For the AICPA U.S. CPA FAR - Financial Accounting and Reporting exam, passive review is not enough. Use this page as a checklist, then move into independent companion practice:
Run topic drills by area: revenue, leases, bonds, tax, cash flows, NFP, and government.
After each missed question, label the failure type:
Recognition error.
Measurement error.
Presentation/classification error.
Journal entry error.
Basis-of-accounting error.
Calculation accuracy error.
Read detailed explanations fully, especially for answer choices you nearly selected.
Rework missed questions without looking at the explanation.
Mix topics only after individual weak areas improve.
Use mock exams to practice time pressure and switching between topics.
Noncumulative preferred stock: subtract only dividends declared.
Notes and examples
Diluted EPS
\[
\text{Diluted EPS} =
\frac{\text{Adjusted income available to common shareholders}}
{\text{Weighted-average common shares plus dilutive potential common shares}}
\]
Potential common share
Method
Include only if
Options and warrants
Treasury stock method
Exercise price below average market price and dilutive
Convertible debt
If-converted method
Reduces EPS
Convertible preferred stock
If-converted method
Reduces EPS
Contingently issuable shares
Include if conditions are met
Dilutive
Bond pricing and interest
\[
\text{Bond price} =
\text{PV of interest payments} + \text{PV of principal repayment}
\]\[
\text{Interest expense} =
\text{Carrying amount at beginning of period} \times \text{Market yield}
\]
Bond condition
Relationship
Amortization effect
Premium
Stated coupon rate greater than market rate
Carrying amount decreases toward face value
Discount
Stated coupon rate less than market rate
Carrying amount increases toward face value
Issued at par
Stated coupon rate equals market rate
Carrying amount equals face value
Depreciation
Method
Formula cue
Best exam use
Straight-line
Depreciable base divided by useful life
Even benefit pattern
Double-declining balance
Beginning book value times 2 divided by life
Accelerated depreciation; ignore salvage until floor
Units of production
Depreciable base times actual units divided by total expected units
Usage-driven assets
Sum-of-years’ digits
Depreciable base times remaining life over SYD denominator
Accelerated depreciation
Depreciable base is generally cost less salvage value, except declining-balance methods typically apply the rate to book value and stop at salvage value.
Inventory and gross profit method
Formula
Plain-English cue
Goods available for sale = beginning inventory plus net purchases
Start point for COGS/inventory
COGS = goods available for sale minus ending inventory
Core inventory equation
Gross profit = sales minus COGS
Margin in dollars
Gross profit percentage = gross profit divided by sales
Used in gross profit method
Estimated COGS = sales times cost percentage
Cost percentage equals 1 minus gross profit percentage
Estimated ending inventory = goods available for sale minus estimated COGS
Gross profit method result
Ratio quick sheet
Ratio
Formula
Interpretation caution
Current ratio
Current assets divided by current liabilities
Liquidity, but inventory quality matters
Quick ratio
Cash plus marketable securities plus receivables, divided by current liabilities
Excludes inventory and prepaid items
Receivables turnover
Net credit sales divided by average receivables
Higher usually means faster collection
Days sales outstanding
365 divided by receivables turnover
Lower usually means faster collection
Inventory turnover
COGS divided by average inventory
LIFO/FIFO affects comparability
Gross margin
Gross profit divided by sales
Pricing and cost control
Debt-to-equity
Total liabilities divided by total equity
Leverage measure
Times interest earned
Income before interest and taxes divided by interest expense
Ability to cover interest
ROA
Net income divided by average total assets
Asset efficiency
ROE
Net income divided by average equity
Owner return; leverage-sensitive
Earnings Per Share
Basic EPS:
\[
\text{Basic EPS}=\frac{\text{Net income}-\text{Preferred dividends}}{\text{Weighted-average common shares outstanding}}
\]
Diluted EPS includes the effect of dilutive potential common shares, such as:
Convertible debt.
Convertible preferred stock.
Options and warrants.
Contingently issuable shares.
EPS Traps
Stock splits and stock dividends are treated retrospectively for all periods presented.
Anti-dilutive securities are excluded from diluted EPS.
Preferred dividends are subtracted for basic EPS even if not declared when cumulative.
Treasury shares are not outstanding shares.
Revenue recognition
Five-step model
Step
Question to answer
Exam trap
1. Identify contract
Is there approval, rights, payment terms, commercial substance, and probable collection?
A quote or unsigned proposal may not be a contract
2. Identify performance obligations
Are promises distinct?
Installation, support, warranties, and licenses may be separate
3. Determine transaction price
What consideration is expected?
Variable consideration may be constrained
4. Allocate transaction price
Allocate based on relative standalone selling prices
Discounts may attach to specific obligations
5. Recognize revenue
When or as control transfers
Shipment, billing, and cash collection are not automatically revenue
Notes and examples
Revenue scenario rules
Scenario
Accounting treatment
Trap
Cash received before performance
Contract liability / deferred revenue
Do not recognize revenue yet
Performance before billing
Contract asset or receivable
Receivable requires unconditional right to payment
Right of return
Recognize revenue net of expected returns; record refund liability and recovery asset
Do not wait for all returns to expire if estimable
Principal vs agent
Principal records gross revenue; agent records net commission
Focus on control before transfer to customer
Assurance warranty
Accrue expected warranty cost
Not a separate performance obligation
Service warranty
Allocate transaction price to warranty service
Separate performance obligation
Consignment
No revenue until sale to end customer
Consignee does not own inventory
Bill-and-hold
Recognize only if control transferred and strict criteria met
Customer request and separately identified goods are key
Customer loyalty points
Allocate part of price to points
Points are often a material right
Gift cards
Liability until redemption; breakage recognized if estimable and not legally restricted
Cash received is not immediate revenue
Nonrefundable upfront fee
Recognize when related good/service transfers unless fee itself is distinct
Upfront payment often supports future service
Contract modification
Treat as separate contract, termination/new contract, or cumulative catch-up depending on added goods/services and pricing
Determine whether remaining goods are distinct
Incremental contract acquisition costs
Capitalize if recoverable, then amortize
Expense only if permitted or not recoverable
Over-time recognition
Recognize revenue over time if at least one condition is met:
Condition
Example cue
Customer simultaneously receives and consumes benefits
Routine services
Entity creates/enhances asset controlled by customer
Construction on customer-owned site
Asset has no alternative use and entity has enforceable right to payment
Customized asset with payment protection
If revenue is recognized over time, common progress measures include:
Input method: costs incurred relative to total expected costs.
Output method: units delivered, milestones, surveys of performance completed.
Revenue Recognition: Five-Step Model
The core revenue model:
Identify the contract with the customer.
Identify performance obligations.
Determine transaction price.
Allocate transaction price to performance obligations.
Recognize revenue when or as obligations are satisfied.
Issue
FAR decision rule
Multiple performance obligations
Allocate based on relative standalone selling prices
Revenue over time
Customer receives benefits as performed, entity creates/enhances customer-controlled asset, or no alternative use plus enforceable right to payment
Revenue at a point in time
Recognize when control transfers
Variable consideration
Estimate if not constrained; include only amounts not likely to reverse materially
Significant financing component
Adjust transaction price if financing is significant
Principal vs agent
Principal recognizes gross revenue; agent recognizes net commission
Right of return
Recognize revenue net of expected returns and a refund liability
Assurance warranty
Usually cost accrual, not separate revenue
Service-type warranty
Separate performance obligation
Contract modification
Could be separate contract, prospective modification, or cumulative catch-up depending on pricing and remaining goods/services
Revenue Traps
Cash collection does not automatically equal revenue.
A contract liability is not “bad”; it often means cash was collected before performance.
A contract asset is not the same as accounts receivable; receivable is unconditional.
Discounts and variable consideration affect the transaction price before allocation.
If the entity is an agent, gross billing is a distractor.
Cash and receivables
Cash classification
Item
Treatment
Demand deposits and currency
Cash
Cash equivalents
Short-term, highly liquid investments readily convertible to known cash amounts
Bank overdraft
Usually liability unless offset permitted with same bank arrangement
Compensating balance
Disclose; classify based on restriction
Restricted cash
Present with cash reconciliation details as required; classify by restriction timing
Notes and examples
Receivables
Topic
Rule
Trap
Trade receivable
Record at amount expected to be collected
Consider allowance for credit losses
Allowance method
Estimate uncollectible amounts and record bad debt expense
Direct write-off generally not GAAP unless immaterial
Write-off
Debit allowance, credit receivable
No new bad debt expense at write-off
Recovery
Reinstate receivable, then record cash collection
Two-step entry is common
Notes receivable
Record at present value if interest is not market-based
Impute interest when needed
Pledge of receivables
Receivables remain on books; borrowing recorded
Not a sale
Assignment
Receivables may collateralize debt or be transferred
Read whether control has transferred
Factoring without recourse
Often sale if control surrendered
Remove receivables and recognize gain/loss
Factoring with recourse
May be sale or secured borrowing depending on control and recourse obligations
Recourse liability may be required
Inventory
Ownership and cut-off
Shipping term / situation
Include in buyer inventory?
Include in seller inventory?
FOB shipping point, in transit after shipment
Yes
No
FOB destination, in transit before delivery
No
Yes
Goods on consignment held by consignee
No, if consignee
Yes, if consignor
Goods sold with repurchase obligation
Usually no sale if control not transferred
Usually remains with seller
Goods out on approval
Depends on acceptance terms
Seller may retain until acceptance
Notes and examples
Cost flow assumptions
Method
COGS in rising prices
Ending inventory in rising prices
Trap
FIFO
Lower COGS
Higher inventory
Balance sheet closer to current cost
LIFO
Higher COGS
Lower inventory
Income statement closer to current cost
Weighted average
Middle result
Middle result
Smooths price changes
Specific identification
Actual item cost
Actual item cost
Used for unique/high-value items
Lower of cost rules
Inventory type
Measurement rule
Key detail
FIFO or average
Lower of cost and net realizable value
NRV is selling price less completion/disposal/transport costs
LIFO or retail inventory
Lower of cost or market
Market is replacement cost, constrained by NRV ceiling and NRV less normal profit floor
Write-downs reduce inventory and increase expense or loss. Under U.S. GAAP, inventory write-downs are generally not reversed.
Inventory
Cost flow assumption
Key points
FIFO
Ending inventory approximates recent costs in rising price environment
LIFO
COGS approximates recent costs; LIFO liquidation can distort income
Weighted average
Smooths unit costs
Specific identification
Used for unique/high-value items
Inventory Valuation
Inventory method
Lower-of test
FIFO or average
Lower of cost and net realizable value
LIFO or retail inventory method
Lower of cost or market
Net realizable value is expected selling price less reasonably predictable completion, disposal, and transportation costs.
Inventory Cost Inclusions
Include:
Purchase price net of discounts.
Freight-in.
Import duties and nonrefundable taxes.
Direct labor and production overhead for manufactured goods.
Expense:
Selling costs.
Abnormal spoilage.
Most storage costs unrelated to production.
Freight-out.
Property, plant, equipment, and long-lived assets
Capitalize vs expense
Expenditure
Capitalize?
Reason
Purchase price, taxes, freight-in, installation
Yes
Necessary to acquire and prepare asset
Site preparation
Yes
Readies asset for intended use
Testing before intended use
Yes, net of proceeds if applicable under current guidance
Necessary preparation
Routine repairs and maintenance
No
Maintains existing benefit
Major improvement or betterment
Yes
Extends life, increases capacity, or improves quality
Replacement of major component
Usually yes
Future benefit beyond current period
Training costs
Usually no
Not part of asset acquisition cost
General administrative costs
Usually no
Not directly attributable
Notes and examples
Interest capitalization
Capitalize avoidable interest when:
A qualifying asset is being constructed for the entity’s own use or as a discrete project for sale/lease.
Expenditures have been made.
Construction activities are in progress.
Interest cost is being incurred.
Stop capitalizing when the asset is substantially ready for intended use.
Impairment and disposal
Asset status
Test
Measurement
Held and used long-lived asset
Recoverability test: carrying amount greater than undiscounted future cash flows
Impairment loss equals carrying amount minus fair value
Held for sale
Lower of carrying amount or fair value less cost to sell
Stop depreciation
Disposal by sale
Compare proceeds with carrying amount
Recognize gain or loss
Abandonment
Adjust to expected value, often zero if no future benefit
Recognize loss
Asset retirement obligations
Step
Treatment
Initial recognition
Record liability at fair value if reasonably estimable
Asset side
Capitalize asset retirement cost into related asset
Subsequent liability accounting
Accrete liability over time
Asset cost
Depreciate over asset life
Revision
Adjust liability and asset as estimates change
Intangibles, software, and goodwill
Item
Recognition
Subsequent accounting
Purchased finite-lived intangible
Capitalize
Amortize over useful life; test for impairment
Purchased indefinite-lived intangible
Capitalize
Do not amortize; test for impairment
Internally generated goodwill
Do not recognize
No asset recorded
Goodwill in business combination
Recognize excess purchase price over identifiable net assets
Test for impairment; do not amortize under regular public-company U.S. GAAP
Research and development
Generally expense as incurred
Limited exceptions
Legal defense of patent
Capitalize if successful and future benefit exists
Expense if unsuccessful
Start-up costs
Expense
Do not capitalize as intangible
Advertising
Expense as incurred or first time advertising takes place, depending on facts
Do not treat as indefinite asset
Notes and examples
Software cost cues
Software type
Stage
Treatment
Software to be sold
Before technological feasibility
Expense
Software to be sold
After technological feasibility until product available for sale
Capitalize
Software to be sold
After product available
Amortize capitalized costs
Internal-use software
Preliminary project stage
Expense
Internal-use software
Application development stage
Capitalize qualifying costs
Internal-use software
Post-implementation/operation
Expense maintenance and training
Liabilities, contingencies, and debt
Loss contingencies
Likelihood
Estimable?
Treatment
Probable
Yes
Accrue loss and disclose as needed
Probable
No
Disclose
Reasonably possible
Either
Disclose
Remote
Either
Usually no accrual or disclosure
Notes and examples
If a loss range exists and no amount is a better estimate, accrue the minimum amount in the range and disclose the range.
Gain contingencies are generally not recognized before realization; disclose only when appropriate and avoid misleading presentation.
Bonds and notes
Topic
Rule
Trap
Effective interest method
Interest expense equals carrying amount times market yield
Cash interest equals face amount times stated rate
Premium amortization
Reduces carrying amount and interest expense over time
Premium bonds move down to face value
Discount amortization
Increases carrying amount and interest expense over time
Discount bonds move up to face value
Debt issuance costs
Generally presented as reduction of debt carrying amount and amortized
Not a separate asset for term debt
Extinguishment
Gain/loss equals carrying amount minus reacquisition price
Include unamortized premium, discount, and issue costs
Troubled modification
Analyze whether terms are substantially different
Do not automatically record gain
Current portion
Principal due within operating cycle or one year, unless refinancing/classification criteria support noncurrent
Read refinancing facts carefully
Common liability journal entry patterns
Event
Debit
Credit
Issue bond at par
Cash
Bonds payable
Issue bond at discount
Cash; Discount on bonds payable
Bonds payable
Issue bond at premium
Cash
Bonds payable; Premium on bonds payable
Accrue interest on discount bond
Interest expense
Cash/interest payable; Discount amortization
Accrue interest on premium bond
Interest expense; Premium amortization
Cash/interest payable
Accrue probable estimable loss
Loss expense
Liability
Recognize ARO initially
Asset retirement cost
ARO liability
Accrete ARO
Accretion expense
ARO liability
Bonds, Notes, and Debt
Topic
Rule
Bond issued at par
Stated rate equals market rate
Bond issued at discount
Stated rate below market rate
Bond issued at premium
Stated rate above market rate
Interest expense
Carrying amount times market/effective rate
Cash interest
Face amount times stated/coupon rate
Discount amortization
Increases carrying amount
Premium amortization
Decreases carrying amount
Debt issuance costs
Usually reduce carrying amount of debt and amortize using interest method
Effective interest relationship:
\[
\text{Interest expense}=\text{Carrying amount at beginning of period}\times\text{Effective interest rate}
\]
Debt Extinguishment
Gain or loss equals reacquisition price compared with net carrying amount of debt.
If reacquisition price is…
Result
Less than carrying amount
Gain
Greater than carrying amount
Loss
Common trap: unamortized premiums, discounts, and issue costs are part of the carrying amount.
Leases
Lessee classification
A lessee classifies a lease as finance if any finance-lease criterion is met.
Criterion
Finance-lease cue
Ownership transfer
Asset transfers to lessee by end of lease
Purchase option
Lessee is reasonably certain to exercise
Lease term
Major part of remaining economic life
Present value
Lease payments plus qualifying residual guarantees are substantially all fair value
Specialized nature
Asset has no alternative use to lessor at lease end
Notes and examples
If none apply, the lessee has an operating lease.
Lessee accounting
Topic
Finance lease
Operating lease
Balance sheet
ROU asset and lease liability
ROU asset and lease liability
Expense pattern
Interest expense plus amortization; usually front-loaded
Single lease cost, generally straight-line
Liability measurement
Present value of lease payments
Present value of lease payments
ROU asset
Liability plus initial direct costs and prepayments, less incentives, adjusted for restoration obligations
Same general measurement
Cash flow classification
Principal usually financing; interest operating under U.S. GAAP
Lease payments generally operating
Lessor classification
Lessor type
When used
Income pattern
Sales-type lease
Control of asset transfers to lessee
Selling profit/loss at commencement, interest income over time
Direct financing lease
No selling profit, but lessor transfers substantially all risks/benefits through payments/residual guarantees
Interest income over time
Operating lease
Asset not effectively sold/financed
Rental income; asset remains on lessor books
Lessee Classification
A lessee classifies a lease as finance if it meets criteria such as:
Ownership transfers by the end of the lease.
Purchase option is reasonably certain to be exercised.
Lease term is for a major part of remaining economic life.
Present value of lease payments is substantially all of fair value.
Asset is specialized with no alternative use to lessor.
If not finance, it is generally operating for the lessee, but both finance and operating leases typically create a right-of-use asset and lease liability, except for qualifying short-term lease elections.
Lessee topic
Finance lease
Operating lease
Balance sheet
ROU asset and lease liability
ROU asset and lease liability
Expense pattern
Interest plus amortization; often front-loaded
Single lease cost, generally straight-line
Cash paid
Lease payment
Lease payment
Lessor Classification
Lessor classification
When used
Sales-type lease
Control effectively transfers to lessee
Direct financing lease
Lessor transfers substantially all risks/rewards and has certain third-party/residual features
Operating lease
Does not meet sales-type/direct financing criteria
Lease trap: guaranteed residual values, initial direct costs, and purchase options can change measurement. Always read who is accounting: lessee or lessor.
Equity
Transaction
Accounting treatment
Trap
Cash dividend declared
Debit retained earnings, credit dividend payable
Liability begins at declaration date
Property dividend
Remeasure property to fair value, recognize gain/loss, then dividend
Do not distribute at book value without remeasurement
Stock dividend, small
Transfer fair value from retained earnings to paid-in capital
Often tested differently from large stock dividend
Stock dividend, large
Transfer par/stated value from retained earnings
No total equity change
Stock split
Memorandum entry; adjust shares and par
No retained earnings transfer
Treasury stock purchase, cost method
Debit treasury stock at cost
Treasury stock is contra-equity
Reissue treasury above cost
Credit APIC from treasury stock
Gain is not income
Reissue treasury below cost
Debit APIC from treasury stock, then retained earnings if needed
Loss is not expense
Accumulated OCI
Separate equity component
Not retained earnings until reclassified if applicable
Notes and examples
Equity
Topic
Rule
Common stock issued above par
Credit common stock at par, excess to APIC
No-par stock
Credit common stock for proceeds unless stated value applies
Treasury stock cost method
Debit treasury stock at cost
Reissue treasury stock above cost
Credit APIC treasury stock
Reissue treasury stock below cost
Debit APIC treasury stock first, then retained earnings if needed
Cash dividends
Reduce retained earnings when declared
Stock dividends
Reclassify retained earnings to paid-in capital
Stock split
No journal entry, but shares and per-share data change
Investments, fair value, and financial instruments
Investment classification
Instrument
Category
Measurement
Unrealized gain/loss
Debt security held for trading
Trading
Fair value
Earnings
Debt security intended and able to be held to maturity
HTM
Amortized cost
Not recognized for fair value changes
Debt security not trading or HTM
AFS
Fair value
OCI, subject to credit loss rules
Equity security with readily determinable fair value
Equity investment
Fair value
Earnings
Equity investment with significant influence
Equity method
Cost adjusted for investor share of income/loss and dividends
Earnings through investor share
Controlled subsidiary
Consolidation
Consolidated financial statements
Eliminations, NCI if not wholly owned
Notes and examples
Equity method
Event
Investor accounting
Initial purchase
Record investment at cost
Investee net income
Increase investment; recognize equity in earnings
Investee net loss
Decrease investment; recognize equity in loss
Investee dividends
Decrease investment; do not recognize dividend income
Basis difference
Amortize/depreciate differences related to identifiable assets
Intercompany profit
Eliminate investor’s share until realized
Fair value hierarchy
Level
Input type
Example
Level 1
Quoted prices in active markets for identical assets/liabilities
Listed stock price
Level 2
Observable inputs other than Level 1
Quoted price for similar asset, yield curve
Level 3
Unobservable inputs
Internal cash flow model assumptions
Highest and best use applies primarily to nonfinancial assets.
Derivatives and hedges
Item
Rule
Derivative recognition
Recognize on balance sheet at fair value
Speculative derivative
Gain/loss in earnings
Fair value hedge
Derivative gain/loss and hedged item fair value change generally in earnings
Cash flow hedge
Effective portion generally in OCI, later reclassified when hedged transaction affects earnings
Net investment hedge
Effective portion generally in translation adjustment within OCI
Investments and Financial Instruments
Investment type
Measurement
Unrealized gain/loss
Trading debt securities
Fair value
Net income
Available-for-sale debt securities
Fair value
OCI, except certain credit losses
Held-to-maturity debt securities
Amortized cost
Generally not recognized for fair value changes
Equity securities without significant influence
Generally fair value
Net income
Equity method investment
Adjust carrying amount for investor share of investee income/loss and dividends
Use equity method when the investor has significant influence but not control.
Investee event
Investor accounting
Investee net income
Increase investment; recognize equity income
Investee net loss
Decrease investment; recognize equity loss
Investee dividends
Decrease investment; not dividend income
Basis differences
Amortize/depreciate differences affecting equity income
Upstream/downstream inventory profit
Eliminate investor share of unrealized profit
Income taxes
Temporary vs permanent differences
Difference
Deferred tax effect?
Example
Temporary difference
Yes
Different book and tax depreciation timing
Permanent difference
No
Municipal bond interest, nondeductible fines
Tax loss/credit carryforward
Potential DTA
Subject to realization assessment
Notes and examples
DTA or DTL decision table
Situation
Future effect
Deferred item
Book basis of asset greater than tax basis
Future taxable amount
DTL
Book basis of asset less than tax basis
Future deductible amount
DTA
Book basis of liability greater than tax basis
Future deductible amount
DTA
Book basis of liability less than tax basis
Future taxable amount
DTL
Common examples
Item
Usual deferred tax result
Why
Tax depreciation faster than book depreciation
DTL
Lower taxable income now, higher taxable income later
Warranty expense accrued for books before tax deduction
DTA
Deductible when paid later
Bad debt allowance for books before tax write-off
DTA
Tax deduction later
Unearned revenue taxed when received but deferred for books
DTA
Book revenue later without tax revenue later
Installment sales taxable later but book revenue now
DTL
Taxable income later
Prepaid expenses deducted for tax before book expense
DTL
Book expense later without tax deduction later
Use enacted tax rates expected to apply when temporary differences reverse. Record a valuation allowance if it is more likely than not that some or all DTA will not be realized.
Uncertain tax positions
Step
Rule
Recognition
Tax benefit must meet more-likely-than-not threshold based on technical merits
Measurement
Record largest benefit amount that is more than 50% likely to be sustained
Interest and penalties
Recognize according to accounting policy and applicable guidance
Disclosure
Include required uncertainty and reconciliation information when applicable
Temporary vs Permanent Differences
Difference type
Deferred tax?
Examples
Temporary difference
Yes
Different depreciation methods, warranty accruals, bad debt allowance
Permanent difference
No
Municipal bond interest, certain fines/penalties, nondeductible expenses
Deferred Tax Assets and Liabilities
Future effect
Deferred item
Future taxable amounts
Deferred tax liability
Future deductible amounts
Deferred tax asset
Common temporary difference patterns:
Book/tax situation
Likely deferred item
Tax depreciation faster than book depreciation
DTL
Warranty expense accrued for books before tax deduction
DTA
Bad debt expense recognized for books before tax deduction
DTA
Unearned revenue taxed before book revenue
DTA
Installment sales recognized for books before tax
DTL
Use enacted tax rates expected to apply when temporary differences reverse.
Business combinations and consolidations
Acquisition method
Step
Requirement
Identify acquirer
Entity obtaining control
Determine acquisition date
Date control is obtained
Measure consideration transferred
Fair value
Recognize identifiable assets acquired and liabilities assumed
Generally fair value
Recognize NCI
Fair value under U.S. GAAP
Recognize goodwill or bargain purchase gain
Based on excess or deficiency
Notes and examples
Goodwill formula in plain form:
Goodwill = consideration transferred + fair value of NCI + fair value of previously held interest - fair value of identifiable net assets acquired
Cost type
Treatment
Acquisition-related legal/accounting fees
Expense
Stock issuance costs
Reduce APIC
Debt issuance costs
Reduce debt carrying amount and amortize
Contingent consideration classified as liability
Fair value at acquisition; remeasure through earnings
Contingent consideration classified as equity
Fair value at acquisition; generally not remeasured
Consolidation eliminations
Elimination
Entry logic
Parent investment vs subsidiary equity
Remove parent investment and subsidiary equity accounts
Intercompany receivables/payables
Eliminate both sides
Intercompany sales/purchases
Eliminate sales and related purchases/COGS
Profit in ending inventory
Reduce inventory and profit until sold externally
Intercompany fixed asset profit
Remove gain and adjust depreciation
Intercompany dividends
Eliminate dividends between consolidated entities
NCI
Present NCI share of subsidiary equity and income separately
Consolidation traps
Consolidated statements present the group as one economic entity.
Only transactions with external parties remain.
NCI is part of equity, not a liability.
Parent and subsidiary accounting policies may need alignment.
Acquisition date fair value adjustments affect later depreciation, amortization, and income allocation.
Acquisition Method
Step
Treatment
Identify acquirer
Entity obtaining control
Measure consideration transferred
Usually fair value
Recognize identifiable assets acquired and liabilities assumed
Fair value at acquisition date
Recognize goodwill or bargain purchase gain
Plug after identifiable net assets
Acquisition-related costs
Expense as incurred
Equity issuance costs
Reduce additional paid-in capital
Debt issuance costs
Account for with related debt
Goodwill formula:
\[
\text{Goodwill}=\text{Consideration transferred}+\text{Noncontrolling interest}+\text{Previously held interest}-\text{Fair value of identifiable net assets acquired}
\]
Consolidation Traps
Intercompany sales are eliminated.
Intercompany receivables/payables are eliminated.
Intercompany inventory profit is eliminated until sold to outsiders.
Land profit from intercompany sale is eliminated until land is sold outside the group.
Noncontrolling interest is presented in equity, not as a liability.
Statement of cash flows
U.S. GAAP classification
Cash flow
Classification
Cash received from customers
Operating
Cash paid to suppliers and employees
Operating
Interest received
Operating
Interest paid
Operating
Dividends received
Operating
Dividends paid
Financing
Income taxes paid
Operating unless specifically identifiable with investing/financing item
Purchase or sale of PPE
Investing
Purchase or sale of debt/equity investments, except trading securities
Investing
Loans made and principal collected
Investing
Borrowing or repaying debt principal
Financing
Issuing or repurchasing stock
Financing
Noncash acquisition by issuing debt/equity
Noncash disclosure, not cash flow body
Notes and examples
Indirect method adjustments
Starting point: net income
Adjustment to operating cash flow
Depreciation/amortization expense
Add back
Bad debt expense
Add back if included in NI; then analyze receivable changes
Gain on sale of asset
Subtract
Loss on sale of asset
Add back
Increase in accounts receivable
Subtract
Decrease in accounts receivable
Add
Increase in inventory
Subtract
Decrease in inventory
Add
Increase in prepaid expenses
Subtract
Decrease in prepaid expenses
Add
Increase in accounts payable/accrued expenses
Add
Decrease in accounts payable/accrued expenses
Subtract
Increase in unearned revenue
Add
Decrease in unearned revenue
Subtract
Classification Under U.S. GAAP
Cash flow item
Classification
Cash receipts from customers
Operating
Cash paid to suppliers/employees
Operating
Interest paid
Operating
Interest received
Operating
Dividends received
Operating
Dividends paid
Financing
Purchase of PP&E
Investing
Sale of PP&E
Investing
Borrowing principal
Financing
Repayment of debt principal
Financing
Issuance of stock
Financing
Purchase of treasury stock
Financing
Income taxes
Operating, unless specifically identifiable with investing or financing item
Noncash investing/financing activity
Disclose separately; not in body of statement
Indirect Method Operating Cash Flow
Start with net income, then:
Adjustment
Direction
Depreciation/amortization
Add back
Loss on sale
Add back
Gain on sale
Subtract
Increase in A/R
Subtract
Decrease in A/R
Add
Increase in inventory
Subtract
Decrease in inventory
Add
Increase in prepaid expense
Subtract
Decrease in prepaid expense
Add
Increase in A/P
Add
Decrease in A/P
Subtract
Increase in accrued liabilities
Add
Decrease in accrued liabilities
Subtract
Cash flow trap: the gain or loss on sale is removed from operating cash flow, but the cash proceeds from the sale appear in investing activities.
Accounting changes, errors, and subsequent events
Changes and corrections
Item
Treatment
Trap
Change in accounting principle
Retrospective application unless impracticable or specific guidance says otherwise
Adjust beginning retained earnings for earliest period presented
Change in estimate
Prospective treatment
No prior-period restatement
Change in depreciation method
Prospective as change in estimate effected by change in principle
Do not restate prior depreciation
Change in reporting entity
Retrospective application
Present statements as if new entity existed in all periods
Error correction
Prior-period adjustment; restate prior statements if presented
Not a current-period expense
Change from unacceptable method to GAAP
Error correction
Treat as correction, not voluntary principle change
Notes and examples
Subsequent events
Type
Condition existed at balance sheet date?
Treatment
Recognized subsequent event
Yes
Adjust financial statements
Nonrecognized subsequent event
No
Disclose if material
Example: lawsuit settled after year-end confirming existing obligation
Yes
Adjust
Example: major business combination after year-end
No
Disclose
Example: casualty loss after year-end
No
Disclose if material
Subsequent Events
Event type
Condition existed at balance sheet date?
Treatment
Recognized subsequent event
Yes
Adjust financial statements
Nonrecognized subsequent event
No
Disclose if material
Examples:
Event
Treatment
Bankruptcy of customer due to poor financial condition existing at year-end
Recognize/adjust
Lawsuit settlement confirming year-end obligation
Recognize/adjust
Major business combination after year-end
Disclose
Fire or natural disaster after year-end
Disclose if material
Issuance of debt or equity after year-end
Disclose if material
Accounting Changes and Error Corrections
Change type
Treatment
Change in accounting principle
Retrospective application, unless impracticable
Change in accounting estimate
Prospective treatment
Change in depreciation method
Treated as change in estimate effected by change in principle; prospective
Change in reporting entity
Retrospective application
Error correction
Prior-period adjustment/restatement
Common trap: depreciation changes usually do not require restating prior depreciation.
Not-for-profit accounting
Net asset classes
Class
Definition
Trap
Net assets without donor restrictions
Not subject to donor-imposed restrictions
Board designations remain without donor restrictions
Net assets with donor restrictions
Subject to donor-imposed purpose or time restrictions
Donor restriction, not management intent
Endowment restrictions
Governed by donor stipulation
Underwater donor-restricted endowments remain with donor restrictions
Notes and examples
Contributions
Scenario
Accounting treatment
Unconditional promise to give
Recognize contribution revenue and receivable
Conditional promise to give
Recognize when condition is substantially met
Donor restriction
Recognize revenue, then release when restriction satisfied
Agency transaction
Liability if NFP acts as agent/intermediary
Exchange transaction
Account as revenue from exchange, not contribution
Donated materials
Recognize at fair value if measurable
Donated services
Recognize if they create/enhance nonfinancial assets or require specialized skills, are provided by those with skills, and would otherwise be purchased
Pledges due in future years
Present value; allowance if uncollectible
NFP statements and expenses
Statement / disclosure
Key FAR point
Statement of financial position
Presents assets, liabilities, and net assets by restriction class
Statement of activities
Reports changes in net assets with and without donor restrictions
Statement of functional expenses
Expenses shown by function and nature
Statement of cash flows
Similar cash flow framework; classification details can differ based on NFP-specific facts
Program services
Activities that accomplish mission
Supporting services
Management/general, fundraising, membership development
NFP restrictions release
Event
Entry logic
Restricted contribution received
Increase net assets with donor restrictions
Purpose restriction satisfied
Reclass from with donor restrictions to without donor restrictions
Time restriction expires
Reclass from with donor restrictions to without donor restrictions
Donor-restricted asset placed in service
Follow NFP’s policy for release timing if allowed and disclosed
Net Asset Classes
Class
Meaning
Net assets without donor restrictions
Not subject to donor-imposed restrictions
Net assets with donor restrictions
Subject to donor purpose or time restrictions
Contributions
Contribution type
Treatment
Unconditional contribution
Recognize when promised/received
Conditional contribution
Recognize only when barrier is overcome and right of release no longer applies
Donor-restricted contribution
Revenue with donor restrictions, then reclassify when restriction satisfied
Exchange transaction
Recognize under revenue/exchange guidance, not contribution model
Donated services
Recognize if they create/enhance nonfinancial assets or require specialized skills, are provided by people with those skills, and would otherwise be purchased
NFP Statement Focus
Statement
FAR focus
Statement of financial position
Net assets with/without donor restrictions
Statement of activities
Changes in net asset classes
Statement of functional expenses
Program vs supporting services; natural classifications
Statement of cash flows
Similar structure, with NFP-specific transactions
NFP traps:
Board designations are not donor restrictions.
Conditional promises are not revenue until conditions are substantially met.
Donor-imposed purpose restrictions are released when the purpose is fulfilled.
Donor-imposed time restrictions are released when the time period passes.
Governmental accounting
Fund categories
Category
Funds
Measurement focus and basis
Governmental funds
General, special revenue, debt service, capital projects, permanent
Before your next CPA FAR practice set, drill these until automatic:
Modified accrual vs accrual.
NFP donor restriction vs board designation.
Revenue recognition with contract liabilities and variable consideration.
Lease classification and lessee balance sheet recognition.
Bond premium/discount amortization direction.
DTA vs DTL decision rules.
Cash flow classification under U.S. GAAP.
Consolidation eliminations and goodwill.
Error correction vs change in estimate.
Inventory ownership and lower-of-cost rules.
Next step: work a timed mixed set of CPA FAR practice questions, then use this Cheat Sheet to tag every miss as a recognition, measurement, presentation, or disclosure error.
AICPA CPA FAR Cheat Sheet
This Cheat Sheet is for candidates preparing for the AICPA U.S. CPA FAR - Financial Accounting and Reporting exam, code CPA FAR. Use it as a fast, independent companion review before topic drills, mock exams, and detailed explanations.
This page is not a substitute for full study. FAR rewards candidates who can quickly decide:
What basis of accounting applies?
What is recognized, measured, presented, or disclosed?
Is the question testing journal entries, financial statement classification, or conceptual reporting?
Is the entity for-profit, not-for-profit, governmental fund, proprietary fund, fiduciary fund, or government-wide?
MasteryExamPrep.com provides independent review support and original practice questions. It is not affiliated with the AICPA.
High-Yield FAR Mindset
FAR questions often look calculation-heavy, but many are really classification and decision-rule questions.
If the question gives you…
Think first…
Common trap
A reporting date and later event
Subsequent event: recognized or disclosed?
Recording events that arose after year-end
Cash received before performance
Liability until earned
Calling all cash receipts revenue
Inventory write-down
FIFO/average vs LIFO/retail rule
Using the wrong lower-of test
Bond premium or discount
Effective interest method
Using stated interest as interest expense
Lease terms
Lessee classification and ROU asset/liability
Forgetting nearly all leases appear on lessee balance sheet, except short-term election
Tax depreciation vs book depreciation
Temporary difference
Treating every tax difference as deferred tax
Donation with donor condition
Conditional contribution first
Recognizing contribution revenue too early
Governmental fund question
Modified accrual/current financial resources
Answering with full accrual rules
Government-wide question
Economic resources/full accrual
Using fund accounting answer choices
Statement of cash flows
Operating, investing, financing
Misclassifying interest, dividends, or noncash items
The FAR Answer Algorithm
Use this mental sequence before calculating:
Identify the reporting entity
Business entity?
Not-for-profit entity?
Governmental fund?
Proprietary fund?
Fiduciary fund?
Government-wide financial statement?
Identify the accounting basis
Accrual?
Modified accrual?
Cash basis information being converted?
Tax basis versus book basis?
Identify the task
Recognition: should it be recorded?
Measurement: at what amount?
Presentation: where does it appear?
Disclosure: note only?
Journal entry: debit and credit?
Locate the time period
Current year activity?
Prior-period correction?
Subsequent event?
Interim period?
Retrospective or prospective treatment?
Check for distractors
Tax numbers when GAAP is tested.
Fair value when historical cost is required.
Cash received when revenue is not earned.
Budgetary accounting when actual financial reporting is tested.
Core Debit and Credit Review
Account type
Normal balance
Increase with
Decrease with
Assets
Debit
Debit
Credit
Expenses
Debit
Debit
Credit
Losses
Debit
Debit
Credit
Dividends/distributions
Debit
Debit
Credit
Liabilities
Credit
Credit
Debit
Equity
Credit
Credit
Debit
Revenue
Credit
Credit
Debit
Gains
Credit
Credit
Debit
Notes and examples
Frequent FAR Journal Entry Patterns
Transaction
Entry logic
Accrued expense
Debit expense, credit liability
Prepaid expense paid
Debit asset, credit cash; later debit expense, credit asset
Unearned revenue received
Debit cash, credit contract liability; later debit liability, credit revenue
Quoted prices in active markets for identical items
Highest
Level 2
Observable inputs other than Level 1
Intermediate
Level 3
Unobservable inputs
Lowest
Accounts Receivable and Bad Debts
Topic
Rule
Allowance method
Required conceptually when bad debts are estimable
Write-off
Reduces A/R and allowance; usually no new expense at write-off
Recovery of written-off account
Reinstate receivable, then record cash collection
Aging method
Estimates ending allowance balance
Percent-of-sales method
Estimates bad debt expense
Factoring without recourse
Usually treated as sale if control surrendered
Factoring with recourse
Evaluate continuing involvement and obligation
Common mistake: confusing bad debt expense with the ending allowance balance. If the allowance already has a balance, adjust only enough to reach the required ending balance.
Property, Plant, Equipment, and Depreciation
Topic
Rule
Initial measurement
Capitalize purchase price and costs necessary to prepare asset for intended use
Repairs and maintenance
Expense unless they extend life, increase capacity, or improve efficiency
First compare carrying amount to undiscounted cash flows; if not recoverable, write down to fair value
Held for sale
Report at lower of carrying amount or fair value less cost to sell
Indefinite-lived intangible
Not amortized; test for impairment
Goodwill
Test at reporting unit level; impairment limited to goodwill balance
Common trap: for held-and-used long-lived assets, undiscounted cash flows are used only for the recoverability screen. The impairment loss is based on fair value.
Intangible Assets
Intangible
Treatment
Purchased finite-life intangible
Capitalize and amortize
Purchased indefinite-life intangible
Capitalize, do not amortize, test for impairment
Internally generated goodwill
Do not recognize
Goodwill from business combination
Recognize as excess purchase price over fair value of identifiable net assets
Research and development
Generally expense as incurred
Legal defense of patent
Capitalize if successful; expense if unsuccessful
Software Costs
Software type/stage
Treatment
Internal-use, preliminary project stage
Expense
Internal-use, application development stage
Capitalize qualifying costs
Internal-use, post-implementation stage
Expense
Software to be sold, before technological feasibility
Expense
Software to be sold, after technological feasibility until ready for sale
Capitalize qualifying costs
Pensions and Postretirement Benefits
Item
Meaning
Projected benefit obligation
Actuarial present value of benefits attributed to employee service using future compensation assumptions
Plan assets
Assets set aside to pay benefits
Funded status
Plan assets minus benefit obligation
Service cost
Benefits earned by employees in current period
Interest cost
Increase in obligation due to passage of time
Expected return on plan assets
Reduces pension expense
Prior service cost
Often recognized in OCI initially and amortized
Gains/losses
Often recognized in OCI initially and amortized under rules
Balance sheet presentation is based on funded status. Do not confuse pension expense with cash contribution.
Contingencies and Commitments
Likelihood
Estimable?
Treatment
Probable
Yes
Accrue loss
Probable
No
Disclose
Reasonably possible
Either
Disclose
Remote
Usually irrelevant
Usually no accrual or disclosure
If a probable loss is a range and no amount is better than another, accrue the low end and disclose the range.
Gain contingencies are generally not recognized until realized or realizable. Avoid recognizing revenue or gains just because management is optimistic.
Ratios and Analytical Procedures
Know what each ratio measures more than memorizing formulas alone.
Ratio
Plain formula
Measures
Current ratio
Current assets / Current liabilities
Short-term liquidity
Quick ratio
Quick assets / Current liabilities
More conservative liquidity
Receivables turnover
Net credit sales / Average A/R
Collection efficiency
Days sales outstanding
365 / Receivables turnover
Average collection period
Inventory turnover
COGS / Average inventory
Inventory movement
Gross margin
Gross profit / Net sales
Product profitability
Debt-to-equity
Total liabilities / Total equity
Leverage
Return on assets
Net income / Average total assets
Asset profitability
Return on equity
Net income / Average equity
Owner return
Times interest earned
Income before interest and taxes / Interest expense
Interest coverage
Ratio trap: if the question asks for an average-balance ratio, use beginning and ending balances when available.
Common FAR Candidate Mistakes
Mistake
How to avoid it
Starting calculations before identifying the basis of accounting
Write “accrual,” “modified accrual,” or “cash conversion” first
Confusing income tax accounting with tax return rules
FAR usually asks book reporting, not tax preparation
Treating all fair value changes the same
Identify security classification or measurement election
Forgetting OCI
Watch AFS debt securities, pension items, hedges, and translation
Misclassifying cash flows
Memorize U.S. GAAP operating/investing/financing rules
Recording NFP donor restrictions incorrectly
Separate donor restrictions from board designations
Using government-wide rules for governmental funds
First identify the statement level
Ignoring existing allowance balances
Compute the required ending balance, then adjust
Using coupon rate for bond interest expense
Use effective rate for expense
Forgetting retrospective treatment of stock splits in EPS
Adjust all presented share counts
Quick Drill: FAR Decision Rules to Memorize
Before mock exams, make sure these are automatic:
Revenue is recognized when control transfers, not necessarily when cash is received.
Allowance write-offs do not create new bad debt expense under the allowance method.
Inventory freight-in is capitalized; freight-out is usually selling expense.
Held-and-used impairment uses undiscounted cash flows for recoverability, fair value for loss.
Goodwill is recognized only when purchased in a business combination.
Bond interest expense uses the effective rate.
Dividends received are operating; dividends paid are financing under U.S. GAAP.
Deferred tax assets relate to future deductible amounts.
Accounting estimates are handled prospectively.
Governmental funds use modified accrual and current financial resources.
Government-wide statements use accrual and economic resources.
NFP board designations are not donor restrictions.
Final Pre-Practice Checklist
You are ready to start a FAR question-bank session when you can quickly answer:
Is this a business, NFP, governmental fund, proprietary fund, fiduciary fund, or government-wide question?
Is the item recognized, disclosed, or ignored?
Is the amount historical cost, amortized cost, fair value, lower-of test, or present value?
Does the gain/loss go to net income, OCI, equity, or nowhere?
Is the cash flow operating, investing, financing, or noncash disclosure?
Is the accounting change retrospective, prospective, or an error correction?
Next step: choose one weak FAR area, complete a focused set of original practice questions, and review every explanation until the decision rule feels automatic.