Exam identity and quick-use rules
This independent Quick Reference is for candidates preparing for the AICPA U.S. CPA FAR - Financial Accounting and Reporting exam, exam code CPA FAR.
Use it as a compact review sheet for final-stage practice:
- Assume U.S. GAAP unless the question explicitly says otherwise.
- Read for the reporting entity first: for-profit, not-for-profit, governmental fund, government-wide, proprietary, or fiduciary.
- Identify the measurement basis before calculating: fair value, amortized cost, historical cost, lower of cost and NRV, modified accrual, or accrual.
- For simulations, build answers from: recognition rule, measurement rule, journal entry, presentation, disclosure.
High-yield topic map
| Area | Know cold | Common trap |
|---|
| Conceptual framework | Recognition, measurement, relevance, faithful representation, comparability, materiality | Materiality is judgmental; conservatism does not justify bias |
| Financial statements | Classification, OCI, cash flows, disclosures | Noncash investing/financing items are disclosed, not placed in cash flow sections |
| Revenue | Five-step model, variable consideration, principal-agent, warranties, contract costs | Billing does not equal revenue; cash received may create a contract liability |
| Inventory | FOB terms, consignment, LIFO/FIFO, lower of cost and NRV, LCM for LIFO/retail | Consigned goods stay on consignor’s books |
| Long-lived assets | Capitalization, depreciation, impairment, disposal, AROs | Held-for-use impairment uses undiscounted cash flows first |
| Intangibles and goodwill | Purchased vs internally generated, finite vs indefinite, impairment | Goodwill is not amortized under regular public-company U.S. GAAP |
| Leases | Lessee finance vs operating, ROU asset and lease liability, lessor classification | Lessee operating leases are still on the balance sheet |
| Liabilities | Bonds, contingencies, asset retirement obligations, debt classification | Probable and estimable loss contingency is accrued, not just disclosed |
| Equity and EPS | Treasury stock, dividends, stock splits, basic and diluted EPS | Anti-dilutive securities are excluded from diluted EPS |
| Investments | Trading, AFS, HTM, equity method, consolidation, fair value hierarchy | Equity securities generally affect earnings, not OCI, unless equity method/consolidation applies |
| Income taxes | Temporary vs permanent differences, DTA/DTL, valuation allowance | Enacted tax rates, not expected or proposed rates |
| Consolidations | Acquisition method, goodwill, NCI, eliminations | Intercompany profit in ending inventory must be eliminated |
| NFP | Net assets with/without donor restrictions, contributions, conditions, functional expenses | Board designations are not donor restrictions |
| Governmental | Modified accrual, fund types, budgetary accounting, government-wide conversion | Governmental funds do not report capital assets or long-term debt as fund assets/liabilities |
Core financial reporting anchors
Recognition and measurement
| Concept | Exam-use definition | Application cue |
|---|
| Asset | Probable future economic benefit controlled by entity from past event | Ask: controlled, measurable, future benefit? |
| Liability | Probable future sacrifice from present obligation due to past event | Ask: present obligation, not merely intent? |
| Revenue | Inflow/enhancement from delivering goods or services | Usually tied to performance obligation satisfaction |
| Expense | Outflow/using up asset or incurring liability from operations | Match with revenue when appropriate |
| Gain/loss | Peripheral or incidental increase/decrease in equity | Often separate from operating revenue/expense |
| Fair value | Exit price in orderly transaction between market participants | Uses principal market or most advantageous market |
| Historical cost | Amount paid or consideration given | Common for PPE before impairment |
| Amortized cost | Initial amount adjusted for repayments and effective-interest amortization | Bonds, notes, HTM debt securities |
| Net realizable value | Estimated selling price less costs to complete, dispose, or transport | Inventory write-downs under FIFO/average |
Financial statement elements
| Statement | Key purpose | Frequent FAR issue |
|---|
| Balance sheet / statement of financial position | Assets, liabilities, equity/net assets at a point in time | Current vs noncurrent classification |
| Income statement | Revenues, expenses, gains, losses for period | Continuing operations vs separately presented items |
| Statement of comprehensive income | Net income plus OCI | Do not include owner transactions in comprehensive income |
| Statement of cash flows | Cash inflows/outflows by operating, investing, financing | Classification under U.S. GAAP |
| Statement of changes in equity | Owner contributions, distributions, comprehensive income components | Treasury stock and dividends |
| Notes | Accounting policies, estimates, contingencies, fair value, risk | Disclosures can be required even without recognition |
Basic earnings per share
\[
\text{Basic EPS} =
\frac{\text{Net income} - \text{Preferred dividends}}
{\text{Weighted-average common shares outstanding}}
\]
Preferred dividend rule:
- Cumulative preferred stock: subtract current-year preferred dividends whether declared or not.
- Noncumulative preferred stock: subtract only dividends declared.
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 |
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 |
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.
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 |
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 |
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.
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 |
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 |
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 |
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 |
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 |
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 |
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 |
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 |
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 |
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 |
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 |
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 |
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.
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 |
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 |
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 |
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 |
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 |
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 |
Governmental accounting
Fund categories
| Category | Funds | Measurement focus and basis |
|---|
| Governmental funds | General, special revenue, debt service, capital projects, permanent | Current financial resources; modified accrual |
| Proprietary funds | Enterprise, internal service | Economic resources; accrual |
| Fiduciary funds | Pension/OPEB trust, investment trust, private-purpose trust, custodial | Economic resources; accrual |
| Government-wide statements | Governmental activities and business-type activities | Economic resources; accrual |
Mnemonic: GRaSPP for governmental funds: General, Special revenue, Debt service, Capital projects, Permanent.
Modified accrual
| Item | Governmental fund treatment |
|---|
| Revenue | Recognize when measurable and available |
| Expenditures | Generally recognize when related fund liability is incurred |
| Long-term debt proceeds | Other financing source |
| Debt principal payments | Expenditure when due |
| Capital asset purchase | Expenditure, not asset |
| Depreciation | Not recorded in governmental funds |
| Long-term debt liability | Not recorded in governmental funds |
| Inventory and prepaid items | Consumption or purchases method depending on policy/facts |
Government-wide conversion
| Governmental funds to government-wide | Conversion idea |
|---|
| Capital outlay expenditures | Capitalize as assets |
| Depreciation | Record depreciation expense |
| Bond proceeds | Remove other financing source; record long-term liability |
| Principal repayment expenditures | Reduce liability |
| Modified accrual revenue deferrals | Adjust to accrual revenue where appropriate |
| Internal service funds | Usually included with governmental activities unless they primarily serve enterprise funds |
Budgetary accounting
| Account | Normal role |
|---|
| Estimated revenues | Budgeted inflows |
| Appropriations | Authorized spending |
| Encumbrances | Commitments from purchase orders/contracts before expenditure |
| Budgetary fund balance | Offset in budgetary entries |
| Expenditures | Actual costs incurred under modified accrual |
Typical encumbrance flow:
- Record encumbrance when purchase order is issued.
- Reverse encumbrance when goods/services are received.
- Record actual expenditure and liability.
Fund statement focus
| Fund type | Statements | Key trap |
|---|
| Governmental funds | Balance sheet; statement of revenues, expenditures, and changes in fund balances | Uses expenditures, not expenses |
| Proprietary funds | Statement of net position; revenues, expenses, changes in fund net position; cash flows | Similar to business accounting |
| Fiduciary funds | Statement of fiduciary net position; changes in fiduciary net position | Excluded from government-wide statements |
| Government-wide | Statement of net position; statement of activities | Includes governmental and business-type activities, not fiduciary |
Governmental revenue examples
| Revenue type | Recognition cue |
|---|
| Property taxes | Recognize when measurable and available; unavailable amounts deferred in governmental funds |
| Sales taxes | Derived tax revenue; recognize when underlying exchange occurs and resources are available |
| Grants | Eligibility requirements matter; expenditure-driven grants recognized as qualifying expenditures occur |
| Licenses and permits | Often recognize when cash received if not measurable before |
| Fines and penalties | Recognize when measurable and available |
Common journal entry patterns
| Transaction | Debit | Credit |
|---|
| Sale on account | Accounts receivable | Sales revenue |
| Estimate bad debts | Bad debt expense | Allowance for credit losses |
| Write off receivable | Allowance for credit losses | Accounts receivable |
| Collect previously written-off receivable | Accounts receivable, then cash | Allowance, then accounts receivable |
| Purchase inventory on account | Inventory | Accounts payable |
| Record COGS | Cost of goods sold | Inventory |
| Receive customer advance | Cash | Contract liability |
| Earn previously deferred revenue | Contract liability | Revenue |
| Purchase equipment | Equipment | Cash/accounts payable |
| Record depreciation | Depreciation expense | Accumulated depreciation |
| Dispose of asset for cash | Cash; accumulated depreciation; loss if needed | Asset; gain if needed |
| Record income tax expense | Income tax expense | Current tax payable; DTL; DTA as applicable |
| Declare cash dividend | Retained earnings | Dividends payable |
| Pay cash dividend | Dividends payable | Cash |
| Purchase treasury stock | Treasury stock | Cash |
Presentation and disclosure traps
| Topic | Correct treatment |
|---|
| Comprehensive income | Net income plus OCI; owner transactions excluded |
| OCI examples | AFS debt unrealized gains/losses, cash flow hedge effective portions, foreign currency translation adjustments, certain pension adjustments |
| Discontinued operations | Separate presentation only when disposal represents a strategic shift with major effect |
| Related parties | Disclose nature of relationship, transactions, amounts, and terms as required |
| Going concern | Management evaluates substantial doubt; disclosures depend on conditions and plans |
| Fair value | Disclose hierarchy and valuation details as required |
| Concentrations of risk | Disclose significant vulnerability when criteria are met |
| Subsequent events | Recognized vs nonrecognized distinction drives adjustment vs disclosure |
| Noncash transactions | Disclose separately from cash flow body |
| Offsetting | Do not offset assets and liabilities unless permitted |
Rapid decision checklists
If the question asks “recognize or disclose?”
- Does an asset, liability, revenue, expense, gain, or loss meet recognition criteria?
- Is the amount measurable with sufficient reliability?
- Is the event probable, reasonably possible, or remote if a contingency?
- Is there a specific GAAP rule overriding general recognition?
- If not recognized, is disclosure required?
If the question asks “which basis?”
| Entity/report | Basis |
|---|
| For-profit GAAP financial statements | Accrual |
| NFP GAAP financial statements | Accrual |
| Governmental fund statements | Modified accrual |
| Proprietary fund statements | Accrual |
| Fiduciary fund statements | Accrual |
| Government-wide statements | Accrual |
If the question asks “fair value or cost?”
| Item | Usual measurement |
|---|
| Trading debt security | Fair value through earnings |
| AFS debt security | Fair value through OCI |
| HTM debt security | Amortized cost |
| Equity security with readily determinable fair value | Fair value through earnings |
| Inventory | Lower of cost and NRV, or LCM for LIFO/retail |
| PPE | Historical cost less depreciation, subject to impairment |
| Asset held for sale | Lower of carrying amount or fair value less cost to sell |
| Acquired assets in business combination | Generally fair value |
| Goodwill | Recognized only in business combination; impairment tested |
If the question asks “asset or expense?”
| Clue | Likely answer |
|---|
| Future benefit and directly attributable to acquisition/preparation | Asset |
| Routine maintenance or recurring operating cost | Expense |
| Training, relocation, start-up | Usually expense |
| Successful legal defense extending intangible benefit | Capitalize |
| R&D under general rule | Expense |
| Internal-use software application development | Capitalize qualifying costs |
| Costs after asset ready for use | Usually expense unless improvement |
Final review priorities
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 Quick Reference to tag every miss as a recognition, measurement, presentation, or disclosure error.