CPA FAR (Financial Accounting & Reporting) Glossary
30 essential terms and definitions for CPA FAR (Financial Accounting & Reporting). Each definition is written for exam preparation, covering the concepts as they are tested on the 2026 syllabus.
A
- Accrual Basis of Accounting
- Accrual basis of accounting recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid, as required by GAAP for financial reporting.
- Allowance for Doubtful Accounts
- Allowance for doubtful accounts is a contra-asset account that reduces accounts receivable to the estimated net realizable value, reflecting management's estimate of uncollectible receivables.
- ASC 606 (Revenue Recognition)
- ASC 606 is the FASB standard that establishes a five-step model for recognizing revenue from contracts with customers: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue as obligations are satisfied.
- ASC 842 (Leases)
- ASC 842 is the FASB lease accounting standard requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for virtually all leases, with classification as either a finance lease or an operating lease.
B
- Basic Earnings Per Share
- Basic earnings per share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period.
C
- Comprehensive Income
- Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events from non-owner sources, including net income plus other comprehensive income items such as unrealized gains on available-for-sale securities and foreign currency translation adjustments.
- Consolidation
- Consolidation is the process of combining the financial statements of a parent company and its subsidiaries into a single set of financial statements, eliminating intercompany transactions and balances to present the economic entity as a whole.
- Contingent Liability
- Contingent liability is a potential obligation that may arise depending on the outcome of a future event. Under GAAP, it is accrued if probable and reasonably estimable, disclosed if reasonably possible, and ignored if remote.
D
- Deferred Tax Asset
- Deferred tax asset represents the future tax benefit arising from deductible temporary differences, net operating loss carryforwards, or tax credit carryforwards that will reduce taxable income in future periods.
- Deferred Tax Liability
- Deferred tax liability represents the future tax obligation arising from taxable temporary differences between the carrying amount of an asset or liability and its tax basis, resulting in taxable amounts in future periods.
- Depreciation
- Depreciation is the systematic allocation of the cost of a tangible long-lived asset over its useful life. Common methods include straight-line, declining balance, and units-of-production.
- Diluted Earnings Per Share
- Diluted EPS adjusts basic EPS for the potential dilution that would occur if all dilutive securities (stock options, convertible bonds, convertible preferred stock) were exercised or converted into common stock.
- Discontinued Operations
- Discontinued operations are components of an entity that have been disposed of or classified as held for sale, reported separately (net of tax) on the income statement below continuing operations.
F
- Fair Value Hierarchy
- Fair value hierarchy under ASC 820 prioritizes the inputs used to measure fair value into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs based on entity assumptions).
- Finance Lease (Lessee)
- A finance lease transfers substantially all the risks and rewards of ownership to the lessee. The lessee recognizes a right-of-use asset and lease liability, with amortization expense on the asset and interest expense on the liability reported separately.
- Fund Accounting
- Fund accounting is a system used by governmental and nonprofit entities that segregates resources into separate funds based on their intended purpose and legal restrictions, ensuring compliance with budgetary and regulatory requirements.
G
- GAAP
- Generally Accepted Accounting Principles (GAAP) are the standard framework of guidelines for financial accounting used in the United States, established primarily by the Financial Accounting Standards Board (FASB).
- Goodwill
- Goodwill is an intangible asset recognized in a business combination representing the excess of the purchase price over the fair value of identifiable net assets acquired. Under GAAP, goodwill is not amortized but tested annually for impairment.
- Governmental Accounting
- Governmental accounting follows standards set by the Governmental Accounting Standards Board (GASB), using fund accounting and modified accrual or accrual basis depending on the fund type, with government-wide statements presented on a full accrual basis.
I
- IFRS
- International Financial Reporting Standards (IFRS) are accounting standards issued by the International Accounting Standards Board (IASB) used in most countries outside the United States, differing from GAAP in areas such as inventory, leases, and revenue recognition.
- Impairment
- Impairment occurs when the carrying amount of a long-lived asset or goodwill exceeds its recoverable amount. Under GAAP, long-lived assets use a two-step test (recoverability then fair value), while goodwill uses a one-step quantitative test.
- Inventory Valuation
- Inventory valuation determines the cost assigned to inventory on the balance sheet and cost of goods sold on the income statement. GAAP permits FIFO, LIFO, and weighted average methods, with inventory reported at the lower of cost or net realizable value.
M
- Modified Accrual Basis
- Modified accrual basis is the accounting method used for governmental fund financial statements, recognizing revenues when measurable and available and expenditures when the related liability is incurred.
N
- Noncontrolling Interest
- Noncontrolling interest (minority interest) is the portion of equity in a subsidiary not attributable to the parent company, presented as a separate component of equity in the consolidated balance sheet.
O
- Operating Lease (Lessee)
- An operating lease under ASC 842 requires the lessee to recognize a right-of-use asset and lease liability, with a single straight-line lease expense recognized over the lease term.
- Other Comprehensive Income
- Other comprehensive income (OCI) includes revenues, expenses, gains, and losses that are excluded from net income under GAAP, such as unrealized gains and losses on certain investments, foreign currency translation adjustments, and pension adjustments.
P
- Pension Accounting
- Pension accounting under ASC 715 requires employers to recognize the funded status (projected benefit obligation minus plan assets) of a defined benefit plan as a net asset or liability on the balance sheet, with service cost in operating income and other components in OCI.
R
- Revenue Recognition
- Revenue recognition is the process of recording revenue in the financial statements when (or as) a performance obligation is satisfied by transferring a promised good or service to a customer, following the five-step model in ASC 606.
S
- Statement of Cash Flows
- Statement of cash flows reports the cash inflows and outflows of an entity during a period, classified into operating, investing, and financing activities, prepared using either the direct or indirect method for operating activities.
- Stock-Based Compensation
- Stock-based compensation under ASC 718 requires entities to measure the cost of employee services received in exchange for equity instruments based on the grant-date fair value of the award, recognized as expense over the requisite service period.