Financial Accounting and Reporting

568 Pages·2016·3.85 MB·English

CPA R T
EVIEW EXTBOOK

FAR

Financial Accounting & Reporting
S 2000–2400
ECTIONS
2018 (E J 1)
FFECTIVE ULY
Surgent CPA Review:
Editor-in-Chief: Liz Kolar, CPA, CGMA
Senior Editor: Susan Cox, M.Acc., CPA

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available from the Financial Accounting Foundation.

Material from Uniform CPA Examination Questions and Unofficial Answers, copyright © 1976 through 2018,
American Institute of Certified Public Accountants, Inc., is used or adapted with permission.

This book is written to provide accurate and authoritative information concerning the covered topics. It is not meant
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© 2018 Surgent CPA Review, LLC
Acknowledgments
Surgent CPA Review was developed by a team of professionals who are experts in the fields of accounting, business
law, and computer science, and are also experienced teachers in CPA Review programs and continuing professional
education courses.
Surgent CPA Review expresses its sincere appreciation to the many individual candidates, as well as accounting
instructors, who took time to write to us about previous editions. The improvements in this edition are attributable
to all of these individuals. Of course, any deficiencies are the responsibilities of the editors and authors. We very
much appreciate and solicit your comments and suggestions about this year’s edition.
The editors and authors are also indebted to the American Institute of Certified Public Accountants, the Financial
Accounting Standards Board, and the Governmental Accounting Standards Board for permission to quote from their
pronouncements. In addition, the AICPA granted us permission to use material from previous Uniform CPA
Examination Questions and Answers. AICPA codification numbers are used throughout the Auditing portion of the
Review to indicate the source of materials.
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the Surgent CPA Review.
Good luck on the exam!

© 2018 Surgent CPA Review, LLC
Contributors
Paul Brown, CPA, is the Director of Technical Services for a large state CPA Society. One of Paul’s main duties is to
serve as the technical reviewer in the state society’s American Institute of Certified Public Accountants (AICPA)
Peer Review Program. The program administers approximately 450 reviews annually and oversees approximately
125 peer reviewers. Paul has previously been an instructor and author of continuing education programs, for
which he had received several outstanding discussion leader and author awards. He also served on the AICPA’s
Technical Reviewers Advisory Task Force to the Peer Review Board and serves as staff liaison to two committees
and one section at the state society level. Prior to joining the state society, Paul was an audit manager with a
regional firm in Florida. He holds a BS degree in Accounting and Finance from Florida State University.
Annhenrie Campbell, PhD, CPA, CMA, CGFM, is a professor of Accounting at California State University, Stanislaus.
A former governmental accountant, her teaching and research interests have included governmental and not-for-
profit accounting throughout her career. She completed her MBA at Humboldt State University in California and
her PhD at the University of Colorado in Boulder. After earning a CPA and CMA and starting her university career,
Dr. Campbell became a Certified Government Financial Manager at the start of the CGFM program. In addition to
numerous presentations, Dr. Campbell and her colleagues continue to publish research on accounting education
issues.

Susan Cox, M.Acc., CPA (FL) has worked in various fields of accounting for over 30 years. She began her career with
Arthur Andersen & Co. after graduating from Florida State University with a master’s degree in accounting. In
addition to her experience in public accounting, she has worked as a senior internal auditor for GTE and as a full-
time accounting instructor at the University of South Florida, where she developed and taught the first online
accounting course. Susan also has previous experience in valuation accounting and as an editor for a national CPA
review publication.
Joshua Dixon, CPA, is President of J Dixon Accounting Services, PC, a full-service tax, accounting, and business
consulting firm located in Frisco, Texas. He graduated from Metropolitan State University of Denver with dual
Bachelor of Science degrees in Accounting and Finance. Josh is a CPA licensed in both Colorado and Texas. He is a
member of the American Institute of Certified Public Accountants (AICPA) and the Texas Society of Certified Public
Accountants (TSCPA).
Tim Firch, JD, LLM, is an Adjunct Professor of accounting and business law. A graduate of the University of
California, Davis, King Hall School of Law, he is a member of the California State Bar, taxation section (inactive in
good standing). His research and teaching interests center on writing skills development for upper-division
accounting students. His writing skills courses include a major research component. He also teaches business law
along with financial, managerial, and tax accounting.
David P. Flanders, MBA, CPA, is an independent technical editor for CPA Examination reviews and tax and
accounting CPE courses. A native of Colorado, he received his MBA and undergraduate degrees from the University
of Colorado at Boulder. He is a CPA in Colorado. For over 20 years he was a corporate accountant and controller
for a variety of corporations, including subsidiaries of NYSE-listed companies. More recently he spent 14 years as a
senior editor of accounting reviews and CPE courses for some of the largest publishing companies in the United
States.
© 2018 Surgent CPA Review, LLC
Al Francisco, PhD, is a Vice President of Accounting Institute Seminars, for which he has written and presented CPA
Review seminars in many locations around the United States since 1972. He passed the CPA Examination in
Montana in 1967, and received a BS in Accounting from Montana State University in 1968 and an MS in Accounting
from the University of Denver in 1969. He completed his PhD in Accounting at Michigan State University in 1972
and joined the faculty at Idaho State University in that year. He has authored a number of CPA Review texts.
LaMarion N. Green-Hughey, CPA, MBA currently serves as Director of Finance for the DeKalb County, Georgia,
Sheriff’s Office. Previously, she served as a Field Auditor for the Office of the Comptroller of the Currency.
LaMarion received both her BBA and MBA from Georgia Southern University and holds an active CPA license in the
state of Georgia.
Janel Greiman is an Assistant Professor at the Monfort College of Business at the University of Northern Colorado.
She teaches tax at the undergraduate level as well as in the Master of Accountancy program. Ms. Greiman earned
her Master of Taxation at the Sturm College of Law at the University of Denver. She is a CPA in Colorado with
recent experience practicing in taxation. She is a member of the AICPA, the Colorado Society of Certified Public
Accountants (CSCPA), the tax section of the CSCPA, and the American Accounting Association. Her research
includes recent publication in Practical Tax Strategies and the American Journal of Business Education.
Jeff Helton, PhD, CMA, CFE, FHFMA, is an Assistant Professor of Health Care Management at Metropolitan State
University of Denver, where he teaches courses in health care finance. He has over 25 years of financial
management experience in hospitals, health plans, and government entities. Jeff is a Certified Management
Accountant, Certified Fraud Examiner, Fellow of the Healthcare Financial Management Association, and a member
of the Board of Examiners for the Healthcare Financial Management Association. He has published articles on
health care accounting and budgeting in Strategic Finance, Healthcare Financial Management, and the American
Journal of Management. Jeff has a PhD in Health Care Management from the University of Texas, an MS in Hospital
Administration from the University of Alabama at Birmingham, and a BBA from Eastern Kentucky University.
Cynthia Hollenbach, BBA, MS, CPA, CGMA, has been teaching at the collegiate level for the last 10 years. She has
also been and is currently a financial consultant to many corporate clients for over 25 years, involved with both
private and public companies. She received her BBA from Baylor University and her MS in Taxation from the
University of North Texas. Cynthia is licensed as a CPA in Texas and recently licensed as a CGMA, a new designation
by the AICPA to recognize skills as a global management accountant.
Tracy Hunt, Esq., is a founding partner of Timby Hunt, LLC. He received his Bachelor of Arts from the University of
North Carolina, Chapel Hill, and his law degree from Widener University School of Law in Wilmington,
Delaware. For the past 15 years, Mr. Hunt has concentrated his legal practice in all areas of civil litigation, including
business-related contract issues, employment, land use, and personal injury. Mr. Hunt also heads up the Wills and
Estates practice for the firm, and assists his business clients in incorporation, drafting of contracts, trademark
infringement, and personnel matters.
Liz Kolar, CPA, CGMA, has been teaching CPA Review for more than 25 years in the United States, has personally
taught more than 2,500 live sessions, and has helped thousands of candidates pass the CPA Exam. She founded
Pinnacle CPA Review and co-founded Surgent Kolar CPA Review. She is a recipient of the ASWA Business Woman of
the Year Northeast Region, Distinguished Faculty Member of the Year, and PICPA Outstanding Educator of the
Year. Liz began her career in Public Accounting with a Big Four accounting firm auditing financial service clients
after graduating from Pace University with an MBA in Public Accounting. Liz’s teaching career spans almost 30
years. She has taught at the undergraduate and graduate levels at Pace University and Seton Hall University, and is
currently a professor at Delaware Valley University.

© 2018 Surgent CPA Review, LLC
Jennifer Louis, CPA, is President of Emergent Solutions Group, LLC, and has over 20 years of experience in
designing and presenting training programs in a wide variety of technical and “soft skills” topics needed for
professional and organizational success. Jen was previously Executive Vice President/Director of Training Services
at AuditWatch, Inc., and an audit manager in the Washington, DC, offices of Deloitte. While there, she participated
as both a local and national instructor for audit staff training.
Lola Neudecker is an Internal Auditor employed at the University of New Mexico. Lola has over 20 years of
financial accounting experience in subjects including auditing, fraud investigations, taxation, contracts and grants,
purchasing, budgeting, payroll, and banking. She has worked in public accounting, higher education, and
government. Lola graduated from the University of Texas at El Paso with a Bachelor’s degree in Business
Administration with a major in Accounting and a Master of Accountancy degree. Lola is a Certified Public
Accountant (CPA), Certified Management Accountant (CMA), Certified Financial Manager (CFM), Certified
Government Auditing Professional (CGAP), Certified Internal Auditor (CIA), Certified Fraud Examiner (CFE), and
Chartered Global Management Accountant (CGMA) and is Certified in Financial Forensics (CFF). She is a member of
the American Institute of Certified Public Accountants (AICPA), The Institute of Internal Auditors (IIA), the
Association of Certified Fraud Examiners, and the Institute of Management Accountants (IMA).
Paul E. Pierson, CPA, is Director of Professional Standards and Peer Review for the Illinois CPA Society. In this
capacity, he oversees the administration of the Peer Review Program for approximately 1,500 CPA firms in Illinois
and Iowa. Paul has served as a discussion leader at the AICPA’s Annual Peer Review Conference and Advanced
Reviewer Training Course as well as several state CPA society conferences and chapter events. He is also
responsible for monitoring the continuing professional education and licensing rules in Illinois and Iowa and
responding to member inquiries regarding those matters. Paul has served on the Technical Reviewers Advisory
Task Force to the AICPA Peer Review Board, and currently serves as staff liaison to the Peer Review Report
Acceptance and Employment Benefits Committees of the Illinois CPA Society. He also oversees the Society’s
Accounting Principles, Audit and Assurance Services, Not-for-Profit, Governmental, and Ethics Committees. Paul
graduated from Illinois State University with a BS in Accounting and was an audit manager with a large, local CPA
firm in East Peoria, Illinois, prior to joining the Society.
Darlene A. Pulliam, PhD, CPA, joined the faculty of West Texas A&M in 1997. A native of eastern New Mexico, Dr.
Pulliam received a BS in Mathematics in 1976 and an MBA in 1978 from Eastern New Mexico University and joined
the accounting firm of Peat, Marwick, Mitchell and Co. (now KPMG) in Albuquerque. After five years in public
accounting, she completed her PhD at the University of North Texas and joined the faculty of the University of
Tulsa in 1987. As a Regents Professor and McCray Professor of Business at WTAMU, her responsibilities include
teaching tax and financial accounting, and advising the students in the Master of Professional Accounting program.
Her publications include many articles appearing in Tax Advisor; the Journal of Accountancy; Practical Tax
Strategies; Oil, Gas and Energy Quarterly; CPA Journal; and the Journal of Forensic Accounting as an author or
coauthor.
Guy Schmitz, JD, LLM, MA, has practiced tax law for over 40 years. He has been a lecturer in tax law at Fontbonne
University and Washington University in St. Louis, Missouri, and is the author of articles for the Journal of the
Missouri Bar and St. Louis Bar Journal. He received his JD from Cornell Law School, where he was editor-in-chief of
the Cornell International Law Journal; received his LLM in Taxation from New York University; and served as clerk
to the U.S. Tax Court.
Ken Smith, PhD, CPA-Retired, is the President of Accounting Institute Seminars, for which he has written and
presented CPA Review seminars in many locations around the United States since 1972. He received his BS in
Accounting from the University of Montana and his PhD from the University of Texas–Austin. Ken is a professor of
accounting at Idaho State University, where he has taught since 1970. He has served as accounting department
chair, associate dean of the College of Business, and College of Business dean. He is actively involved with the
AICPA and the American Accounting Association.
© 2018 Surgent CPA Review, LLC
Strategic Solutions for Business (SSB) is a management consulting firm based in Denver, Colorado, specializing in
accounting and information technology. Bryan Smith, CPA, is a managing partner of SSB with over 12 years of
experience assisting clients with business intelligence, data conversions, revenue/cost assurance, data and process
analytics, internal audit, operational metrics, mergers and acquisitions, and financial and regulatory compliance.
Amy Weisbender, CPA, previously a staff accountant at one of the Big Four, has worked in audit, finance, and
consulting for over 11 years. She has worked in various industries including restaurants, telecommunications,
manufacturing, technology, energy, real estate, and travel management. Amy’s focus is on business analysis and
project management with an emphasis on IT and accounting projects.
John (Jack) M. Surgent, MS in Taxation, CPA, is Chairman of Surgent Professional Education, the largest provider of
tax and financial-planning seminars to CPAs in the United States. Mr. Surgent has presented over 1,800 live
seminars in the past 25 years and has been named Outstanding Discussion Leader by various professional
organizations. He has worked in the tax department of a Big Four accounting firm and was an assistant professor at
St. Joseph's University in Philadelphia. Mr. Surgent received his Bachelor's degree in accounting from Villanova
University and a Master's in Taxation from Villanova University School of Law.
Geri B. Wink, BBA, MBA, CPA, joined the faculty at Colorado State University–Pueblo in 2004 after serving over 20
years on the accounting faculty at the University of Texas at Tyler. She received both her BBA and MBA from Sam
Houston State University and holds CPA licenses in both Texas and Colorado. She maintained a tax practice for
over 20 years while in Texas. Her publications include articles and cases appearing in Oil and Gas Quarterly,
Management Accounting, The Business Review, Journal of International Society of Business Disciplines, and Journal
of International Academy of Case Studies. She also has written a book with a coauthor, Intermediate Accounting
DeMystified. She is very active in the Colorado Society of CPAs.

© 2018 Surgent CPA Review, LLC
Table of Contents
Financial Accounting & Reporting
Section 2000 Overview of the Financial Accounting and Reporting Examination ............................................. 1
Section 2100 Conceptual Framework, Standard Setting, and Financial Reporting ........................................... 7
Section 2200 Select Financial Statement Accounts ...................................................................................... 145
Section 2300 Select Transactions ................................................................................................................. 343
Section 2400 State and Local Governments ................................................................................................. 443
© 2018 Surgent CPA Review, LLC
______________________________________________
Section 2000
Overview of the Financial Accounting
and Reporting Examination
2010 The CPA Examination
2020 The Financial Accounting and Reporting Section of the CPA Examination

2010 The CPA Examination
2010.01 The Exam
The Uniform CPA Examination (the Exam) provides reasonable assurance to state boards of
accountancy that individuals who pass the Exam possess the minimum level of technical
knowledge and skills necessary for initial licensure. Ongoing changes in the business world,
along with advancements in technology, have impacted the accounting profession and
affected the required knowledge, skills, and professional responsibilities of newly licensed
Certified Public Accountants (CPAs).
To remain relevant to the real-world demands of the profession, the AICPA has determined
that newly licensed CPAs must not only demonstrate sufficient content knowledge, but also
possess:
a. higher-order cognitive skills, including critical thinking, problem solving, and analytical
ability, as well as professional skepticism,
b. a thorough understanding of professional and ethical responsibilities,
c. a strong understanding of the business environment and processes, and
d. effective communication skills.
2010.02 AICPA Skill Framework
The AICPA has adopted a skill framework based on the modified Bloom’s Taxonomy of
Educational Objectives. Bloom’s Taxonomy classifies a continuum of skills that students can
be expected to learn and demonstrate. The taxonomy is widely used in educational and
licensure testing to define the level of skills to be assessed and to guide the development of
test questions.
In applying this framework, approximately 600 representative tasks that a newly licensed
CPA may be expected to complete were identified. Based on the nature of a task, one of four
skill levels is assigned to each of the tasks, as follows:

© 2018 Surgent CPA Review, LLC Section 2000
2

Skill Levels
The examination or assessment of problems, and use of judgment to
Evaluation
draw conclusions.
The examination and study of the interrelationships of separate
Analysis areas in order to identify causes and find evidence to support
inferences.
Application The use or demonstration of knowledge, concepts, or techniques.
Remembering and The perception and comprehension of the significance of an area
Understanding utilizing knowledge gained.
2010.03 Exam Focus
The percentage for each skill level for each exam section is shown in the table below:

Section Remembering and Application Analysis Evaluation
Understanding
AUD 30%-40% 30%-40% 15%-25% 5%-15%
BEC 15%-25% 50%-60%* 20%-30% -
FAR 10%-20% 50%-60% 25%-35% -
REG 25%-35% 35%-45% 25%-35% -
* Includes written communications
2010.04 Content Integration
As discussed previously, each of the Exam sections is designed to test higher-order skills by
incorporating the applicable content knowledge and skills that are required in the context of
the work of a newly licensed CPA. Tasks that involve application, analysis, and/or evaluation
skills may include some content from other Exam sections, which would occur naturally in
the task from a contextual perspective. These tasks will always be based upon the primary
content knowledge of a particular Exam section, but could draw upon a candidate’s basic
knowledge of general accounting, auditing, tax, and business concepts. For example, in the
AUD section of the Exam, a TBS designed to evaluate inventory observation audit procedures
might include some inventory valuation/obsolescence or sales cutoff considerations, even
though these concepts would be evaluated more extensively in FAR.
2010.05 Blueprint
The Blueprint is organized by content AREA, content GROUP, and content TOPIC. Each topic
includes one or more representative TASKS. The purpose of the Blueprint is to:
a. document the minimum level of knowledge and skills necessary for initial licensure.
b. assist candidates in preparing for the Exam by outlining the knowledge and skills that
may be tested.
c. apprise educators of the knowledge and skills candidates need to function as newly
licensed CPAs.
d. guide the development of Exam questions.
Section 2000 © 2018 Surgent CPA Review, LLC