CCFA: Financial Accounting and Reporting

The Financial Accounting and Reporting domain tests whether you can build and read the four primary statements under accrual accounting and adjust reported numbers for analysis. Questions target revenue recognition, expense matching, asset measurement, and the classification choices that move cash flow between operating, investing, and financing sections.

Core rules

• Accrual accounting records revenue when the performance obligation is satisfied, not when cash arrives. Under the five-step revenue model in ASC 606 and IFRS 15, identify the contract, identify performance obligations, determine the transaction price, allocate it, and recognize revenue as obligations are met.
• The matching principle ties expenses to the revenue they help generate, which is why depreciation, amortization, and warranty provisions appear before cash moves.
• Inventory cost flow affects margin and taxes: FIFO leaves older costs in cost of goods sold during inflation, LIFO raises cost of goods sold and lowers taxable income, and weighted average smooths both.
• Impairment tests compare carrying amount with recoverable amount; under IFRS the recoverable amount is the higher of fair value less costs of disposal and value in use.
• Deferred tax arises when accounting and tax bases diverge temporarily; a deferred tax liability is common when tax depreciation runs ahead of book depreciation.

Worked example

A company buys equipment for 100,000 with a five-year life and no residual value. Straight-line book depreciation is 20,000 per year. Tax authorities allow 40,000 in year one. Pre-tax book income is 60,000 and the tax rate is 25%. Taxable income is 60,000 + 20,000 - 40,000 = 40,000, so current tax is 10,000. Book tax expense is 60,000 × 25% = 15,000. The 5,000 difference is a deferred tax liability: the company will pay it as tax depreciation falls below book depreciation in later years. The entry debits tax expense 15,000, credits current tax payable 10,000, and credits deferred tax liability 5,000.

Traps

• Interest paid is operating under US GAAP but may be operating or financing under IFRS; dividends paid are financing under US GAAP and may be operating or financing under IFRS.
• LIFO liquidation inflates profit when old layers are sold; do not treat it as sustainable.
• Capitalizing a cost defers expense and flatters current EBITDA; check capitalized interest and software costs.
• A change in depreciation estimate is prospective, not a prior-period error.