CPA FAR flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Fundamental qualitative characteristics

Relevance and faithful representation are fundamental. Relevance includes predictive value, confirmatory value, and materiality; faithful representation is complete, neutral, and free from material error.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness, and understandability increase the usefulness of financial information but do not replace the fundamental characteristics of relevance and faithful representation.

Accrual basis accounting

Recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid, providing better matching of revenues and expenses than cash basis accounting.

Going concern assumption

Financial statements assume the entity will continue operating long enough to realize assets and settle liabilities in the normal course of business absent evidence to the contrary.

Basic EPS formula

Basic EPS equals net income minus preferred dividends, divided by the weighted-average number of common shares outstanding during the period.

Diluted EPS

Diluted EPS reflects potential common shares from options, warrants, convertibles, and other dilutive securities using the if-converted method or treasury stock method as appropriate.

Comprehensive income

Comprehensive income equals net income plus other comprehensive income. OCI includes certain unrealized gains and losses, pension adjustments, foreign currency translation, and cash flow hedge amounts.

Operating cash flow classification

Under US GAAP, interest paid, interest received, and dividends received are generally classified as operating cash flows, while dividends paid are classified as financing cash flows.

Revenue recognition steps

Identify the contract, identify performance obligations, determine the transaction price, allocate the price to performance obligations, and recognize revenue when or as obligations are satisfied.

Reportable segment tests

A segment is reportable if revenue, profit or loss, or assets are at least 10% of the combined amount; reportable segments must cover at least 75% of external revenue.

Retained earnings rollforward

Ending retained earnings equals beginning retained earnings plus net income minus dividends declared; prior-period adjustments and certain equity transactions may also affect the balance.

Materiality

Information is material if omitting or misstating it could influence decisions of primary users. Materiality is entity-specific and considers both quantitative and qualitative factors.

Finance lease criteria

A lessee classifies a lease as finance if ownership transfers, a purchase option is reasonably certain, the term is a major part of asset life, the present value is substantially all fair value, or the asset is specialized.

Operating lease cost

A lessee recognizes a single total lease cost on a straight-line basis over the lease term, with the lease liability accreted and the right-of-use asset adjusted each period.

Lease liability measurement

Initial lease liability equals the present value of unpaid lease payments, discounted using the rate implicit in the lease or the lessee's incremental borrowing rate if implicit rate is unavailable.

Bond premium

A bond sells at a premium when the stated coupon rate exceeds the market rate; the carrying amount decreases toward face value as the premium amortizes over the bond's life.

Effective interest method

Interest expense equals the beginning carrying amount multiplied by the market rate; amortization equals interest expense minus cash interest paid for the period.

Deferred tax liability

A deferred tax liability arises from taxable temporary differences expected to reverse in future periods; it represents taxes payable later when book income exceeds taxable income.

Valuation allowance

A valuation allowance reduces deferred tax assets when it is more likely than not that some or all will not be realized, based on all positive and negative evidence.

Stock compensation measurement

Equity-classified awards are measured at grant-date fair value and recognized as compensation cost over the requisite service period, usually the vesting period.

Loss contingency accrual

Accrue a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated; disclose reasonably possible losses that are not accrued.

Fair value hierarchy

Level 1 uses quoted prices for identical assets in active markets; Level 2 uses observable inputs other than Level 1; Level 3 uses unobservable inputs.

PP&E impairment test

Compare the carrying amount with undiscounted future cash flows; if the carrying amount is not recoverable, write it down to fair value and recognize an impairment loss.

Goodwill impairment

Compare a reporting unit's fair value with its carrying amount; if fair value is lower, recognize an impairment loss for the excess, limited to the goodwill allocated to that reporting unit.

Modified accrual basis

Governmental funds recognize revenues when measurable and available and expenditures when the related liability is incurred, focusing on current financial resources.

Government-wide statements

Accrual-basis statements report governmental and business-type activities as a whole; fiduciary activities are excluded, and internal service funds are generally folded into governmental activities.

Governmental fund types

General, special revenue, debt service, capital projects, and permanent funds use modified accrual accounting and a current financial resources measurement focus.

Proprietary fund types

Enterprise and internal service funds use accrual accounting and an economic resources measurement focus; enterprise funds report business-type activities in government-wide statements.

Fiduciary fund types

Pension and OPEB trust funds, investment trust funds, private-purpose trust funds, and custodial funds hold resources for others and are excluded from government-wide statements.

Fund balance classifications

Nonspendable, restricted, committed, assigned, and unassigned are fund balance classifications; committed amounts require formal action by the highest governing body and cannot be lifted by management alone.

Major fund criteria

The General Fund is always major. Other governmental or enterprise funds are major if they meet the 10% fund-type test and 5% combined governmental-and-enterprise test for assets, liabilities, revenues, or expenditures/expenses.

Budgetary comparison schedule

Required for the General Fund and each major special revenue fund with a legally adopted budget; it compares original budget, final budget, and actual amounts, often with a variance column.