FAR Video #1 of 3 (below). The first AICPA Answer Explanations for FAR multiple choice question in this video from the October 2019 AICPA release relate to accruals and deferrals. Candidates must know the difference between accruals and deferrals. Deferrals mean that a transaction impacts cash before impacting the income statement while accruals impact the income statement before hitting cash. The AICPA appears to have pulled this first question right out of the i-75 test bank! The next question asks about unrealized gains on available for sale debt securities which go to other comprehensive income, OCI, rather than to the income statement. This question also appears to be taken right out of i-75 and I would expect both of these first two questions to be asked again real soon! The AICPA also released a question about how the issuance of common stock for cash, impacts the cash flow statement. Once again, right out of the i-75 test bank! Candidates must know which section of the cash flow statement is impacted when various transactions occur. The statement of cash flows is always tested on the FAR exam. Then a question was asked about business combinations and how the parent and subsidiary financial statements are not impacted by the eliminating entries made prior to consolidation. The next question was about not for profit organizations. The question asked about the primary purpose of the statement of activities, which is to provide relevant information to the donors and resource providers. The CPA Exam released a follow up question about not for profit organizations regarding the reporting of expenses by both natural and functional classifications, a requirement now for all not for profits. Then one more question on not for profits with regard to the statement of cash flows. The question indicated the indirect method rather than direct method and asked about what would be added back to the change in net assets figure in the operating section. The answer was depreciation, a non-cash expense and this would have been the same answer even if the statement of cash flows was prepared for a for profit. In that case, you would have added back depreciation expense to net income in the operating section. Another cash flow statement question, this one asked about net cash provided by financing. This is yet another question that seems to have been pulled from the i-75 test bank. CPA FAR candidates must know what types of cash transactions impact the different sections of a cash flow statement before visiting the Prometric testing center. The next question was about earnings per share, long time member of the AICPA FAR blueprint followed by another NASBA favorite, segment reporting. You don’t have to understand segment reporting and weighted average common shares outstanding prior to getting your notice to schedule, but you must understand these financial accounting and reporting topics before entering the Prometric testing center. The next question involved adjusting and correcting journal entries, another question that appears to be pulled from the i-75 test bank. The final question in FAR Video # 1 involves bank reconciliations. Deposits in transit and outstanding checks and NSF can be asked in FAR or Audit.
FAR Video #2 of 3 (Below) In the second video containing the AICPA Answer Explanations for FAR questions from October of 2019, inventory is heavily tested. The first question asked about a switch from FIFO to LIFO and what the effects on ending inventory and net income and taxes payable would be during a period of rising prices, inflation. This question could have been asked in BEC, Audit or even REG. The next question was inventory related also, as it asked about consignment, another cross exam topic. Consignment questions could be asked in FAR, Audit or BEC. Another inventory question, on weighted average, periodic inventory. Calculating weighted average cost per unit is important because its needed to determine weighted average cost of goods sold or weighted average ending inventory. Yet another inventory question, this time LIFO periodic. The question asked for cost of goods sold but it could easily have asked for ending inventory and in the video, I teach you a trick so that you could easily determine either. The next question involves fixed assets and particularly the land and building account. The next 2 questions are about double declining balance depreciation and the resulting carrying amount. The next question is about investments in common stock using the fair value through net income method and the equity method. The next question concerns intangible assets, such as a patent or copyright. FAR candidates need to know how amortization expense is determined for intangible assets. The next 2 questions were about accrued liabilities and how much needs to be booked as payables at year end. Then a question was asked about amortizing bond discount or bond premium using either the effective interest or straight line method.
FAR Video #3 of 3 (Below) Video 3 AICPA Answer Explanations for FAR. The first question is about stockholders’ equity and in particular, a stock split. When a corporation splits its stock, it splits the par value. If the par value was $10 before the split and the stock splits 5:1, then the par value is divided by 5 and the new par value is $2 per share. No journal entries are needed in connection with a stock split. The next question asked about error corrections and how the income statement and balance sheet is impacted when a prior year error is corrected in the current year. In the AICPA question, accumulated depreciation would be impacted on the balance sheet when no depreciation expense was recorded in the prior year. The next question asked about accrued expenses for unused vacation pay when the unused vacation pay accumulates to the following year. The unused vacation pay becomes an accrued liability. The next question deals with error corrections, errors detected prior to the current year financial statement release. Before you walk into the Prometric testing center, you must know if ending inventory is overstated, net income is overstated and if expenses are understated, that net income is overstated. When you study and prepare to pass the CPA Exam, you must know how error corrections impact the financial statements. The next question was an error correction also, inventory purchase was not recorded but the inventory was included in the count so only liabilities were understated, not the assets. The next question was about contingent liabilities. The terms reasonably possible, and probable and also remote are very important for a CPA Candidate. Only losses that are probable and reasonably estimable should be accrued. When the loss is reasonably possible, footnote disclosure only. When the loss is reasonably possible disclosure of a given range of losses would be required when no amount is considered more likely than any other amount. This is different when the loss is probable and a range of losses is given. When the loss needs to be booked because the contingent loss is probable and estimable, then the lower amount of the range is booked as a contingent liability if no amount is considered more likely. The next question was about derivatives which is part of the FASB AICPA blueprint for BEC, FAR and also Audit. Derivatives include stock options because options “derive” their value from another instrument, the common stock share price. The other choices, municipal bonds, bank certificates of deposit and money market funds are not derivatives because they do not derive their value from another instrument. Then the exam asked about research and development expense. In questions like this, you not only have to know what is R&D, you have to know what is NOT R&D expense. Research and development cannot be from routine on-going efforts to improve existing products. Also, costs during production are not R&D. The next question was about software and when to expense as R&D, early costs up to technological feasibility, then capitalize until the product makes it into the packaging ready for sale. Then back to expense for customer support. Then the government accounting questions which were a good mix of fund accounting and government wide financial statements. The first section asked about Government wide financial statements and in particular, the CAFR. The statistical section of the CAFR is unaudited and includes data that spans multiple fiscal years regarding things like property tax revenues. The next GASB question you had to know that in a permanent fund, the principal cannot be spent, only the income can be spent. In a special revenue fund, both the principal and interest can be spent. In the next question, you had to know that enterprise funds include activities that are financed through user charges and not paid for by general fund property tax revenues. The next question involved the format of the government wide statement of activities and GASB requires a column for governmental activities (that includes internal service fund) a second column for business type activities, (that includes enterprise funds) and another column for discretely presented component units (not already blended into the first column). The next question required the candidate to know the difference between revenues and other financing sources in the capital projects fund. The next question dealt with the modified approach to infrastructure assets and a CPA FAR candidate needs to know that governmental entities can use the modified approach to newly constructed infrastructure assets such as roads, bridges, tunnels, storm sewers, and not have to record depreciation. The next question asked about how property tax revenues are recorded in the government wide statement of activities, using full accrual accounting. Under full accrual rules, revenue is recorded net of the amount expected to be uncollectible. The final question in FAR released by the AICPA asked how bond payments were treated in the fund based financial statements and they are treated as an expenditure, both principal and interest.
Darius’s AICPA Answer Explanations for FAR. Recently released multiple choice questions with the correct letter answer but did not release the explanatory answers. My students tell me that none of the other CPA Review Courses have the answer explanations available yet. CPAexamTutoring.com is the first website to publish these answer explanations and in this video you can watch me narrate and explain the answers. I will also give you my opinion as to whether the question is likely to appear on your FAR exam. Amazingly, several of these questions appear to have come from the i-75 test bank.