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CPA Exam: Core Terms (FAR / AUD / REG)

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Foundational accounting, audit, and tax concepts across the three core sections.

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Accrual basis

(FAR) Revenue is recognized when earned and expenses when incurred, regardless of when cash moves.
Matching principle

(FAR) Expenses are recorded in the same period as the revenues they helped generate.
Going concern assumption

(FAR) Financial statements assume the entity will continue operating for the foreseeable future.
Five-step revenue model (ASC 606)

(FAR) Identify the contract, identify performance obligations, determine the transaction price, allocate it, recognize revenue as obligations are satisfied.
Deferred revenue

(FAR) Cash received before the performance obligation is satisfied. It is a liability, not revenue.
Accounting equation

(FAR) Assets equal liabilities plus equity. Every entry must keep it in balance.
Contra account

(FAR) An account that offsets a related account, such as accumulated depreciation against a fixed asset.
FIFO vs. LIFO

(FAR) In rising prices FIFO leaves newer, higher costs in ending inventory and reports higher income; LIFO does the reverse.
Lower of cost or net realizable value

(FAR) Inventory is written down when NRV falls below cost. The write-down is not reversed under US GAAP.
Straight-line vs. double-declining depreciation

(FAR) Straight-line spreads cost evenly; double-declining front-loads expense and ignores salvage value until the floor is reached.
Capitalize vs. expense

(FAR) Costs that provide future economic benefit are capitalized; costs consumed in the current period are expensed.
Impairment

(FAR) An asset is written down when its carrying amount is not recoverable and exceeds fair value.
Operating vs. finance lease (lessee)

(FAR) Both put a right-of-use asset and lease liability on the balance sheet; the difference is the income statement pattern — straight-line versus front-loaded.
Deferred tax liability

(FAR) Arises from a temporary difference that will produce taxable amounts in future periods, such as accelerated tax depreciation.
Permanent vs. temporary difference

(FAR) Permanent differences never reverse and do not create deferred taxes; temporary differences reverse and do.
Statement of cash flows sections

(FAR) Operating, investing, and financing. Interest paid is operating under US GAAP.
Direct vs. indirect method

(FAR) Both produce the same operating cash flow; the indirect method starts from net income and adjusts.
Consolidation

(FAR) Required when one entity controls another, generally above 50% voting interest. Intercompany transactions are eliminated.
Equity method

(FAR) Used for significant influence, generally 20-50%. The investor records its share of investee income and reduces the investment for dividends.
Noncontrolling interest

(FAR) The portion of a subsidiary's equity not owned by the parent, reported within consolidated equity.
Fair value hierarchy

(FAR) Level 1 quoted prices in active markets, Level 2 observable inputs, Level 3 unobservable inputs.
Audit risk model

(AUD) Audit risk equals inherent risk times control risk times detection risk. Only detection risk is controlled by the auditor.
Reasonable assurance

(AUD) A high but not absolute level of assurance. An audit is not a guarantee that all misstatements are found.
Materiality

(AUD) The threshold above which a misstatement could influence the decisions of financial statement users.
Professional skepticism

(AUD) An attitude of questioning mind and critical assessment of evidence throughout the audit.
Tests of controls vs. substantive procedures

(AUD) Tests of controls evaluate operating effectiveness; substantive procedures detect material misstatement in amounts and disclosures.
Unmodified vs. qualified opinion

(AUD) Unmodified means the statements are fairly presented; qualified means except for a specific matter they are.
Adverse vs. disclaimer of opinion

(AUD) Adverse means the statements are materially misstated overall; a disclaimer means the auditor could not obtain sufficient evidence to form an opinion.
Going concern in the audit report

(AUD) Substantial doubt that is adequately disclosed leads to an unmodified opinion with a separate going concern section.
Emphasis-of-matter paragraph

(AUD) Draws attention to a matter properly presented or disclosed. It does not modify the opinion.
Independence in fact vs. appearance

(AUD) Both are required. An auditor may be unbiased in fact yet still impaired if a reasonable observer would doubt it.
Management representation letter

(AUD) A written confirmation from management obtained near the report date. Refusal is a scope limitation.
Subsequent events

(AUD) Recognized events provide evidence of conditions existing at the balance sheet date and adjust the statements; nonrecognized events are only disclosed.
Internal control components (COSO)

(AUD) Control environment, risk assessment, control activities, information and communication, and monitoring.
Segregation of duties

(AUD) Authorization, recordkeeping, and custody of assets should be held by different people.
Gross income

(REG) All income from whatever source derived unless specifically excluded by the tax code.
Above-the-line deductions

(REG) Deductions taken to arrive at adjusted gross income, available whether or not the taxpayer itemizes.
Tax credit vs. deduction

(REG) A credit reduces tax dollar for dollar; a deduction only reduces taxable income.
Basis

(REG) The taxpayer's investment in property, used to compute gain or loss on disposition. Adjusted for improvements and depreciation.
Capital gain holding period

(REG) More than one year is long-term and taxed at preferential rates; one year or less is short-term and taxed as ordinary income.

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