CPA BAR common mistakes
CPA BAR · Understand the traps and how to avoid them.
Treating a special-purpose local government as a component unit and consolidating it into the primary government's reporting entity when the government is not financially accountable for it.
Candidates memorize 'component unit = include' and skip the financial-accountability and benefit/burden tests, conflating oversight with accountability.
What to do instead
Before including any entity, walk the two-part test: is there appointment of a voting majority with the ability to impose will, or a fiscal dependency with benefit/burden? If no to both, disclose as a related organization, not a component unit.
Reconciling governmental fund balances to net position on the government-wide statement by adjusting only for capital assets and ignoring long-term liabilities, deferred inflows/outflows, and internal service fund net position.
The reconciliation is memorized as a single 'add capital assets' adjustment, so candidates omit the multi-column bridge and lose partial credit.
What to do instead
Build the reconciliation as a checklist of every adjustment column: capital assets net of depreciation, long-term debt principal, accrued interest, unavailable revenue, internal service fund reclassification, and deferred items. Reconcile line by line, not as one lump sum.
Recording a lessee's operating lease by expensing payments as incurred rather than recognizing a right-of-use asset and lease liability on the balance sheet.
Candidates carry forward pre-ASC 842 intuition where operating leases were off-balance-sheet and over-apply that to all leases.
What to do instead
Apply the recognition rule first: any lease over 12 months creates a ROU asset and lease liability; only the short-term lease election allows off-balance-sheet treatment. Then determine classification for income statement pattern.
Using the expected return on plan assets as the discount rate or as the service cost discount in a pension or OPEB calculation.
The two rates sound interchangeable and candidates confuse the return assumption with the high-quality corporate bond yield used to discount liabilities.
What to do instead
Anchor the discount rate to the yield on high-quality corporate bonds matched to benefit timing; use expected return only to compute the return on plan assets component of net periodic cost. Keep the two rates in separate labeled lines.
Computing diluted EPS by adding all potentially dilutive securities to the numerator and denominator without testing each for antidilution or applying the if-converted and treasury stock methods correctly.
Candidates apply a single formula and skip the sequential antidilution test, especially with convertible debt where interest add-back matters.
What to do instead
Rank securities from most to least dilutive, apply the treasury stock method to options and the if-converted method to convertibles with the after-tax interest add-back, and stop including any security that increases EPS.
Classifying a lease or contract as a finance lease based only on the transfer-of-ownership criterion, ignoring the present value test, economic life test, and purchase option.
Candidates anchor on the most memorable criterion and stop evaluating once one test is checked.
What to do instead
Evaluate all five classification criteria independently and classify as finance if any one is met; show the present value computation explicitly using the incremental borrowing rate when the implicit rate is not known.
Analyzing a variance by computing the total difference and attributing it to price or quantity alone rather than decomposing into price and efficiency components.
The total variance is easy to compute and candidates stop there, or they mix up which factor is held constant.
What to do instead
Always compute the two-part decomposition: price variance on actual quantity, quantity variance on standard price. Label which input is held constant in each sub-variance before calculating.
Choosing a capital budgeting recommendation from IRR alone when projects differ in scale or when IRR and NPV conflict.
Candidates treat IRR as the superior metric and ignore the reinvestment rate assumption and scale differences.
What to do instead
For mutually exclusive projects, rank by NPV; use IRR only as a screening hurdle. When they conflict, state that NPV assumes reinvestment at the cost of capital and governs the decision.
Computing a residual income or EVA measure without deducting an imputed capital charge, or using book value of equity where invested capital is required.
Residual income is confused with ROI or net income, and the capital charge is treated as optional.
What to do instead
Write the formula explicitly: operating income minus (required rate times invested capital). Confirm the capital base matches the rate used and adjust accounting income for EVA items before computing.
Preparing a government-wide statement by converting governmental fund statements without eliminating internal balances or reclassifying internal service fund activity.
Candidates treat the conversion as a simple column addition and miss interfund eliminations and the governmental-versus-business-type split.
What to do instead
Before aggregating, eliminate interfund receivables/payables and transfers, move internal service fund balances to the appropriate function, and separate governmental from business-type activities. Reconcile the totals back to the fund statements.