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Free CPA Financial Accounting and Reporting Practice Questions & Answers
500 exam-style Financial Accounting and Reporting questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 1
Basic earnings per share is computed as:
Select an option first.
Correct answer: B — (Net income − Preferred dividends) divided by the weighted average common shares outstanding
Explanation: Basic EPS = (Net income − Preferred dividends) / Weighted average COMMON shares OUTSTANDING. Preferred dividends are subtracted because they are not available to common shareholders. Note two details: shares must be WEIGHTED for the portion of the year they were outstanding, and OUTSTANDING excludes treasury shares (which are issued but not outstanding).
Question 2
Which items are reported in Other Comprehensive Income (the PUFE mnemonic)?
Select an option first.
Correct answer: D — Pension adjustments, Unrealised gains/losses on AFS debt securities, Foreign currency translation, and the Effective portion of cash flow hedges
Explanation: PUFE: Pension adjustments, Unrealised gains and losses on Available-for-sale DEBT securities, Foreign currency translation, and the Effective portion of cash flow hedges. Note carefully that unrealised gains on EQUITY securities go to NET INCOME (not OCI) under ASU 2016-01 — a change that catches many candidates.
Question 3
Comprehensive income is defined as:
Select an option first.
Correct answer: C — Net income plus other comprehensive income
Explanation: Comprehensive income = Net income + Other comprehensive income. It captures ALL changes in equity during a period EXCEPT those resulting from transactions with owners (share issuances, dividends, treasury stock). It may be presented in a single continuous statement or in two consecutive statements.
Question 4
Under the indirect method, depreciation expense is:
Select an option first.
Correct answer: B — Added back to net income, because it is a non-cash expense
Explanation: Depreciation is a NON-CASH expense that reduced net income but consumed no cash. The indirect method therefore ADDS IT BACK to reconcile accrual net income to cash from operations. The same logic applies to amortisation and depletion.
Question 5
In the indirect method, a GAIN on the sale of equipment is:
Select an option first.
Correct answer: A — SUBTRACTED from net income, because the full proceeds appear in investing activities
Explanation: The gain is SUBTRACTED in the operating section because the ENTIRE sale proceeds are reported as an INVESTING inflow. Leaving the gain in operating income would double-count it. This sign is the most-tested item in the statement of cash flows — a LOSS, conversely, is added back.
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Question 6
An increase in accounts receivable during the period is:
Select an option first.
Correct answer: C — SUBTRACTED from net income under the indirect method
Explanation: If receivables INCREASED, the company earned more revenue than it COLLECTED in cash — so accrual net income overstates cash. The increase is SUBTRACTED. The general rule: an increase in a current ASSET is subtracted; an increase in a current LIABILITY is added.
Question 7
Which of the following is a FINANCING activity in the statement of cash flows?
Select an option first.
Correct answer: C — Issuance of common stock
Explanation: Issuing STOCK is a FINANCING activity — it involves the entity's owners. Purchasing equipment is INVESTING. Collecting receivables is OPERATING. Note that under US GAAP, INTEREST PAID is an OPERATING activity (though IFRS permits classifying it as financing) — a common GAAP/IFRS divergence.
Question 8
Dividends PAID by the company are classified as:
Select an option first.
Correct answer: B — A financing activity
Explanation: Dividends PAID are a FINANCING activity under US GAAP — they are a transaction with owners. Note the asymmetry: dividends RECEIVED and interest RECEIVED are OPERATING activities under US GAAP. IFRS allows more flexibility on all of these, which is a favourite comparison point.
Question 9
The current ratio is computed as:
Select an option first.
Correct answer: C — Current assets divided by current liabilities
Explanation: Current ratio = Current assets / Current liabilities. It measures short-term liquidity. The QUICK (acid-test) ratio is stricter, excluding inventory and prepaid expenses from the numerator, because those are the current assets least readily convertible to cash.
Question 10
The three-step DuPont decomposition of return on equity is:
Select an option first.
Correct answer: C — Net profit margin × Asset turnover × Financial leverage
Explanation: ROE = (NI/Sales) × (Sales/Avg Assets) × (Avg Assets/Avg Equity) = Net profit margin × Asset turnover × Equity multiplier. The value of the decomposition is diagnostic: it shows WHY ROE changed. An ROE rising purely because the leverage term rose is a warning sign, not an achievement.
Question 11
Book value per common share equals:
Select an option first.
Correct answer: C — (Common equity − Preferred equity − Dividends in arrears) divided by common shares OUTSTANDING
Explanation: BVPS = (Common stockholders' equity − Preferred equity − Cumulative dividends in arrears) / Common shares OUTSTANDING. Preferred claims come out first. Shares OUTSTANDING = issued − treasury; using ISSUED shares is the standard error.
Question 12
The five governmental fund types (GRaSPP) are:
Select an option first.
Correct answer: D — General, Special Revenue, Debt Service, Capital Projects and Permanent
Explanation: GRaSPP: General, Special Revenue, Debt Service, Capital Projects, Permanent. All five use MODIFIED ACCRUAL and the CURRENT FINANCIAL RESOURCES measurement focus — they hold no capital assets and no long-term debt.
Question 13
Governmental funds use which basis of accounting and measurement focus?
Select an option first.
Correct answer: C — MODIFIED accrual; CURRENT FINANCIAL RESOURCES
Explanation: GOVERNMENTAL funds (GRaSPP) use MODIFIED ACCRUAL and the CURRENT FINANCIAL RESOURCES focus. PROPRIETARY funds (Internal Service, Enterprise) and FIDUCIARY funds use FULL ACCRUAL and the ECONOMIC RESOURCES focus — as do the GOVERNMENT-WIDE statements. This split is the architecture of the whole topic.
Question 14
Under modified accrual, revenue is recognised when it is:
Select an option first.
Correct answer: A — MEASURABLE and AVAILABLE
Explanation: Modified accrual recognises revenue when it is MEASURABLE and AVAILABLE. 'Available' generally means collectible within the current period or within 60 DAYS after period end. The 60-day rule is the single most-tested number in governmental accounting.
Question 15
The two net asset classes for a not-for-profit entity are:
Select an option first.
Correct answer: A — Net assets WITHOUT donor restrictions and net assets WITH donor restrictions
Explanation: Since ASU 2016-14 there are only TWO net asset classes: WITHOUT donor restrictions and WITH donor restrictions. The old three-class model (unrestricted / temporarily restricted / permanently restricted) is GONE — option A describes the superseded framework and is the intended trap.
Question 16
A not-for-profit contribution that is CONDITIONAL (contains a barrier and a right of return) should be:
Select an option first.
Correct answer: C — DEFERRED; cash received is recorded as a refundable advance (a liability)
Explanation: A CONDITIONAL contribution has a BARRIER the NFP must overcome AND a right of return. It is NOT revenue until the barrier is overcome — cash received in the meantime is a REFUNDABLE ADVANCE (a liability). Note the crucial distinction: a donor RESTRICTION on use is NOT a condition; restricted contributions ARE recognised as revenue immediately, within the 'with donor restrictions' class.
Question 17
For an NFP to recognise DONATED SERVICES, the services must (SOME):
Select an option first.
Correct answer: B — Require Specialised skills, be Otherwise needed (would have been purchased), be Measurable, and be Easily valued at fair value
Explanation: SOME: Specialised skills required; Otherwise needed by the organisation; Measurable; Easily valued at fair value. A lawyer donating legal services qualifies; the same lawyer stuffing envelopes does not. If the criteria are not met, footnote disclosure only — no journal entry.
Question 18
The anti-dilution rule for diluted EPS states that a potential common share is included ONLY if it:
Select an option first.
Correct answer: C — DECREASES EPS
Explanation: A potential common share is included in DILUTED EPS only if it DECREASES EPS (is dilutive). Anti-dilutive securities are EXCLUDED. Critically: in a NET LOSS year, ALL potential shares are anti-dilutive (they would reduce the loss per share), so diluted EPS = basic EPS. That single sentence answers a whole family of questions.
Question 19
A segment is REPORTABLE if it meets any of the 10% tests. Which is NOT one of them?
Select an option first.
Correct answer: A — Number of employees is at least 10% of the total
Explanation: The three 10% tests are REVENUE, ASSETS, and absolute PROFIT OR LOSS. Employee headcount is not a criterion. Note also the 75% rule: reportable segments must together account for at least 75% of consolidated EXTERNAL revenue — if they fall short, additional segments are added.
Question 20
A Type 1 (recognised) subsequent event is one where the underlying condition:
Select an option first.
Correct answer: C — EXISTED at the balance sheet date; the financial statements are ADJUSTED
Explanation: Type 1 (RECOGNISED): the condition EXISTED at the balance sheet date, so the statements are ADJUSTED. Type 2 (NONRECOGNISED): the condition AROSE AFTER, so it is DISCLOSED only. The test is always the same question: did the condition exist on the balance sheet date?
Question 21
A customer who was already insolvent at year-end files for bankruptcy in January, before the statements are issued. This is:
Select an option first.
Correct answer: D — A TYPE 1 event requiring ADJUSTMENT of the allowance for doubtful accounts
Explanation: The CONDITION (insolvency) EXISTED at the balance sheet date — the bankruptcy filing merely CONFIRMED it. That makes it a TYPE 1 event requiring ADJUSTMENT. Contrast a customer's factory burning down in January: that condition AROSE after year-end, making it Type 2 (disclose only).
Question 22
The 10-K filing deadline for a LARGE ACCELERATED FILER (public float of $700 million or more) is:
Select an option first.
Correct answer: B — 60 days after fiscal year-end
Explanation: The pattern is 60 / 75 / 90 as the filer gets smaller: LARGE ACCELERATED (float ≥ $700M) = 60 days; ACCELERATED ($75M–$700M float) = 75 days; NON-ACCELERATED (< $75M float) = 90 days.
Question 23
A DIRECT foreign currency quotation expresses:
Select an option first.
Correct answer: B — The DOMESTIC price of ONE FOREIGN currency unit (e.g. $1.10 per €1)
Explanation: A DIRECT quote gives the DOMESTIC price of ONE unit of FOREIGN currency ($1.10/€1). An INDIRECT quote gives foreign units per one domestic unit (€0.91/$1). They are RECIPROCALS: direct = 1/indirect. Writing the units beside each number prevents the inversion error that dominates FX questions.
Question 24
Under the TRANSLATION method (functional currency is the local currency), the translation gain or loss is reported in:
Select an option first.
Correct answer: A — Other comprehensive income (the cumulative translation adjustment)
Explanation: TRANSLATION (functional = local currency) sends the gain or loss to OCI, accumulating as the CUMULATIVE TRANSLATION ADJUSTMENT. REMEASUREMENT (functional = parent's currency) sends it to NET INCOME. The destination of the gain is the entire distinction, and it is the reliable exam point.
Question 25
The times interest earned ratio is computed as:
Select an option first.
Correct answer: D — EBIT divided by interest expense
Explanation: TIE = EBIT / Interest expense. It measures how many times operating earnings cover the interest obligation — a higher figure indicates greater capacity to service debt. Using NET income (option A) is wrong, because interest has already been deducted in arriving at it.
Question 26
The accounts receivable turnover ratio uses which numerator?
Select an option first.
Correct answer: D — NET CREDIT sales
Explanation: AR turnover = NET CREDIT SALES / Average net accounts receivable. Cash sales never create a receivable, so including them distorts the ratio. Days sales outstanding = 365 / AR turnover.
Question 27
Inventory turnover is computed using which numerator?
Select an option first.
Correct answer: A — COST OF GOODS SOLD
Explanation: Inventory turnover = COST OF GOODS SOLD / Average inventory. COGS is used because inventory is carried at COST — using SALES (which includes the markup) is the standard distractor and inflates the ratio.
Question 28
The cash conversion cycle equals:
Select an option first.
Correct answer: D — DSO + DIO − DPO
Explanation: CCC = Days Sales Outstanding + Days Inventory Outstanding − Days Payable Outstanding. Note the MINUS on DPO: paying suppliers more slowly SHORTENS the cycle, because suppliers are effectively financing the operation. A NEGATIVE cycle (as at Amazon) means suppliers fund the business entirely.
Question 29
Which is required for a discontinued operation to be presented?
Select an option first.
Correct answer: A — A component (or group of components) that represents a STRATEGIC SHIFT with a MAJOR effect on operations and results
Explanation: A discontinued operation requires a component that represents a STRATEGIC SHIFT having (or that will have) a MAJOR EFFECT on the entity's operations and financial results — exiting a line of business, a geographic area, or a major equity method investment. Selling one store from a chain of 500 is not a strategic shift.
Question 30
Government-wide financial statements use:
Select an option first.
Correct answer: A — FULL ACCRUAL and the ECONOMIC RESOURCES measurement focus
Explanation: GOVERNMENT-WIDE statements use FULL ACCRUAL and ECONOMIC RESOURCES — reporting ALL assets and liabilities, including capital assets and long-term debt. The GOVERNMENTAL FUND statements use modified accrual and current financial resources. Converting between the two is what the reconciliation at the bottom of the fund statements accomplishes.
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