CPA Exam Glossary

A costing method that assigns all manufacturing costs — direct materials, direct labor, variable overhead, and fixed overhead — to products. Required under GAAP for external reporting. Contrasts with variable costing, which excludes fixed overhead from product costs.

An accounting method where revenue is recognized when earned and expenses when incurred, regardless of cash timing. Required under GAAP for most businesses. Government proprietary funds and government-wide statements also use full accrual.

The original cost basis of property adjusted for improvements, depreciation, and other items. Used to calculate gain or loss on disposition. Different rules apply for property acquired by purchase, gift, or inheritance.

A parallel tax system designed to ensure high-income taxpayers pay a minimum amount of tax. Calculated by adding back certain preference items and adjustments to regular taxable income. The Tax Cuts and Jobs Act significantly increased the AMT exemption amount.

The five-step revenue recognition standard: (1) identify the contract, (2) identify performance obligations, (3) determine the transaction price, (4) allocate the price, and (5) recognize revenue when obligations are satisfied. Applies to most contracts with customers.

The lease accounting standard requiring lessees to recognize a right-of-use asset and lease liability for virtually all leases over 12 months. Leases are classified as finance or operating based on five criteria. Replaced ASC 840.

All information used by auditors to reach conclusions underlying the audit opinion. Must be both sufficient (enough quantity) and appropriate (relevant and reliable). Gathered through procedures like inspection, observation, inquiry, and confirmation.

Cash or other non-like-kind property received in a like-kind exchange under Section 1031. Boot triggers gain recognition to the extent of the lesser of boot received or realized gain. The most commonly tested trigger for gain in 1031 exchanges.

A structured data type that helps search engines understand site hierarchy and display navigation paths in search results. Implemented as JSON-LD on content pages to improve SEO and user navigation.

The three foundational principles of information security: Confidentiality (data accessible only to authorized parties), Integrity (data is accurate and unaltered), and Availability (data is accessible when needed). Forms the basis for evaluating security controls.

Control Objectives for Information and Related Technologies — a framework for IT governance and management. Provides 5 governance domains and 4 management domains. Helps organizations align IT strategy with business objectives.

The process of combining financial statements of a parent and its subsidiaries into a single set of statements. Requires eliminating intercompany transactions, investment accounts against subsidiary equity, and recognizing noncontrolling interests.

Committee of Sponsoring Organizations of the Treadway Commission internal control framework. Five components: control environment, risk assessment, control activities, information and communication, and monitoring. The standard framework tested on AUD.

The systematic allocation of a tangible asset's cost over its useful life. Common methods include straight-line, double-declining balance, and units-of-production. Tax depreciation uses MACRS (Modified Accelerated Cost Recovery System).

A framework that decomposes return on equity into three components: profit margin (net income/sales), asset turnover (sales/assets), and financial leverage (assets/equity). ROE = Margin × Turnover × Leverage. Useful for identifying drivers of profitability.

The process of choosing the optimal business structure (C-corp, S-corp, partnership, LLC, sole proprietorship) based on tax implications, liability protection, and operational needs. Each entity type has distinct tax treatment for income, losses, and distributions.

Quarterly tax payments required when withholding and credits are insufficient. Individuals must pay the lesser of 90% of current year tax or 100% of prior year tax (110% if AGI exceeds $150,000) to avoid penalties. Due April 15, June 15, September 15, January 15.

An inventory valuation method assuming the earliest purchased items are sold first. Results in lower COGS and higher net income during rising prices compared to LIFO. The most commonly used method internationally and required under IFRS.

A budget adjusted for the actual level of activity. Unlike a static budget, it recalculates variable costs based on actual volume achieved. The difference between a flexible budget and actual results isolates spending variances from volume variances.

A system used by governments and nonprofits that segregates resources into separate funds based on restrictions or designated purposes. Three government fund categories: governmental (general, special revenue, capital projects, debt service, permanent), proprietary, and fiduciary.

Generally Accepted Accounting Principles — the standard framework for financial reporting in the United States. Set by FASB (Financial Accounting Standards Board) for private sector entities and GASB for state and local governments.

Governmental Accounting Standards Board — the independent organization that sets accounting and financial reporting standards for U.S. state and local governments. GASB standards differ significantly from FASB/GAAP in areas like fund accounting and modified accrual.

The amount a taxpayer can give to any individual each year without filing a gift tax return or using lifetime exemption. Currently $19,000 per recipient per year (2026). Married couples can split gifts, effectively doubling the exclusion to $38,000.

Processes implemented by management to provide reasonable assurance regarding financial reporting reliability, operational effectiveness, and compliance with laws and regulations. Evaluated using the COSO framework with five interrelated components.

The tax code provision allowing taxpayers to defer capital gains tax on the exchange of like-kind real property held for business use or investment. Personal property and inventory do not qualify. Gain is deferred, not forgiven — it reduces replacement property basis.

The discount rate that makes the net present value of a project equal to zero. Used in capital budgeting decisions — projects with IRR exceeding the hurdle rate are generally accepted. Can give conflicting signals with NPV for mutually exclusive projects.

The tax form that reports a partner's, S-corp shareholder's, or trust beneficiary's share of income, deductions, and credits from the entity. Each partner receives a K-1 showing their distributive share for the tax year.

A tax-deferred exchange of qualifying real property under IRC Section 1031. Both the relinquished and replacement properties must be held for business use or investment. Boot (non-like-kind property) received triggers gain recognition.

The magnitude of a misstatement that would influence the economic decisions of financial statement users. Auditors set materiality thresholds during planning and use them throughout the audit to evaluate identified misstatements. Both quantitative and qualitative factors are considered.

The accounting basis used by governmental funds. Revenue is recognized when measurable and available (collectible within 60 days of year-end). Expenditures are recognized when the related liability is incurred. Differs from full accrual used in proprietary funds.

The equity equivalent for not-for-profit organizations. Classified in two categories: without donor restrictions (available for general use) and with donor restrictions (limited by donor-imposed conditions — either purpose or time restrictions).

A voluntary framework providing standards, guidelines, and best practices for managing cybersecurity risk. Five core functions: Identify, Protect, Detect, Respond, Recover. Widely adopted across industries and heavily tested on ISC.

The difference between the present value of cash inflows and outflows of an investment, discounted at the required rate of return. Positive NPV indicates the project adds value. Preferred over IRR for capital budgeting decisions involving mutually exclusive projects.

A partner's tax basis in their partnership interest. Starts with contributions, increases with income and additional contributions, and decreases with distributions, losses, and deductions. Cannot go below zero — excess losses are suspended.

Public Company Accounting Oversight Board — the organization that oversees audits of public companies (issuers). Establishes auditing standards for public company audits. AICPA standards apply to non-issuers (private companies).

A promise to transfer a distinct good or service to a customer under ASC 606. Each performance obligation is evaluated separately for revenue recognition. A good or service is distinct if the customer can benefit from it independently.

Under ASC 842, the lessee's right to use the underlying asset for the lease term. Initial measurement equals the lease liability plus prepayments and initial direct costs, minus lease incentives. Not the fair value of the leased asset.

A retirement account funded with after-tax dollars. Contributions are not deductible, but qualified distributions (after age 59½ and 5-year holding period) are entirely tax-free. No required minimum distributions during the owner's lifetime. Income limits apply for direct contributions.

A corporation that elects pass-through tax treatment under Subchapter S of the IRC. Income flows through to shareholders and is taxed at the individual level. Limited to 100 shareholders, one class of stock, and eligible shareholders only (no nonresident aliens or C-corp shareholders).

A structured process for planning, creating, testing, and deploying an information system. Phases typically include planning, analysis, design, development, testing, implementation, and maintenance. Both waterfall and agile approaches are tested on ISC.

System and Organization Controls report — an independent examination of a service organization's controls. SOC 1 covers financial reporting controls, SOC 2 covers Trust Services Criteria (security, availability, processing integrity, confidentiality, privacy), and SOC 3 is a public-facing summary.

A system where predetermined costs are established for products and used to measure performance. Variances between standard and actual costs are analyzed to identify inefficiencies in materials, labor, and overhead.

Audit procedures designed to detect material misstatements at the assertion level. Include tests of details (examining individual transactions/balances) and substantive analytical procedures (evaluating relationships among financial data). Contrasts with tests of controls.

A strategy of selling securities at a loss to offset capital gains and reduce tax liability. Up to $3,000 of net capital losses can offset ordinary income annually, with unlimited carryforward. Wash sale rules prevent repurchasing substantially identical securities within 30 days.

The five criteria evaluated in a SOC 2 engagement: security (mandatory), availability, processing integrity, confidentiality, and privacy. Organizations choose which criteria to include based on their services and client needs.

The standard audit opinion indicating that financial statements present fairly, in all material respects, in accordance with the applicable financial reporting framework. Also called a "clean" opinion. The most common audit report type for companies without material issues.

A costing method that assigns only variable manufacturing costs to products. Fixed overhead is treated as a period expense. Used for internal decision-making but not acceptable under GAAP for external reporting. Produces different income than absorption costing when inventory levels change.

The process of comparing actual results to budgeted or standard amounts and analyzing the differences. Common variances include material price/quantity, labor rate/efficiency, and overhead spending/volume. Favorable variances decrease costs; unfavorable variances increase costs.

IRS rule disallowing a loss deduction on the sale of a security if a substantially identical security is purchased within 30 days before or after the sale. The disallowed loss is added to the basis of the replacement security, deferring rather than eliminating the loss.

A budgeting method that requires justifying every expense from zero each period, rather than using the prior period as a starting point. Forces managers to evaluate all activities and priorities. More time-consuming but can eliminate inefficient spending.

How many terms should I memorize for the CPA exam?

You don't need to memorize every term — focus on understanding concepts and how they apply. The terms in this glossary cover the most frequently tested concepts across all six CPA exam sections. Prioritize terms related to the section you're currently studying.

Which CPA exam section has the most terminology?

FAR typically has the broadest terminology because it covers financial accounting, governmental accounting, and not-for-profit accounting. However, ISC introduces many IT-specific terms that may be unfamiliar to accounting-focused candidates.

Are the same terms tested on multiple CPA exam sections?

Yes, some concepts span multiple sections. For example, internal controls appear on both AUD and ISC. Tax basis is tested on both REG and TCP. Understanding how the same concept applies differently across sections strengthens your overall preparation.

How should I study CPA exam terminology?

Rather than rote memorization, focus on understanding each term in context. Practice applying terms in multiple-choice questions and task-based simulations. Create connections between related terms and revisit unfamiliar terminology during your review.