CPA FAR Quick Review
Use these examples as focused review. They assume the stated facts and simplified conditions. Read the applicable current U.S. GAAP guidance and official exam blueprint for the full requirements and exceptions.
Connect statements with a rollforward
A company begins the year with retained earnings of $82,000, earns $24,000 and declares $7,000 of dividends. Assuming no other retained-earnings adjustments, ending retained earnings is $99,000. Dividends reduce equity rather than net income. Write the rollforward before placing the amount on a statement, and keep accumulated other comprehensive income separate from retained earnings.
Reconcile profit and operating cash
Begin with net income of $46,000. Add $8,000 of depreciation, subtract a $5,000 increase in receivables and add a $2,000 increase in operating payables: operating cash flow is $51,000 under these simplified facts. Depreciation reduced profit without using current-period cash. Receivables rose because collections lagged the revenue recognized. Check the direction of each working-capital change rather than memorizing a list without its reason.
Separate conditions from donor restrictions
A donor gives $12,000 for next year's tutoring program with no condition. Recognize contribution revenue with donor restrictions when the unconditional contribution is recognized. If the agreement instead requires a substantive performance barrier and gives the donor a right of return, assess the condition before recognizing revenue. Cash received before satisfying such a condition is generally a refundable advance. Board-designated amounts remain without donor restrictions.
Keep the reporting level visible
A governmental fund acquires equipment for $18,000 using current financial resources. In the governmental-fund statements, the purchase generally is an expenditure. At the government-wide level, recognize a capital asset and depreciate it over its useful life under the applicable facts. The reconciliation bridges those reporting perspectives. Identify the financial statements requested before deciding whether a capital outlay is an expense, expenditure or asset.
Adjust to the required ending allowance
Gross receivables are $210,000 and the required ending allowance is $9,000. If the unadjusted allowance has a $2,000 credit balance, record $7,000 of additional credit-loss expense and allowance. Net receivables are $201,000. The target ending balance is not automatically the expense. If the unadjusted allowance is a debit, the needed adjustment increases accordingly.
Apply the correct inventory model
FIFO inventory costs $27,000 and has net realizable value of $24,500. Under lower of cost and net realizable value, report $24,500 and recognize a $2,500 write-down. Net realizable value is estimated selling price less reasonably predictable completion, disposal and transportation costs. For LIFO or the retail inventory method, use the applicable lower-of-cost-or-market guidance instead of applying this example mechanically.
Recalculate estimates prospectively
Equipment has a $38,000 carrying amount at the start of a year. Management revises the remaining useful life to four years and the residual value to $2,000. With straight-line depreciation, the new annual expense is ($38,000 - $2,000) / 4 = $9,000. The revision affects current and future periods. Recompute from the remaining carrying amount, not the original cost.
Match classification with measurement
An investment in trading debt securities rises from $15,000 to $16,400 at fair value. Assuming no other transactions, recognize a $1,400 unrealized gain in earnings. An available-for-sale debt security has different presentation rules for qualifying unrealized changes, while held-to-maturity debt uses amortized cost with applicable credit-loss guidance. State the category before choosing earnings, other comprehensive income or amortized cost.
Separate bond expense from cash
A bond has a $94,000 carrying amount, a 6% annual effective yield and a $5,000 annual coupon. For a full annual period under the effective-interest method, interest expense is $5,640 and discount amortization is $640. The carrying amount rises to $94,640 after the coupon payment. The contractual cash payment and expense answer different questions. Use the beginning carrying amount for the period's calculation.
Allocate by standalone selling prices
A contract promises two distinct goods with standalone selling prices of $300 and $200. Its $450 transaction price is allocated $270 and $180 using their 60% and 40% relative shares, assuming the general allocation rule applies. Recognize each allocated amount when control of that good transfers under the facts. A single cash collection does not make both obligations satisfied.
Accrue a supported estimate
Counsel concludes that a loss is probable and estimates a range of $20,000 to $32,000, with no amount a better estimate. Under the general U.S. GAAP contingency model, accrue $20,000 and consider disclosure of the remaining exposure. If one amount is a better estimate, use that estimate. Do not substitute an unsupported midpoint for the accounting rule.
Distinguish temporary and permanent differences
A deductible temporary difference of $14,000 reverses when the enacted tax rate is expected to be 25%. The initial deferred tax asset is $3,500, before considering a valuation allowance. A nondeductible fine is a permanent difference and creates no deferred tax asset. Assess realization evidence for deferred tax assets, and keep current tax payable separate from the deferred tax calculation.
Build the lease liability from unpaid payments
A simplified lease has three unpaid annual payments of $10,000 due at the end of each year and a 5% applicable discount rate. The initial liability is $10,000/1.05 + $10,000/1.1025 + $10,000/1.157625, approximately $27,232. The first year's interest is approximately $1,362, and the $10,000 payment reduces principal by approximately $8,638. An advance payment changes the schedule. The right-of-use asset also considers applicable prepayments, incentives and initial direct costs.
Use dates to separate errors and subsequent events
Inventory omitted from the prior year's closing count may require correction of a prior-period error. New information about a lawsuit that already existed at year-end may be a recognized subsequent event. A new uninsured fire after year-end generally is a nonrecognized subsequent event, with disclosure if material. Put the balance-sheet date, the event and the financial-statement issuance or availability date on a short timeline before choosing the treatment.