CPA FAR Quick Review: Financial Accounting and Reporting
Quick review for AICPA CPA FAR: financial reporting, journal entries, cash flows, government, NFP, leases, tax, and high-yield traps.
AICPA CPA FAR Quick Review
This Quick Review 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 |
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 |
| Credit sale | Debit A/R, credit revenue |
| Estimate bad debts | Debit bad debt expense, credit allowance |
| Write off account | Debit allowance, credit A/R |
| Depreciation | Debit depreciation expense, credit accumulated depreciation |
| Bond issued at discount | Debit cash and discount, credit bonds payable |
| Bond issued at premium | Debit cash, credit premium and bonds payable |
| Finance lease, lessee | Recognize ROU asset and lease liability |
| Income tax temporary difference | Recognize DTA or DTL if criteria met |
Financial Statement Framework
For-Profit Financial Statements
| Statement | Main purpose | FAR focus |
|---|---|---|
| Balance sheet | Financial position at a point in time | Classification, valuation, current vs noncurrent |
| Income statement | Performance over a period | Revenue, expenses, gains, losses |
| Comprehensive income | Net income plus OCI items | AFS debt securities, pension items, certain hedges, foreign currency translation |
| Statement of cash flows | Cash inflows/outflows | Operating, investing, financing classification |
| Statement of equity | Changes in ownership interests | Stock issuances, dividends, treasury stock, OCI, retained earnings |
Recognition vs Measurement vs Presentation
| Question wording | What it usually asks |
|---|---|
| “Should be reported as…” | Presentation/classification |
| “Amount recognized…” | Recognition and measurement |
| “Journal entry…” | Debit/credit mechanics |
| “Disclosed but not accrued…” | Contingency or subsequent event |
| “Included in comprehensive income…” | OCI versus net income |
| “Fund financial statements…” | Governmental fund basis |
| “Government-wide statements…” | Full accrual government reporting |
Fair Value and Measurement Bases
| Measurement basis | Use when… | Watch out |
|---|---|---|
| Historical cost | Initial acquisition of many assets | Later impairment may override |
| Amortized cost | Bonds, loans, HTM debt securities | Effective interest method |
| Lower of cost and NRV | Inventory under FIFO/average | Do not use replacement cost ceiling/floor here |
| Lower of cost or market | Inventory under LIFO/retail inventory method | Market has replacement cost constraints |
| Fair value through net income | Trading debt securities, many equity securities | Unrealized gains/losses hit income |
| Fair value through OCI | Available-for-sale debt securities | Unrealized gains/losses usually OCI |
| Present value | Leases, asset retirement obligations, bonds | Use correct rate and timing |
Fair value hierarchy:
| Level | Inputs | Reliability |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical items | Highest |
| Level 2 | Observable inputs other than Level 1 | Intermediate |
| Level 3 | Unobservable inputs | Lowest |
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.
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.
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 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 |
| Additions/improvements | Capitalize |
| Depreciation start | When asset is ready for intended use |
| Salvage value | Excluded from depreciable base |
| Land | Not depreciated |
| Land improvements | Depreciated if limited life |
Depreciation Methods
| Method | Pattern |
|---|---|
| Straight-line | Equal expense each period |
| Double-declining balance | Accelerated; ignore salvage until final floor |
| Sum-of-years’ digits | Accelerated |
| Units of production | Based on actual usage |
Display formula for straight-line depreciation:
\[ \text{Annual depreciation}=\frac{\text{Cost}-\text{Salvage value}}{\text{Useful life}} \]Impairment and Assets Held for Sale
| Asset status | Test |
|---|---|
| Held and used, long-lived asset | 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 |
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 | Investor share affects income |
| Consolidated subsidiary | Consolidate assets, liabilities, revenues, expenses | Eliminate intercompany items |
Equity Method Quick Rules
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 |
Consolidations and Business Combinations
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.
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 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.
Income Taxes
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.
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.
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 |
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.
Statement of Cash Flows
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.
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.
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 | 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
Government accounting is a major FAR differentiator because the same government may report under different measurement focuses and bases.
Government-Wide vs Fund Financial Statements
| Reporting level | Measurement focus | Basis of accounting |
|---|---|---|
| Government-wide | Economic resources | Accrual |
| Governmental funds | Current financial resources | Modified accrual |
| Proprietary funds | Economic resources | Accrual |
| Fiduciary funds | Economic resources | Accrual |
Fund Types
| Category | Funds |
|---|---|
| Governmental funds | General, special revenue, debt service, capital projects, permanent |
| Proprietary funds | Enterprise, internal service |
| Fiduciary funds | Pension and other employee benefit trust, investment trust, private-purpose trust, custodial |
Governmental Fund Accounting
Governmental funds use modified accrual.
| Item | Modified accrual treatment |
|---|---|
| Revenues | 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 purchases | Expenditure, not capital asset in governmental fund statements |
| Depreciation | Not recorded in governmental fund statements |
| Encumbrances | Budgetary control, not actual expenditure |
| Supplies inventory | Purchase method or consumption method may be used depending on policy |
Government-Wide Reporting
Government-wide statements use accrual accounting and report:
- Capital assets.
- Depreciation.
- Long-term debt.
- Internal service fund activity often included with governmental activities unless mainly serving enterprise funds.
- Governmental and business-type activities.
Fund Balance Classifications
| Classification | Meaning |
|---|---|
| Nonspendable | Not in spendable form or legally required to remain intact |
| Restricted | Externally imposed or constitutionally/legally restricted |
| Committed | Constrained by highest level of government decision-making authority |
| Assigned | Intended for a specific purpose |
| Unassigned | Residual classification, primarily general fund |
Governmental Accounting Traps
- Capital asset purchases in governmental funds are expenditures, not assets.
- Bond proceeds in governmental funds are other financing sources, not revenue.
- Government-wide statements record long-term assets and liabilities; governmental funds generally do not.
- “Available” is a modified accrual revenue concept.
- Fiduciary activities are excluded from government-wide statements.
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.
How to Use This Review with Practice Questions
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.
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.