CPA Exam: FAR Deck (F1, F2) Questions
and Answers.
How is the level in fair value hierarchy determined? - Answer By the lowest level of significant input
What the the fundamental and enhancing qualitative characteristics of financial information? -
Answer Fundamental Characteristics: Relevance and Faithful Representation. Relevance requires
information be complete, neutral, and free from error. Faithful representation requires information
have predictive and confirmatory value, and be material
Enhancing Characteristics: Comparability, Understand ability, Timeliness, and Verifiability
What is the primary objective of financial reporting? - Answer The primary objective of financial
reporting is to provide financial information that is useful to the primary users of financial reports
(SFAC 8, Chapter 1). Those primary users are lenders, creditors, and investors.
SFAC - Statements of Financial Accounting Concepts
How are activities grouped on an income statement and how do they differ for single vs. multi step
statements? - Answer They are grouped into continuing operations and discontinued operations.
Disc ops will always be at the bottom. For a multi-step income statement the continued operations
are separated into operating activities and continuing but non-operating activities. These includes
things like interest, gain/loss on asset, gain/loss on available for sales securities, transaction costs,
etc.
How are prior period adjustments booked? - Answer they are booked through equity in retained
earnings and do not impact the P&L
How should a segregated bank account used to pay a long-term liabilities be classified? - Answer it
should be classified as a non-current asset.
What is the minimum operating cycle for the purposes of reporting current assets and current
liabilities? - Answer12 months; even if the company has an operating cycle that is less than this
What condition must be present for a contract modification to be accounted for as a separate (new)
contract? - Answer when the contract is modified due to a scope change and a change in price that is
standalone exists
, What is the five step approach for revenue recognition - AnswerISTAR?
I - (Identify) Identify contract with customer
S - (Separate) Identify separate performance obligations
T - (Transaction): Determine the transaction price
A - (Allocate): Allocate transaction price to separate performance obligations
R - (Recognize): Recognize revenue when or as the entity satisfies each performance obligation
What makes an entity an agent vs. principal in a transaction? - Answer An entity is an agent when
they do not control the good or service before it is provided to the customer. Indicators of this
include: another party (principal) is primarily responsible for fulfilling the contract; the entity has no
inventory risk; the entity does not have discretion in establishing prices of the other party's goods or
services
What is the % of completion method for recognizing revenue on a contract? - Answer% completion
method is determined by comparing incurred costs to date to total estimated costs to complete the
contract. The company applies that % complete to the estimated gross profit (or revenue) to arrive
at the amount to be recognized that period.
Total Costs Incurred / Estimated Total Cost = % Complete
Contact Value - Estimated Total Cost = Estimated Gross Profit
% Complete x Estimated Gross Profit = Gross Profit to be Recognized in Period
How do you calculate the net asset or net liability on a contract? - Answer Take your CIP and
compare to progress billings. If CIP > progress billings then you have a net asset. If CIP < progress
billings then you have a net liability.
Remember, if you using the % of completion method to recognize revenue then CIP includes costs
incurred and GP recognized to date. If using contract complete method then CIP only includes costs
incurred
When do repurchase agreements require the seller to book the transaction as a financing
arrangement? - Answer When the repurchase price is equal to or greater than the original sales
prices AND the expected market value
and Answers.
How is the level in fair value hierarchy determined? - Answer By the lowest level of significant input
What the the fundamental and enhancing qualitative characteristics of financial information? -
Answer Fundamental Characteristics: Relevance and Faithful Representation. Relevance requires
information be complete, neutral, and free from error. Faithful representation requires information
have predictive and confirmatory value, and be material
Enhancing Characteristics: Comparability, Understand ability, Timeliness, and Verifiability
What is the primary objective of financial reporting? - Answer The primary objective of financial
reporting is to provide financial information that is useful to the primary users of financial reports
(SFAC 8, Chapter 1). Those primary users are lenders, creditors, and investors.
SFAC - Statements of Financial Accounting Concepts
How are activities grouped on an income statement and how do they differ for single vs. multi step
statements? - Answer They are grouped into continuing operations and discontinued operations.
Disc ops will always be at the bottom. For a multi-step income statement the continued operations
are separated into operating activities and continuing but non-operating activities. These includes
things like interest, gain/loss on asset, gain/loss on available for sales securities, transaction costs,
etc.
How are prior period adjustments booked? - Answer they are booked through equity in retained
earnings and do not impact the P&L
How should a segregated bank account used to pay a long-term liabilities be classified? - Answer it
should be classified as a non-current asset.
What is the minimum operating cycle for the purposes of reporting current assets and current
liabilities? - Answer12 months; even if the company has an operating cycle that is less than this
What condition must be present for a contract modification to be accounted for as a separate (new)
contract? - Answer when the contract is modified due to a scope change and a change in price that is
standalone exists
, What is the five step approach for revenue recognition - AnswerISTAR?
I - (Identify) Identify contract with customer
S - (Separate) Identify separate performance obligations
T - (Transaction): Determine the transaction price
A - (Allocate): Allocate transaction price to separate performance obligations
R - (Recognize): Recognize revenue when or as the entity satisfies each performance obligation
What makes an entity an agent vs. principal in a transaction? - Answer An entity is an agent when
they do not control the good or service before it is provided to the customer. Indicators of this
include: another party (principal) is primarily responsible for fulfilling the contract; the entity has no
inventory risk; the entity does not have discretion in establishing prices of the other party's goods or
services
What is the % of completion method for recognizing revenue on a contract? - Answer% completion
method is determined by comparing incurred costs to date to total estimated costs to complete the
contract. The company applies that % complete to the estimated gross profit (or revenue) to arrive
at the amount to be recognized that period.
Total Costs Incurred / Estimated Total Cost = % Complete
Contact Value - Estimated Total Cost = Estimated Gross Profit
% Complete x Estimated Gross Profit = Gross Profit to be Recognized in Period
How do you calculate the net asset or net liability on a contract? - Answer Take your CIP and
compare to progress billings. If CIP > progress billings then you have a net asset. If CIP < progress
billings then you have a net liability.
Remember, if you using the % of completion method to recognize revenue then CIP includes costs
incurred and GP recognized to date. If using contract complete method then CIP only includes costs
incurred
When do repurchase agreements require the seller to book the transaction as a financing
arrangement? - Answer When the repurchase price is equal to or greater than the original sales
prices AND the expected market value
