Free CPA Exam Flashcards

The standard framework of guidelines for financial accounting in the U.S. Established by FASB. Includes principles like revenue recognition, matching, full disclosure, and consistency. Required for publicly traded companies.

Accrual basis: recognizes revenue when earned and expenses when incurred, regardless of cash flow. Cash basis: records transactions only when cash changes hands. GAAP requires accrual basis for financial statements.

Reports assets, liabilities, and equity at a specific point in time. Fundamental equation: Assets = Liabilities + Stockholders' Equity. Assets listed in order of liquidity; liabilities in order of maturity.

Reports revenues, expenses, gains, and losses over a period of time. Net Income = Revenue − Expenses + Gains − Losses. Presented in single-step or multi-step format.

Reports cash inflows and outflows in three categories: Operating (day-to-day business), Investing (long-term assets), and Financing (debt and equity). Can use direct or indirect method for operating section.

Straight-line: (Cost − Salvage) ÷ Useful Life. Double-declining balance: 2 × (1 ÷ Useful Life) × Book Value. Sum-of-years' digits: Remaining Life ÷ Sum of Years × Depreciable Base. Units of production: based on actual usage.

Five-step model: (1) Identify the contract, (2) Identify performance obligations, (3) Determine transaction price, (4) Allocate price to obligations, (5) Recognize revenue when obligations are satisfied—either over time or at a point in time.

FIFO (First-In, First-Out): oldest costs to COGS. LIFO (Last-In, First-Out): newest costs to COGS (not allowed under IFRS). Weighted average: average cost per unit. Lower of cost or net realizable value applies.

AR recorded at net realizable value. Bad debt estimated using: percentage of sales method (income statement approach) or aging of receivables method (balance sheet approach). Write-offs debit Allowance, credit AR.

Lessees recognize a right-of-use (ROU) asset and lease liability for all leases >12 months. Finance leases: amortize ROU asset and record interest. Operating leases: single lease expense on a straight-line basis.

Unmodified (clean): financial statements are fairly presented. Qualified: except for a specific issue. Adverse: statements are NOT fairly presented. Disclaimer: auditor cannot form an opinion due to scope limitation.

A misstatement is material if it could influence the economic decisions of users. Auditors set materiality levels during planning. Performance materiality is set lower than overall materiality to reduce aggregation risk.

Audit Risk = Inherent Risk × Control Risk × Detection Risk. Inherent risk: susceptibility to misstatement. Control risk: risk controls fail to prevent/detect. Detection risk: risk audit procedures fail to detect. Only detection risk is controlled by auditor.

Five components: (1) Control Environment, (2) Risk Assessment, (3) Control Activities, (4) Information & Communication, (5) Monitoring Activities. Framework used to evaluate internal control effectiveness.

Tests of controls: evaluate operating effectiveness of internal controls (walkthroughs, reperformance). Substantive procedures: detect material misstatements directly (analytical procedures, tests of details).

Sufficiency: quantity of evidence (more needed for higher risk). Appropriateness: quality—relevance and reliability. External evidence > internal. Auditor-generated > client-generated. Original > copies.

Auditor evaluates whether substantial doubt exists about the entity's ability to continue as a going concern within one year. If doubt exists and is not alleviated, an emphasis-of-matter paragraph is added to the audit report.

Positive confirmation: recipient responds whether they agree or disagree. Negative confirmation: recipient responds only if they disagree. Blank confirmation: recipient fills in the amount (most reliable). Used for AR, bank balances, legal matters.

Five statuses: Single, Married Filing Jointly (MFJ), Married Filing Separately (MFS), Head of Household (HoH), Qualifying Surviving Spouse. Status determines tax brackets, standard deduction, and eligibility for credits.

Single: $15,000. MFJ: $30,000. HoH: $22,500. Additional deduction for age 65+ or blind: $1,950 (single) or $1,550 (married). Taxpayers choose the greater of standard or itemized deductions.

Short-term (held ≤1 year): taxed as ordinary income. Long-term (held >1 year): taxed at 0%, 15%, or 20% depending on income. Net Investment Income Tax (NIIT): additional 3.8% on investment income above thresholds.

Allows deferral of gain on exchange of real property held for business or investment. Must identify replacement property within 45 days and close within 180 days. Personal property no longer qualifies after TCJA.

Maximum 100 shareholders (all must be U.S. citizens/residents or certain trusts). Only one class of stock. Must be domestic corporation. Pass-through taxation: income/losses flow to shareholders' personal returns.

Partnerships file Form 1065 (informational return). No entity-level tax. Income, deductions, and credits pass through to partners via Schedule K-1. Partners pay self-employment tax on their distributive share.

General rule: 3 years from filing date (or due date if later). Substantial omission (>25% of gross income): 6 years. Fraud or failure to file: no statute of limitations. Amended returns: file within 3 years of original filing.

Treasury regulations governing practice before the IRS. Applies to CPAs, attorneys, enrolled agents. Requires: due diligence, no unreasonable positions, prompt return of client records, written disclosure of conflicts.

C Corp: double taxation, unlimited shareholders, multiple stock classes. S Corp: pass-through, ≤100 shareholders, one stock class. LLC: pass-through, flexible management, self-employment tax on active members.

Allows up to 20% deduction on qualified business income from pass-through entities. Subject to W-2 wage and property limitations above income thresholds. Specified service trades (law, accounting, consulting) have additional limitations.

Formula: WACC = (E/V × Re) + (D/V × Rd × (1−T)). Where E = equity, D = debt, V = total value, Re = cost of equity, Rd = cost of debt, T = tax rate. Used as discount rate for capital budgeting decisions.

Sum of present values of future cash flows minus initial investment. NPV > 0: accept the project (adds value). NPV < 0: reject. NPV = 0: indifferent. Preferred over IRR for mutually exclusive projects.

The discount rate that makes NPV equal to zero. Decision rule: accept if IRR > required rate of return (hurdle rate). Assumes reinvestment at IRR (a potential limitation vs. NPV method).

Compares actual results to budgeted/standard costs. Price variance: (Actual Price − Standard Price) × Actual Quantity. Quantity variance: (Actual Quantity − Standard Quantity) × Standard Price. Favorable = under budget; Unfavorable = over budget.

Section 302: CEO/CFO certify financial statements. Section 404: Management assesses internal controls; auditor attests. Section 906: Criminal penalties for fraudulent certification. Created PCAOB to oversee auditors of public companies.

Governmental funds: General, Special Revenue, Capital Projects, Debt Service, Permanent. Proprietary funds: Enterprise, Internal Service. Fiduciary funds: Pension Trust, Investment Trust, Private-Purpose Trust, Custodial.

Revenues recognized when measurable and available (collected within 60 days of period end). Expenditures recognized when the liability is incurred. Used by governmental funds. Full accrual used by proprietary and fiduciary funds.

GASB sets accounting standards for state and local governments. FASB sets standards for private-sector entities and non-profits. Key difference: GASB focuses on accountability and budgetary compliance; FASB focuses on profitability and cash flows.

Net assets classified as: with donor restrictions or without donor restrictions. Must present Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and Statement of Functional Expenses.

Goodwill = Purchase Price − Fair Value of Net Assets Acquired. Not amortized. Tested annually for impairment. Impairment: if carrying amount of reporting unit exceeds fair value, write down goodwill (cannot exceed carrying amount).

DTL: taxable income will be HIGHER in future (e.g., accelerated depreciation). DTA: taxable income will be LOWER in future (e.g., warranty expense). Recorded at enacted tax rates. DTA may need valuation allowance if realization is uncertain.

Premium: market rate < stated rate (investors pay more). Discount: market rate > stated rate (investors pay less). Premium amortized reduces interest expense; discount amortized increases interest expense over bond life.

Options measured at fair value on grant date using Black-Scholes or binomial model. Expense recognized over the vesting period. No adjustment for subsequent fair value changes. Forfeitures can be estimated or recognized as they occur.

Acquisition method required: (1) Identify the acquirer, (2) Determine acquisition date, (3) Recognize and measure identifiable assets/liabilities at fair value, (4) Recognize goodwill or gain on bargain purchase.

Basic EPS: (Net Income − Preferred Dividends) ÷ Weighted Average Common Shares. Diluted EPS: includes effect of stock options, convertible bonds, convertible preferred using treasury stock or if-converted methods.

Deduction: reduces taxable income (value = deduction × marginal tax rate). Credit: reduces tax liability dollar-for-dollar (more valuable). Refundable credits can create a refund; nonrefundable credits reduce tax to zero only.

Required if expected tax liability ≥ $1,000. Due quarterly: Apr 15, Jun 15, Sep 15, Jan 15. Safe harbor: pay 100% of prior year tax (110% if AGI > $150,000) or 90% of current year tax to avoid penalty.

Type I (recognized): conditions existed at balance sheet date—adjust financial statements. Type II (non-recognized): conditions arose after balance sheet date—disclose only. Evaluation period extends through date financial statements are issued/available.

Must disclose: nature of relationship, description of transactions, dollar amounts, amounts due to/from. Common related parties: parent/subsidiary, affiliates, principal owners, management, immediate family of officers.

Fixed costs: total stays constant regardless of volume (per-unit decreases). Variable costs: total changes proportionally with volume (per-unit stays constant). Mixed: contains both elements. High-low method separates components.

Break-even point (units) = Fixed Costs ÷ Contribution Margin per Unit. Break-even point (dollars) = Fixed Costs ÷ Contribution Margin Ratio. CM Ratio = (Sales − Variable Costs) ÷ Sales.

Key principles: Responsibilities, Public Interest, Integrity, Objectivity & Independence, Due Care, Scope & Nature of Services. Independence required in fact AND appearance for attest engagements. Violations can lead to license revocation.