'No Significant Control' (No influence, Significant influence, Control).
Financial Reporting Fundamentals
Inventory, PPE, Investments & Business Combinations
For inventory, remember that IFRS prohibits LIFO. For PPE, be ready to calculate depreciation using straight-line, units-of-production, and double-declining balance. For investments, the percentage of ownership (or level of influence) is key to determining the correct accounting method.
Financial Reporting Fundamentals
Inventory, PPE, Investments & Business Combinations
Confusing the impact of FIFO vs. LIFO on net income during periods of rising vs. falling costs.
Financial Reporting Fundamentals
Inventory, PPE, Investments & Business Combinations
Forgetting to include all necessary costs in the initial capitalization of PPE.
Financial Reporting Fundamentals
Inventory, PPE, Investments & Business Combinations
Incorrectly applying the accounting method for investments based on the level of ownership/influence.
Financial Reporting Fundamentals
Intangible Assets
Non-physical assets with long-term value, e.g., patents.
Financial Reporting Fundamentals
ASC 842
GAAP standard for lease accounting, requiring ROU assets.
Financial Reporting Fundamentals
Right-of-Use (ROU) Asset
Lessee's right to use an asset over a lease term.
Financial Reporting Fundamentals
Lease Liability
Lessee's obligation to make lease payments.
Financial Reporting Fundamentals
Contingent Liability
Potential obligation dependent on future events.
Financial Reporting Fundamentals
Retained Earnings
Accumulated net income less dividends, part of equity.
Financial Reporting Fundamentals
Treasury Stock
Company's own repurchased shares, reduces equity.
Financial Reporting Fundamentals
Intangibles, Leases, Liabilities & Equity
For Lease Accounting (ASC 842), remember 'ROU-L': Right-Of-Use asset and Lease Liability are now on the balance sheet for most leases!
Financial Reporting Fundamentals
Intangibles, Leases, Liabilities & Equity
For the CPA exam, pay close attention to the specific criteria for capitalizing internally developed software costs versus expensing R&D. Also, memorize the lease classification tests for lessors under ASC 842, as these are frequently tested.
Financial Reporting Fundamentals
Intangibles, Leases, Liabilities & Equity
Misclassifying an operating lease as a finance lease (or vice versa) for lessors, leading to incorrect revenue recognition.
Financial Reporting Fundamentals
Intangibles, Leases, Liabilities & Equity
Failing to recognize a Right-of-Use asset and lease liability for a non-short-term operating lease as a lessee.
Financial Reporting Fundamentals
Intangibles, Leases, Liabilities & Equity
Expensing all software development costs without considering capitalization criteria after technological feasibility is achieved.
Financial Reporting Fundamentals
Derivative
Financial instrument whose value is derived from an underlying asset.
Advanced Financial Reporting Topics
Hedging
Using derivatives to mitigate financial risks, like interest rate or currency changes.
Advanced Financial Reporting Topics
Functional Currency
The currency of the primary economic environment in which an entity operates.
Advanced Financial Reporting Topics
Remeasurement Method
Translates foreign currency to reporting currency; gains/losses to net income.
Advanced Financial Reporting Topics
Translation Method
Translates foreign currency to reporting currency; adjustments to OCI.
Advanced Financial Reporting Topics
Operating Activities
Cash flows from primary revenue-generating activities.
Advanced Financial Reporting Topics
Investing Activities
Cash flows from acquiring and disposing of long-term assets.
Advanced Financial Reporting Topics
Financing Activities
Cash flows from debt and equity transactions.
Advanced Financial Reporting Topics
Derivatives, Foreign Currency & Cash Flows
For Foreign Currency: 'Remeasure to Report, Income's the Port; Translate to Local, OCI's the Goal!' (Remeasurement when functional currency is Reporting, gains/losses to Income; Translation when functional currency is Local, adjustments to OCI).
Advanced Financial Reporting Topics
Derivatives, Foreign Currency & Cash Flows
Memorize that the direct method for the Statement of Cash Flows is preferred by FASB, but the indirect method is more commonly used in practice. Both methods yield the same net cash flow from operating activities.
Advanced Financial Reporting Topics
Derivatives, Foreign Currency & Cash Flows
Confusing the accounting for fair value hedges with cash flow hedges, especially where gains/losses are recognized.
Advanced Financial Reporting Topics
Derivatives, Foreign Currency & Cash Flows
Incorrectly classifying cash flow activities (e.g., classifying interest paid as financing instead of operating).
Advanced Financial Reporting Topics
Derivatives, Foreign Currency & Cash Flows
Forgetting that non-cash investing and financing activities must be disclosed, even though they don't appear in the main cash flow statement.
Advanced Financial Reporting Topics
Basic EPS
Net income available to common shareholders divided by weighted-average common shares.
Advanced Financial Reporting Topics
Diluted EPS
Basic EPS adjusted for the impact of all potentially dilutive securities.
Advanced Financial Reporting Topics
Retrospective Application
Restating prior period financial statements as if a new principle was always used.
Advanced Financial Reporting Topics
Prospective Application
Applying a change to current and future periods only, no prior restatement.
Advanced Financial Reporting Topics
R&D Costs
Expenditures for discovering new knowledge or products, generally expensed as incurred.
Advanced Financial Reporting Topics
Stock-Based Compensation
Payments to employees in company equity, expensed at fair value over vesting period.
Advanced Financial Reporting Topics
Vesting Period
The period over which an employee must render service to earn the right to stock compensation.
Advanced Financial Reporting Topics
Technological Feasibility
Point at which software development costs begin to be capitalized.
Advanced Financial Reporting Topics
EPS, Accounting Changes, R&D & Stock Compensation
For Accounting Changes, think 'P-E-R': Principle = Retrospective, Estimate = Prospective, Error = Retrospective (Prior Period Adjustment).
Advanced Financial Reporting Topics
EPS, Accounting Changes, R&D & Stock Compensation
For the CPA Exam, remember that U.S. GAAP generally requires R&D costs to be expensed as incurred, with very limited exceptions. This is a common point of confusion, so watch for scenarios that try to trick you into capitalizing R&D.
Advanced Financial Reporting Topics
EPS, Accounting Changes, R&D & Stock Compensation
Confusing basic and diluted EPS calculations, especially regarding anti-dilutive securities.
Advanced Financial Reporting Topics
EPS, Accounting Changes, R&D & Stock Compensation
Incorrectly applying retrospective vs. prospective treatment for accounting changes.
Advanced Financial Reporting Topics
EPS, Accounting Changes, R&D & Stock Compensation
Capitalizing R&D costs that should be expensed, or vice versa, especially for software development.
Advanced Financial Reporting Topics
Temporary Difference
Difference in timing of revenue/expense recognition between GAAP and tax.
Advanced Financial Reporting Topics
Permanent Difference
Items recognized for GAAP or tax, but never for both.
Advanced Financial Reporting Topics
Deferred Tax Asset (DTA)
Future tax savings due to temporary differences; often from expenses recognized earlier for tax.
Advanced Financial Reporting Topics
Deferred Tax Liability (DTL)
Future tax payments due to temporary differences; often from expenses recognized later for tax.
Advanced Financial Reporting Topics
Discontinued Operations
A component of an entity disposed of or held for sale, representing a strategic shift.
Advanced Financial Reporting Topics
Comprehensive Income
Net income plus other comprehensive income (OCI).
Advanced Financial Reporting Topics
Other Comprehensive Income (OCI)
Gains/losses excluded from net income but included in comprehensive income.
Advanced Financial Reporting Topics
Income Taxes, Discontinued Ops & Comprehensive Income
Think 'PUFER' for the main OCI items: Pension adjustments, Unrealized gains/losses (AFS), Foreign currency adjustments, Effective portion of cash flow hedges, Revaluation surplus (IFRS only, but good to know for context).
Advanced Financial Reporting Topics
Income Taxes, Discontinued Ops & Comprehensive Income
Memorize the specific items that constitute Other Comprehensive Income (OCI) under GAAP, as the exam frequently tests the classification of these items. Keywords to spot include 'unrealized gain/loss on available-for-sale securities' and 'foreign currency translation adjustment'.
Advanced Financial Reporting Topics
Income Taxes, Discontinued Ops & Comprehensive Income
Confusing temporary differences with permanent differences; only temporary differences create deferred taxes.
Advanced Financial Reporting Topics
Income Taxes, Discontinued Ops & Comprehensive Income
Failing to report discontinued operations net of tax and separately on the income statement.
Advanced Financial Reporting Topics
Income Taxes, Discontinued Ops & Comprehensive Income
Omitting OCI items when calculating comprehensive income, or incorrectly including them in net income.
Advanced Financial Reporting Topics
Fair Value
Price to sell asset or transfer liability in orderly transaction.
Advanced Financial Reporting Topics
SEC
Securities and Exchange Commission; regulates public companies.
Advanced Financial Reporting Topics
Form 10-K
Annual report filed by public companies with SEC.
Advanced Financial Reporting Topics
Level 1 Inputs
Quoted prices for identical assets in active markets.
Advanced Financial Reporting Topics
Level 3 Inputs
Unobservable inputs for an asset or liability.
Advanced Financial Reporting Topics
Market Approach
Valuation using prices from comparable market transactions.
Advanced Financial Reporting Topics
Income Approach
Valuation converting future amounts to a single present value.
Advanced Financial Reporting Topics
Public Company Reporting & Fair Value Measurements
Remember 'LAM': Level 1 = Active Markets, Level 2 = Adjusted Markets, Level 3 = Management Estimates. It helps recall the hierarchy's reliability!
Advanced Financial Reporting Topics
Public Company Reporting & Fair Value Measurements
The CPA Exam often tests the specific reporting deadlines for public companies (e.g., 10-K for large accelerated filers within 60 days of year-end). Memorize these specific timeframes for various filer statuses.
Advanced Financial Reporting Topics
Public Company Reporting & Fair Value Measurements
Confusing fair value with historical cost or entity-specific value.
Advanced Financial Reporting Topics
Public Company Reporting & Fair Value Measurements
Misclassifying inputs into the wrong fair value hierarchy level.
Advanced Financial Reporting Topics
Public Company Reporting & Fair Value Measurements
Forgetting the specific reporting requirements and deadlines for public companies.
Advanced Financial Reporting Topics
Governmental Accounting
Accounting for public entities, focusing on accountability.
Governmental Accounting Foundations
GASB
Governmental Accounting Standards Board, sets GAAP for governments.
Governmental Accounting Foundations
Fund Accounting
Segregating resources for specific purposes.
Governmental Accounting Foundations
Governmental Funds
Account for basic government services, focus on current resources.
Governmental Accounting Foundations
Modified Accrual Basis
Revenues measurable and available; expenditures when incurred.
Governmental Accounting Foundations
Special Revenue Fund
Accounts for specific revenue sources, restricted use.
Governmental Accounting Foundations
Capital Projects Fund
Accounts for major capital asset acquisitions.
Governmental Accounting Foundations
Debt Service Fund
Accounts for repayment of general long-term debt.
Governmental Accounting Foundations
Governmental Concepts, Standards & Fund Accounting
GASB: G-overnment A-ccounting S-tandards B-oard. Think 'Government Always Sets Boundaries' for fund accounting.
Governmental Accounting Foundations
Governmental Concepts, Standards & Fund Accounting
For the CPA Exam, remember that GASB is for state and local governments, FASB for private entities. Keywords like 'accountability,' 'stewardship,' and 'legal compliance' signal governmental accounting principles.
Governmental Accounting Foundations
Governmental Concepts, Standards & Fund Accounting
Confusing GASB with FASB: They govern different types of entities and have distinct conceptual frameworks.
Governmental Accounting Foundations
Governmental Concepts, Standards & Fund Accounting
Applying full accrual accounting to Governmental Funds: Remember, Governmental Funds use the modified accrual basis.
Governmental Accounting Foundations
Governmental Concepts, Standards & Fund Accounting
Not understanding the 'availability' criterion for revenue recognition in modified accrual: It's not just measurable, but also available to finance current period expenditures.
Governmental Accounting Foundations
Proprietary Funds
Funds accounting for business-type activities using full accrual.
Governmental Accounting Foundations
Enterprise Funds
Proprietary funds for public-facing, self-supporting services.
Governmental Accounting Foundations
Internal Service Funds
Proprietary funds for services provided to other government departments.
Governmental Accounting Foundations
Full Accrual Basis
Recognizes revenues when earned, expenses when incurred.
Governmental Accounting Foundations
Economic Resources Focus
Measures all assets and liabilities, both current and noncurrent.
Governmental Accounting Foundations
Statement of Net Position
Proprietary fund balance sheet, showing assets, liabilities, net position.
Governmental Accounting Foundations
Statement of Revenues, Expenses, and Changes in Fund Net Position
Proprietary fund income statement.
Governmental Accounting Foundations
Governmental Financial Statements & Proprietary Funds
P.F.A.S.T.: **P**roprietary **F**unds **A**lways **S**how **T**he (full) accrual basis, like a business!
Governmental Accounting Foundations
Governmental Financial Statements & Proprietary Funds
The FAR exam often tests the distinction between proprietary funds (full accrual) and governmental funds (modified accrual). Pay close attention to keywords like 'user charges,' 'self-supporting,' or 'internal services' to identify proprietary fund scenarios.
Governmental Accounting Foundations
Governmental Financial Statements & Proprietary Funds
Confusing the full accrual basis of proprietary funds with the modified accrual basis of governmental funds.
Governmental Accounting Foundations
Governmental Financial Statements & Proprietary Funds
Incorrectly classifying an activity as an Enterprise Fund when it should be an Internal Service Fund, or vice-versa.
Governmental Accounting Foundations
Governmental Financial Statements & Proprietary Funds
Forgetting that proprietary funds report depreciation expense, unlike governmental funds.
Governmental Accounting Foundations
Fiduciary Funds
Funds holding resources in a trustee or agency capacity for others.
Governmental Accounting Foundations
Interfund Loans
Temporary advances between funds, expected to be repaid.
Governmental Accounting Foundations
Interfund Transfers
Nonreciprocal flows of assets between funds, no repayment expected.
Governmental Accounting Foundations
Budgetary Control
Legal authority to limit expenditures to appropriated amounts.
Governmental Accounting Foundations
Pension Trust Fund
Fiduciary fund for employee retirement and other benefits.
Governmental Accounting Foundations
Custodial Fund
Fiduciary fund for assets held temporarily for others.
Governmental Accounting Foundations
Program Budgeting
Budgeting focused on specific programs or services provided.
Governmental Accounting Foundations
Other Financing Sources/Uses
Reporting category for interfund transfers in governmental funds.
Governmental Accounting Foundations
Fiduciary Funds, Interfund Transactions & Budgeting
Fiduciary Funds: P-I-P-C. 'P'eople 'I'nvest 'P'ensions 'C'arefully. Remember these four types!
Governmental Accounting Foundations
Fiduciary Funds, Interfund Transactions & Budgeting
Memorize the four types of fiduciary funds: Pension (and other employee benefit) trust funds, Investment trust funds, Private-purpose trust funds, and Custodial funds. The exam often tests your ability to identify which fund type is appropriate for a given scenario.
Governmental Accounting Foundations
Fiduciary Funds, Interfund Transactions & Budgeting
Confusing interfund loans (repayable) with interfund transfers (non-repayable). Loans create receivables/payables, transfers create 'Other Financing Sources/Uses'.
Governmental Accounting Foundations
Fiduciary Funds, Interfund Transactions & Budgeting
Including fiduciary fund assets in government-wide financial statements. Fiduciary assets belong to external parties and are excluded.
Governmental Accounting Foundations
Fiduciary Funds, Interfund Transactions & Budgeting
Forgetting that governmental budgets often have legal force, making them more than just financial plans.
Governmental Accounting Foundations
Modified Accrual
Revenues measurable & available; expenditures when incurred.
Governmental Accounting Foundations
Full Accrual
Revenues when earned; expenses when incurred.
Governmental Accounting Foundations
Government-Wide Statements
Entity-wide view; full accrual; economic resources.
Governmental Accounting Foundations
Economic Resources Measurement Focus
Long-term view of assets, liabilities, and equity.
Governmental Accounting Foundations
Current Financial Resources Measurement Focus
Focus on cash and near-cash resources available.
Governmental Accounting Foundations
Modified vs. Full Accrual & Gov't-Wide Statements
MAGEC: Modified Accrual for Governmental Funds. Full Accrual for Everything Else (Proprietary, Fiduciary, Government-Wide).
Governmental Accounting Foundations
Modified vs. Full Accrual & Gov't-Wide Statements
Memorize that governmental funds use modified accrual and a current financial resources measurement focus, while proprietary funds, fiduciary funds, and government-wide statements use full accrual and an economic resources measurement focus. This is a frequently tested concept.
Governmental Accounting Foundations
Modified vs. Full Accrual & Gov't-Wide Statements
Confusing 'expenditures' with 'expenses' – expenditures are used in modified accrual, expenses in full accrual.
Governmental Accounting Foundations
Modified vs. Full Accrual & Gov't-Wide Statements
Applying full accrual concepts (like depreciation or long-term debt) directly to governmental fund financial statements.
Governmental Accounting Foundations
Modified vs. Full Accrual & Gov't-Wide Statements
Forgetting that government-wide statements are a consolidation and conversion of all governmental and business-type activities using full accrual.
Governmental Accounting Foundations
FASB ASC 958
Primary authoritative guidance for Not-for-Profit organizations.
Not-for-Profit Accounting Essentials
Statement of Financial Position
NFP equivalent of a balance sheet; shows assets, liabilities, net assets.
Not-for-Profit Accounting Essentials
Statement of Activities
NFP equivalent of an income statement; shows changes in net assets.
Not-for-Profit Accounting Essentials
Net Assets
The NFP equivalent of equity; classified as with or without donor restrictions.
Not-for-Profit Accounting Essentials
Net Assets Without Donor Restrictions
Funds available for any purpose consistent with the NFP's mission.
Not-for-Profit Accounting Essentials
Net Assets With Donor Restrictions
Funds subject to donor-imposed stipulations on their use or time.
Not-for-Profit Accounting Essentials
NFP Concepts, Standards & Financial Statements
NFP's 3 Statements: 'SPA' - Statement of Financial Position, Statement of Activities, Statement of Cash Flows. Think of a relaxing spa for your NFP's financial health!
Not-for-Profit Accounting Essentials
NFP Concepts, Standards & Financial Statements
The FAR exam often tests the fundamental difference between donor-imposed restrictions and board-designated funds. Remember: only donor-imposed restrictions create 'Net Assets With Donor Restrictions.' Board designations are internal and do not change the net asset classification.
Not-for-Profit Accounting Essentials
NFP Concepts, Standards & Financial Statements
Confusing board-designated funds with donor-restricted funds. Only donor restrictions create 'Net Assets With Donor Restrictions.'
Not-for-Profit Accounting Essentials
NFP Concepts, Standards & Financial Statements
Applying governmental accounting standards (GASB) to NFPs instead of FASB ASC 958.
Not-for-Profit Accounting Essentials
NFP Concepts, Standards & Financial Statements
Forgetting that NFPs still use accrual basis accounting, not cash basis, for their financial statements.
Not-for-Profit Accounting Essentials
Unrestricted Net Assets
NFP assets usable for any purpose, no donor limits.
Not-for-Profit Accounting Essentials
Restricted Net Assets
NFP assets with donor-imposed purpose or time limits.
Not-for-Profit Accounting Essentials
Release from Restriction
Reclassification of restricted net assets to unrestricted as conditions met.
Not-for-Profit Accounting Essentials
Program Services
Expenses directly related to an NFP's mission and service delivery.
Not-for-Profit Accounting Essentials
Supporting Activities
Expenses not directly program-related, like management and fundraising.
Not-for-Profit Accounting Essentials
Functional Expenses
Classification of expenses by their purpose (program or support).
Not-for-Profit Accounting Essentials
NFP Contributions & Functional Expenses
F.A.R.M. for Functional Allocation Rules: F - Fundraising, A - Administrative, R - Research (Program), M - Mission (Program).
Not-for-Profit Accounting Essentials
NFP Contributions & Functional Expenses
Memorize the two criteria for recognizing donated services: 1) create or enhance nonfinancial assets OR 2) require specialized skills, provided by skilled individuals, and would typically be purchased. This is a frequently tested concept.
Not-for-Profit Accounting Essentials
NFP Contributions & Functional Expenses
Failing to differentiate between donor-imposed restrictions and internal board designations. Only donor restrictions create 'Net Assets with Donor Restrictions.'
Not-for-Profit Accounting Essentials
NFP Contributions & Functional Expenses
Incorrectly recognizing all donated services. Only those meeting specific criteria (specialized skills or creating/enhancing assets) are recognized.
Not-for-Profit Accounting Essentials
NFP Contributions & Functional Expenses
Not properly allocating shared expenses (e.g., rent, utilities) between program and supporting activities, leading to misstated functional expenses.
Not-for-Profit Accounting Essentials
Statement of Functional Expenses
Details expenses by functional and natural classification.
Not-for-Profit Accounting Essentials
Functional Classification
Categorizing expenses by purpose: program, management, fundraising.
Not-for-Profit Accounting Essentials
Natural Classification
Categorizing expenses by economic nature: salaries, supplies, depreciation.
Not-for-Profit Accounting Essentials
Liquidity Disclosure
Information on financial assets available to meet short-term needs.
Not-for-Profit Accounting Essentials
Voluntary Health and Welfare Organizations (VHWOs)
NFPs providing health and welfare services, required to present SFE.
Not-for-Profit Accounting Essentials
NFP Specific Reporting & Disclosure Requirements
To remember the three functional expense categories: 'P-M-F' for 'Program, Management, Fundraising.' Think 'Please Make Funds' for the mission!
Not-for-Profit Accounting Essentials
NFP Specific Reporting & Disclosure Requirements
For the CPA Exam, remember that the Statement of Functional Expenses is REQUIRED for VHWOs and HIGHLY RECOMMENDED for all other NFPs. Pay close attention to the qualitative and quantitative aspects of the liquidity and availability disclosure.
Not-for-Profit Accounting Essentials
NFP Specific Reporting & Disclosure Requirements
Confusing functional and natural expense classifications.
Not-for-Profit Accounting Essentials
NFP Specific Reporting & Disclosure Requirements
Overlooking the requirement for liquidity and availability disclosures.
Not-for-Profit Accounting Essentials
NFP Specific Reporting & Disclosure Requirements
Not providing sufficient detail for net assets with donor restrictions.
Not-for-Profit Accounting Essentials
Program Service Revenue
Revenue from activities related to an NFP's mission.
Not-for-Profit Accounting Essentials
Exchange Transaction
NFP provides goods/services in return for payment.
Not-for-Profit Accounting Essentials
Endowment Fund
Donor-restricted funds where principal is maintained permanently.
Not-for-Profit Accounting Essentials
Underwater Endowment
Fair value of endowment is below original gift amount.
Not-for-Profit Accounting Essentials
Finance Lease
Lease that transfers control of an asset to the lessee.
Not-for-Profit Accounting Essentials
Internal Controls
Processes to safeguard assets and ensure reliable financial reporting.
Not-for-Profit Accounting Essentials
Common NFP Transactions & Accounting Challenges
For NFP revenue: 'E' for Exchange (ASC 606), 'C' for Contribution (ASC 958). E.C. - Easy Choice!
Not-for-Profit Accounting Essentials
Common NFP Transactions & Accounting Challenges
Memorize that NFP investments are generally reported at fair value. Also, understand that revenue from exchange transactions follows ASC 606, similar to for-profit entities, while contributions follow ASC 958-605.
Not-for-Profit Accounting Essentials
Common NFP Transactions & Accounting Challenges
Confusing program service revenue (exchange transactions) with contributions. Remember, one is reciprocal, the other is nonreciprocal.
Not-for-Profit Accounting Essentials
Common NFP Transactions & Accounting Challenges
Incorrectly classifying investment returns for endowments, especially failing to distinguish between unrestricted and donor-restricted amounts.
Not-for-Profit Accounting Essentials
Common NFP Transactions & Accounting Challenges
Failing to recognize a lease liability and ROU asset for nearly all NFP leases under ASC 842, regardless of whether they are operating or finance leases.
Not-for-Profit Accounting Essentials
ASC 606
GAAP standard for revenue recognition from contracts with customers.
Key Transaction Cycles & Reporting
Transaction Price
Amount of consideration an entity expects to receive from a customer.
Key Transaction Cycles & Reporting
Standalone Selling Price
Price at which an entity would sell a good/service separately.
Key Transaction Cycles & Reporting
Control Transfer
Point at which customer obtains control of an asset or service.
Key Transaction Cycles & Reporting
Accrued Expense
Expense incurred but not yet paid or recorded; creates a liability.
Key Transaction Cycles & Reporting
Deferred Expense
Expense paid in advance but not yet incurred; creates an asset.
Key Transaction Cycles & Reporting
Revenue & Expense Recognition Deep Dive
For Revenue Recognition: 'CRISP' - Contract, Rights, Identify obligations, Standalone price, Performance satisfied.
Key Transaction Cycles & Reporting
Revenue & Expense Recognition Deep Dive
The CPA Exam will test your ability to apply the five-step model to complex scenarios, including variable consideration, principal vs. agent considerations, and contract modifications. Pay close attention to indicators of control transfer for point-in-time versus over-time recognition.
Key Transaction Cycles & Reporting
Revenue & Expense Recognition Deep Dive
Failing to identify all separate performance obligations in a contract.
Key Transaction Cycles & Reporting
Revenue & Expense Recognition Deep Dive
Incorrectly allocating the transaction price when standalone selling prices are not directly observable.
Key Transaction Cycles & Reporting
Revenue & Expense Recognition Deep Dive
Recognizing revenue before control of the good or service has been transferred to the customer.
Key Transaction Cycles & Reporting
Net Realizable Value
The amount a company expects to collect from receivables.
Key Transaction Cycles & Reporting
Cash, Receivables, Inventory & PPE Transactions
To remember the inventory costing methods, think 'FILO' for 'First-In, Last-Out' for FIFO, and 'LILO' for 'Last-In, Last-Out' for LIFO. It's a bit of a twist, but helps recall the 'in' and 'out' flow!
Key Transaction Cycles & Reporting
Cash, Receivables, Inventory & PPE Transactions
For PPE, remember that land is generally not depreciated. Also, for inventory, be mindful of the LIFO conformity rule if a company uses LIFO for tax purposes, it must also use it for financial reporting.
Key Transaction Cycles & Reporting
Cash, Receivables, Inventory & PPE Transactions
Confusing restricted cash with unrestricted cash on the balance sheet.
Key Transaction Cycles & Reporting
Cash, Receivables, Inventory & PPE Transactions
Forgetting to apply the lower of cost or net realizable value rule for inventory.
Key Transaction Cycles & Reporting
Cash, Receivables, Inventory & PPE Transactions
Incorrectly calculating gains or losses on PPE disposal by not removing accumulated depreciation.
Key Transaction Cycles & Reporting
Fair Value Option
Allows certain financial assets/liabilities to be reported at fair value.
Key Transaction Cycles & Reporting
Bargain Purchase
Acquisition where FV of net assets exceeds consideration transferred.
Key Transaction Cycles & Reporting
Amortization
Systematic allocation of the cost of an intangible asset over its useful life.
Key Transaction Cycles & Reporting
Impairment
Reduction in an asset's carrying value due to a decline in its fair value.
Key Transaction Cycles & Reporting
Other Comprehensive Income
Gains/losses not recognized in net income but included in comprehensive income.
Key Transaction Cycles & Reporting
Investments, Business Combos & Intangible Assets
I.B.I. = Investments, Business Combinations, Intangibles. Think 'I Buy It' to remember these complex topics involve acquiring assets.
Key Transaction Cycles & Reporting
Investments, Business Combos & Intangible Assets
For business combinations, remember that acquisition-related costs (e.g., legal, consulting) are expensed as incurred, not capitalized. This is a common trick on the exam to inflate goodwill or asset values.
Key Transaction Cycles & Reporting
Investments, Business Combos & Intangible Assets
Capitalizing acquisition-related costs in a business combination instead of expensing them.
Key Transaction Cycles & Reporting
Investments, Business Combos & Intangible Assets
Incorrectly classifying investments (e.g., treating AFS securities as Trading for unrealized gains/losses).
Key Transaction Cycles & Reporting
Investments, Business Combos & Intangible Assets
Amortizing goodwill or other indefinite-lived intangible assets instead of testing them for impairment.
Key Transaction Cycles & Reporting
Operating Lease
No ownership transfer; single, straight-line lease expense.
Key Transaction Cycles & Reporting
Accumulated OCI (AOCI)
Cumulative unrealized gains/losses not yet in net income.
Key Transaction Cycles & Reporting
Hedge Accounting
Matching gains/losses of hedging instrument and hedged item.
Key Transaction Cycles & Reporting
Leases, Liabilities, Equity & Derivatives/Hedging
For Finance Lease criteria, think 'OTIS': Ownership transfer, Option to purchase, Term (major part), present value Is substantial, Specialized asset.
Key Transaction Cycles & Reporting
Leases, Liabilities, Equity & Derivatives/Hedging
For leases, remember the five criteria for a finance lease: transfer of ownership, purchase option reasonably certain, lease term is major part of economic life, PV of payments covers substantially all fair value, or specialized asset. Meeting any one makes it a finance lease.
Key Transaction Cycles & Reporting
Leases, Liabilities, Equity & Derivatives/Hedging
Confusing the accounting for operating leases vs. finance leases, especially the income statement impact.
Key Transaction Cycles & Reporting
Leases, Liabilities, Equity & Derivatives/Hedging
Incorrectly applying the probability and estimability criteria for contingent liabilities.
Key Transaction Cycles & Reporting
Leases, Liabilities, Equity & Derivatives/Hedging
Forgetting that treasury stock reduces total shareholders' equity, not just outstanding shares.
Key Transaction Cycles & Reporting
Reporting Currency
The currency in which a parent company prepares its financial statements.
Key Transaction Cycles & Reporting
Direct Method
SCF method reporting major gross cash receipts and payments from operations.
Key Transaction Cycles & Reporting
Indirect Method
SCF method reconciling net income to net cash flow from operations.
Key Transaction Cycles & Reporting
Foreign Currency, Cash Flows, EPS & Accounting Changes
For Accounting Changes, remember 'P.E.R.': Principle = Retrospective; Estimate = Prospective; Error = Retrospective.
Key Transaction Cycles & Reporting
Foreign Currency, Cash Flows, EPS & Accounting Changes
The CPA Exam frequently tests the impact of foreign currency translation adjustments on Other Comprehensive Income (OCI) and Accumulated Other Comprehensive Income (AOCI). Remember that translation adjustments arise from the current rate method and flow through OCI to AOCI on the balance sheet.
Key Transaction Cycles & Reporting
Foreign Currency, Cash Flows, EPS & Accounting Changes
Confusing foreign currency transactions (gains/losses to net income) with foreign currency translation adjustments (gains/losses to OCI/AOCI under the current rate method).
Key Transaction Cycles & Reporting
Foreign Currency, Cash Flows, EPS & Accounting Changes
Forgetting to subtract preferred dividends when calculating the numerator for EPS.
Key Transaction Cycles & Reporting
Foreign Currency, Cash Flows, EPS & Accounting Changes
Incorrectly applying retrospective vs. prospective treatment for accounting changes and error corrections.
Key Transaction Cycles & Reporting