Step2Study

CPA Exam - FAR (Financial Accounting and Reporting) practice questions

200 free questions with answers and explanations.

Practice test
  1. 1.A company acquired 80% of the voting stock of Subsidiary Co. on January 1, Year 1, for $500,000. On the acquisition date, Subsidiary Co. had identifiable net assets with a fair value of $600,000. The noncontrolling interest's share of Subsidiary Co.'s fair value was $120,000. What amount of goodwill should be recognized in the consolidated financial statements?Financial Reporting
  2. 2.A company changed its inventory valuation method from FIFO to weighted-average during the current year. This change is considered preferable and material. How should this change in accounting principle be reported in the company's financial statements under U.S. GAAP?Financial Reporting
  3. 3.A company incurred $100,000 in research costs and $50,000 in development costs for a new product during the current year. The development costs met the criteria for capitalization under U.S. GAAP starting from the point a project's technological feasibility was established, which was $20,000 of the total development costs. How should these costs be recognized in the financial statements for the current year?Financial Reporting
  4. 4.A company owns a portfolio of marketable securities. At year-end, the fair value of its equity investments for which it does not elect the fair value option and does not have significant influence is lower than their cost. The impairment is considered to be other-than-temporary. How should this impairment be recognized under U.S. GAAP?Financial Reporting
  5. 5.A public company is preparing its annual financial statements. Which of the following items would typically be disclosed as a subsequent event that requires disclosure but not adjustment to the financial statements?Financial Reporting
  6. 6.A company issues 10-year, $1,000,000 face value bonds with a stated interest rate of 6% when the market interest rate is 7%. Interest is paid annually. Which of the following statements is true regarding the issuance of these bonds?Financial Reporting
  7. 7.A company is performing its annual impairment test for goodwill. The company has one reporting unit with a carrying amount (including goodwill) of $1,500,000. The fair value of the reporting unit is determined to be $1,200,000. The carrying amount of goodwill assigned to this reporting unit is $300,000. What amount of goodwill impairment loss should the company recognize?Financial Reporting
  8. 8.A company recognized revenue from a contract to install specialized machinery. The contract stipulated that payment was due 30 days after installation, but the customer could return the machinery within 60 days of installation for a full refund if it did not perform to specifications. The company determines that the customer has a significant economic incentive to return the machinery if it does not perform as expected, and the likelihood of return is difficult to estimate reliably. When should the company recognize revenue under ASC 606?Financial Reporting
  9. 9.A company prepares its financial statements in accordance with U.S. GAAP. Which of the following best describes the primary objective of financial reporting for external users?Financial Reporting
  10. 10.A company leases a machine under a 5-year lease term, with no option to purchase. The machine's useful life is 7 years. The present value of lease payments is $450,000, and the fair value of the machine is $500,000. The lease payments do not include a bargain purchase option, and the underlying asset is not of a specialized nature. The company does not elect the short-term lease exception. How should this lease be classified by the lessee under ASC 842?Financial Reporting
  11. 11.A company is preparing its statement of cash flows using the indirect method. During the year, the company had net income of $200,000. Depreciation expense was $30,000, and a gain on the sale of equipment was $5,000. Accounts receivable decreased by $10,000, and accounts payable increased by $15,000. What is the net cash provided by operating activities?Financial Reporting
  12. 12.A company reports its financial results quarterly. For interim financial reporting, how should an anticipated year-end bonus to employees be recognized if the bonus amount can be reasonably estimated?Financial Reporting
  13. 13.A company is considering whether to capitalize or expense certain expenditures related to its property, plant, and equipment. Which of the following expenditures would most likely be capitalized?Financial Reporting
  14. 14.A company is developing a new, innovative software product. During the current year, it incurred the following costs related to this project: $150,000 for research activities to explore new algorithms, $200,000 for development activities to design and code the software after technological feasibility was established, and $50,000 for marketing research to assess market demand for the new product. How much of these costs should be capitalized according to U.S. GAAP?Financial Reporting
  15. 15.A publicly traded company holds a portfolio of equity investments that are classified as available-for-sale (AFS). At the end of the current fiscal year, the fair value of these investments is $2,500,000, and their original cost was $2,300,000. During the year, the company had also sold some AFS securities, realizing a gain of $50,000. How should the unrealized gain on the remaining AFS investments be reported in the financial statements?Financial Reporting
  16. 16.A public company is preparing its annual financial statements. Which of the following events occurring after the balance sheet date but before the financial statements are issued would generally require an adjustment to the financial statements under U.S. GAAP?Financial Reporting
  17. 17.A company has a liability for environmental remediation costs. The company can estimate a range of possible outcomes, with probabilities assigned to each. The estimated costs are $5,000,000 (20% probability), $7,000,000 (50% probability), and $10,000,000 (30% probability). What amount should the company recognize as a liability under U.S. GAAP, assuming all outcomes are equally likely to occur within their respective ranges?Financial Reporting
  18. 18.A company issues 10-year, $1,000,000 face value bonds with a stated interest rate of 6% payable semi-annually. The market interest rate for similar bonds is 8%. Which of the following statements is true regarding the issuance of these bonds?Financial Reporting
  19. 19.A public company is preparing its annual financial statements. Which of the following items should be disclosed as a separate line item on the income statement, net of tax?Financial Reporting
  20. 20.A company has several reporting segments. For segment reporting purposes under ASC 280, a segment is considered reportable if its reported revenue (including both sales to external customers and intersegment sales) is at least 10% of the combined revenue of all operating segments. Which of the following is also a criterion for a segment to be considered reportable?Financial Reporting
  21. 21.A publicly traded company, Newton Corp., is preparing its financial statements for the year ended December 31, Year 1. On January 15, Year 2, a major customer, whose accounts receivable balance was $1,500,000 at December 31, Year 1, filed for bankruptcy due to unforeseen circumstances that arose in early January Year 2. Newton Corp. had no indication of the customer's financial distress prior to Year 2. How should Newton Corp. account for this event?Financial Reporting
  22. 22.A company sells goods to a customer on credit for $200,000 with terms 2/10, net 30. The customer is expected to take the discount. The company uses the net method to account for sales discounts. How much revenue should the company recognize at the point of sale?Financial Reporting
  23. 23.A publicly traded company is preparing its annual financial statements for the year ended December 31, Year 1. The company discovered that it had incorrectly expensed a $50,000 piece of equipment purchased on January 1, Year 1, that should have been capitalized. The equipment has an estimated useful life of 5 years and no salvage value. The company uses the straight-line depreciation method. Assuming a 25% tax rate, what is the impact of this error correction on the net income for Year 1, before considering the tax effect?Financial Reporting
  24. 24.A company changed its inventory valuation method from FIFO to weighted-average in the current year. This change is considered a change in accounting principle. How should this change be accounted for under U.S. GAAP?Financial Reporting
  25. 25.A company is preparing its financial statements and needs to classify its investments. Which of the following investments would be classified as an 'available-for-sale' security under U.S. GAAP?Financial Reporting
  26. 26.A company changed its inventory valuation method from FIFO to weighted-average during the current fiscal year. This change was made to provide more relevant and reliable information in its financial statements. Which of the following best describes the accounting treatment for this change under U.S. GAAP?Financial Reporting
  27. 27.A company recognized revenue from a contract to install specialized machinery. The contract includes a variable consideration component tied to the machinery's performance over the first year. The company estimates this variable consideration using the expected value method. At contract inception, which of the following conditions must be met for the variable consideration to be included in the transaction price?Financial Reporting
  28. 28.A publicly traded company acquired a competitor on January 1, Year 1, for $500 million. The fair value of the identifiable net assets acquired was $400 million. The acquisition agreement included a contingent consideration arrangement, requiring an additional payment of $20 million if the acquired company's revenue exceeds a certain threshold in Year 1. At the acquisition date, the fair value of this contingent consideration was estimated to be $15 million. By December 31, Year 1, the acquired company's revenue threshold was met, and the contingent consideration liability was re-measured to a fair value of $22 million. What is the amount of goodwill recognized by the acquiring company at the acquisition date?Financial Reporting
  29. 29.A public company is preparing its annual financial statements. The company operates in two distinct business segments: Segment A and Segment B. Segment A reports revenue of $100 million, Segment B reports revenue of $80 million, and unallocated corporate revenue is $20 million. The company's total assets are $500 million, with Segment A having $200 million, Segment B having $150 million, and $150 million unallocated corporate assets. Total profit for Segment A is $15 million, and for Segment B is $10 million, with a corporate loss of $5 million. What is the minimum combined identifiable revenue for the reportable segments to meet the 10% revenue test under ASC 280, Segment Reporting?Financial Reporting
  30. 30.A company leases a machine under a 5-year lease term, with no option to purchase. The machine has an economic life of 7 years. The present value of lease payments is $450,000, which is 80% of the machine's fair value. The lease does not transfer ownership, nor does it contain a purchase option the lessee is reasonably certain to exercise. The machine is not of a specialized nature. How should the lessee classify this lease under ASC 842?Financial Reporting
  31. 31.A company is preparing its statement of cash flows using the indirect method. During the year, the company reported net income of $500,000. Depreciation expense was $80,000, and a gain on the sale of equipment was $20,000. Accounts receivable decreased by $30,000, while accounts payable increased by $15,000. Inventory increased by $25,000. What is the net cash flow from operating activities?Financial Reporting
  32. 32.A publicly traded company, Innovate Corp., developed a new patented pharmaceutical drug. The company incurred the following costs related to the drug prior to its release: $2,000,000 for research activities, $1,500,000 for development activities after technological feasibility was established, $500,000 for legal fees to obtain the patent, and $250,000 for successful defense of the patent against an infringement lawsuit. What is the total amount that Innovate Corp. should capitalize as an intangible asset related to this patent?Financial Reporting
  33. 33.A company issued 10,000 shares of $1 par value common stock for $50 per share. Later in the year, the company repurchased 1,000 of these shares for $60 per share and accounted for them using the cost method. What is the impact of the repurchase on the company's total stockholders' equity?Financial Reporting
  34. 34.A public company is preparing its quarterly financial statements. Which of the following is an appropriate application of the integral view of interim reporting?Financial Reporting
  35. 35.A company needs to account for a contingent liability related to an ongoing lawsuit. Legal counsel advises that it is probable that the company will lose the lawsuit, and the estimated loss can be reasonably estimated within a range of $5,000,000 to $10,000,000. There is no amount within the range that is a better estimate than any other amount. How should the company report this contingent liability in its financial statements under U.S. GAAP?Financial Reporting
  36. 36.A publicly traded company, Alpha Corp., reported pretax financial income of $1,000,000 for the year ended December 31, Year 1. Included in this amount is $150,000 of warranty expense, for which the actual warranty payments made during Year 1 were $100,000. For tax purposes, warranty expense is deductible only when paid. Alpha Corp.'s enacted tax rate is 25%. What is the deferred tax liability or asset related to the warranty expense at December 31, Year 1?Financial Reporting
  37. 37.A company is preparing its financial statements and needs to classify an investment in another company's equity securities. The company owns 15% of the investee's outstanding common stock and can exert significant influence over the investee's operating and financial policies. How should this investment be accounted for?Financial Reporting
  38. 38.A company changed its inventory valuation method from FIFO to weighted-average during the current year. This change is considered a change in accounting principle. How should the company account for this change?Financial Reporting
  39. 39.A company is preparing its financial statements for the year ended December 31, Year 1. On November 1, Year 1, the company purchased a patent for $300,000. The patent has a remaining legal life of 15 years and an estimated useful life of 10 years. The company uses the straight-line method for amortization. What is the amortization expense for the patent for Year 1?Financial Reporting
  40. 40.A company issues a $1,000,000, 5-year bond with a stated interest rate of 6% payable annually. The market interest rate for similar bonds is 8%. Which of the following statements is true regarding the bond's issuance?Financial Reporting
  41. 41.A company is reviewing its allowance for doubtful accounts. At year-end, Accounts Receivable totals $500,000, and the existing credit balance in the Allowance for Doubtful Accounts is $2,000. Based on an aging schedule, the company estimates that $27,000 of its accounts receivable will be uncollectible. What is the amount of Bad Debt Expense the company should recognize for the year?Financial Reporting
  42. 42.A company has a defined benefit pension plan. At the end of the year, the company's actuary provides the following information: Projected Benefit Obligation (PBO) of $10,000,000, Plan Assets (fair value) of $8,500,000, and an unrecognized prior service cost of $300,000. What is the funded status of the pension plan that should be reported on the company's balance sheet?Financial Reporting
  43. 43.A company is preparing its year-end financial statements. During the year, the company recognized $500,000 in revenue from sales, $200,000 in cost of goods sold, $150,000 in operating expenses, and $20,000 in interest expense. Additionally, the company had an unrealized gain of $30,000 on available-for-sale (AFS) securities and a foreign currency translation adjustment loss of $10,000. What is the company's comprehensive income for the year?Financial Reporting
  44. 44.A company is preparing its year-end financial statements. On December 1, Year 1, the company purchased a building for $1,000,000. The building has an estimated useful life of 40 years and a salvage value of $100,000. The company uses the straight-line depreciation method. What is the depreciation expense for the building for the year ended December 31, Year 1?Financial Reporting
  45. 45.A not-for-profit entity (NFP) is preparing its Statement of Cash Flows using the direct method. The NFP received $200,000 in unrestricted cash contributions, $50,000 in cash for a temporarily restricted program, and spent $10,000 on investment expenses related to its endowment. How should these items be presented in the operating activities section?Not-for-Profit Entities
  46. 46.A state government implemented a new pension plan for its employees during the current fiscal year. The actuarially determined contribution for the year was $10,000,000. However, due to budget constraints, the state only contributed $8,000,000 to the pension plan. On the government-wide financial statements, what amount should the state report as pension expense for the year, assuming no other changes in net pension liability?State and Local Governments
  47. 47.A local historical society, a not-for-profit organization, receives a $50,000 grant from a private foundation to fund a specific educational program for the next two years. The grant agreement states that the funds must be spent on program expenses and any unspent funds must be returned. How should this grant be recognized and presented in the society's financial statements for the year received?State and Local Governments
  48. 48.A county government issued $10,000,000 in general obligation bonds at par to finance the construction of a new administrative building. The bonds have a 20-year maturity. During the construction phase, the county incurred $2,000,000 in architect fees and $5,000,000 in contractor payments. Which of the following statements accurately describes the accounting treatment for the bond proceeds within the governmental funds?State and Local Governments
  49. 49.A state government operates a lottery system, with a portion of the proceeds legally mandated to be transferred to the General Fund to support general government operations. This transfer is non-reciprocal and does not involve repayment. In the government-wide financial statements, how should this transfer be reported?State and Local Governments
  50. 50.A not-for-profit entity received a gift of marketable securities with a fair value of $250,000. The donor stipulated that the principal amount must be maintained in perpetuity, but the income generated from these securities could be used for general operating expenses. How should this contribution be classified on the Statement of Financial Position?Not-for-Profit Entities