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Free Questions › CPA › Financial Accounting and Reporting
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 331
The fair value measurement should be based on the price in the:
Select an option first.
Correct answer: C — PRINCIPAL market (the one with the greatest volume and activity), even if another market would give a better price
Explanation: The PRINCIPAL market — the one with the greatest VOLUME and level of activity — governs, even if another market would pay MORE. Only if there is NO principal market does the entity use the MOST ADVANTAGEOUS market (highest price net of transaction costs). This counterintuitive rule is exactly what is tested.
Question 332
A change in ACCOUNTING PRINCIPLE is generally accounted for:
Select an option first.
Correct answer: D — RETROSPECTIVELY — restating prior periods and adjusting opening retained earnings
Explanation: A change in PRINCIPLE is applied RETROSPECTIVELY: prior periods presented are restated, and the opening balance of retained earnings for the earliest period presented is adjusted for the cumulative effect. Two EXCEPTIONS are handled PROSPECTIVELY: a change TO LIFO, and a change in DEPRECIATION METHOD.
Question 333
A change in ACCOUNTING ESTIMATE is accounted for:
Select an option first.
Correct answer: D — PROSPECTIVELY — no restatement; the new estimate is applied from the current period forward
Explanation: A change in ESTIMATE is PROSPECTIVE. Prior periods are NOT restated. Examples: useful life, salvage value, the allowance for doubtful accounts, warranty rates. Notably, a change in DEPRECIATION METHOD is treated as a change in estimate effected by a change in principle — and is therefore also prospective.
Question 334
The correction of an ERROR in previously issued financial statements requires:
Select an option first.
Correct answer: B — RESTATEMENT of prior periods and adjustment of opening retained earnings
Explanation: An ERROR requires RESTATEMENT: prior periods presented are restated, opening retained earnings for the earliest period presented is adjusted (net of tax) for the cumulative effect on periods NOT presented, and the nature and effect of the error are disclosed. Note: a change FROM a non-GAAP method TO GAAP is an ERROR CORRECTION, not a change in principle.
Question 335
Research and development costs are generally:
Select an option first.
Correct answer: C — EXPENSED as incurred
Explanation: ASC 730 requires R&D to be EXPENSED as incurred. Narrow exceptions permit capitalisation: a TANGIBLE asset with an ALTERNATIVE FUTURE USE; software costs after TECHNOLOGICAL FEASIBILITY; and IPR&D acquired in a BUSINESS COMBINATION (which becomes an indefinite-life intangible until the project completes or is abandoned).
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Question 336
Under ASC 606, revenue from a sales-based ROYALTY on a licence of intellectual property is recognised:
Select an option first.
Correct answer: A — When the subsequent SALE occurs (or the performance obligation is satisfied, whichever is later)
Explanation: The SALES-BASED (or usage-based) ROYALTY EXCEPTION: revenue is recognised at the LATER of when the subsequent sale or usage occurs, or when the performance obligation to which the royalty relates has been satisfied. This is a specific exception to the general variable-consideration rules and applies only to licences of IP.
Question 337
A stock dividend of 10% (a SMALL stock dividend) is recorded by capitalising retained earnings at:
Select an option first.
Correct answer: D — FAIR MARKET VALUE at the declaration date
Explanation: A SMALL stock dividend (generally under 20–25%) is capitalised at FAIR MARKET VALUE. A LARGE stock dividend (20–25% or more) behaves like a split and is capitalised at PAR. Small = FMV, large = par — a pairing worth memorising outright.
Question 338
The percentage-of-completion (cost-to-cost) measure of progress is:
Select an option first.
Correct answer: B — Costs incurred to date divided by TOTAL ESTIMATED costs
Explanation: Progress = Costs incurred to date / TOTAL ESTIMATED costs. Revenue recognised = Progress × Contract price. The TOTAL ESTIMATED COST is a management ESTIMATE and is the most manipulable input in the model — understating it inflates the percentage and accelerates revenue.
Question 339
An expected LOSS on a long-term construction contract is recognised:
Select an option first.
Correct answer: A — IN FULL, IMMEDIATELY, in the period the loss becomes probable
Explanation: An expected total LOSS is recognised IN FULL and IMMEDIATELY — never spread over the remaining term. PROFITS are spread across the contract; LOSSES land at once. That asymmetry is conservatism in action and is the reliable exam point on this topic.
Question 340
A cash flow hedge's EFFECTIVE portion of the change in fair value is recorded in:
Select an option first.
Correct answer: B — Other comprehensive income, and reclassified to net income when the hedged item affects earnings
Explanation: CASH FLOW hedge (hedging a FORECASTED transaction): the EFFECTIVE portion goes to OCI and is RECLASSIFIED to net income when the hedged item affects earnings — achieving the matching. A FAIR VALUE hedge (hedging an EXISTING asset or liability) sends BOTH sides to net income immediately, where they offset.
Question 341
For a FAIR VALUE hedge, the change in fair value of the hedged item is recorded in:
Select an option first.
Correct answer: B — NET INCOME, offsetting the change in fair value of the derivative
Explanation: In a FAIR VALUE hedge, BOTH the derivative's fair value change AND the hedged item's fair value change go to NET INCOME, where the effective portions OFFSET. The net income impact is therefore only the INEFFECTIVE portion. Fair value hedge ⇒ income now; cash flow hedge ⇒ OCI now, income later.
Question 342
Under the acquisition method, acquisition-related COSTS (legal fees, due diligence) are:
Select an option first.
Correct answer: A — EXPENSED as incurred
Explanation: Acquisition-related costs — advisory, legal, accounting, valuation and other professional fees — are EXPENSED as incurred. They are NOT part of the consideration transferred and do NOT increase goodwill. (Costs to ISSUE DEBT or EQUITY as part of the deal are treated separately, as debt issue costs or a reduction of APIC respectively.)
Question 343
Stock-based compensation expense is measured at:
Select an option first.
Correct answer: D — The GRANT-DATE FAIR VALUE, recognised over the vesting period and NOT remeasured for later share-price changes
Explanation: Compensation cost is fixed at the GRANT-DATE FAIR VALUE (from an option-pricing model) and recognised over the VESTING period. It is NOT remeasured for subsequent share-price movements — if the stock collapses, the expense continues unchanged. The only true-up is for actual FORFEITURES.
Question 344
Under US GAAP, when a range of possible losses exists and no amount within the range is more likely than any other, the entity accrues:
Select an option first.
Correct answer: B — The LOW end of the range, with disclosure of the range
Explanation: US GAAP accrues the LOW END of the range, disclosing the additional exposure. IFRS, by contrast, accrues the MIDPOINT. This is one of the most frequently examined GAAP/IFRS divergences, and the midpoint (option C) is the intended trap for candidates who have studied both.
Question 345
A contract asset arises when:
Select an option first.
Correct answer: A — The entity has performed but its right to consideration is CONDITIONAL on something other than the passage of time
Explanation: A CONTRACT ASSET arises when the entity has performed but its right to payment is CONDITIONAL (on completing another obligation, for instance). Once the right becomes UNCONDITIONAL — only the passage of time remains — it becomes a RECEIVABLE. The distinction matters because a contract asset carries performance risk as well as credit risk.
Question 346
A performance obligation is DISTINCT if:
Select an option first.
Correct answer: D — The customer can benefit from it on its own (or with readily available resources) AND it is separately identifiable within the contract
Explanation: BOTH criteria must be met: (1) CAPABLE of being distinct — the customer can benefit from it alone or with readily available resources; AND (2) DISTINCT WITHIN THE CONTEXT of the contract — separately identifiable from other promises. Separate PRICING (option A) is not the test.
Question 347
Under ASC 606, a licence that is FUNCTIONAL (the IP has standalone functionality) is recognised:
Select an option first.
Correct answer: D — At a POINT IN TIME, when the customer can use and benefit from the licence
Explanation: A FUNCTIONAL licence (software that works as-is, a completed film, a drug formula) transfers a right to USE the IP as it exists — so revenue is recognised at a POINT IN TIME. A SYMBOLIC licence (a brand, a team logo, whose value depends on ongoing activity) transfers a right to ACCESS and is recognised OVER TIME.
Question 348
Costs to OBTAIN a contract (e.g. a sales commission) that are incremental and expected to be recovered should be:
Select an option first.
Correct answer: D — CAPITALISED as an asset and amortised over the period of benefit
Explanation: INCREMENTAL costs of obtaining a contract (costs that would NOT have been incurred if the contract had not been won — typically a sales commission) are CAPITALISED if recovery is expected, and amortised over the benefit period. A practical expedient permits expensing if the amortisation period is one year or less.
Question 349
A right of return means the entity should recognise:
Select an option first.
Correct answer: D — Revenue only for the amount it EXPECTS to be entitled to, with a refund liability and an asset for the right to recover goods
Explanation: With a right of return, revenue is recognised only for the consideration the entity EXPECTS to be entitled to (constrained variable consideration). A REFUND LIABILITY is recorded for the expected returns, and an ASSET is recognised for the right to RECOVER the returned goods (at the former carrying amount less recovery costs).
Question 350
A principal in a revenue arrangement recognises revenue:
Select an option first.
Correct answer: A — GROSS — the entire amount to which it is entitled
Explanation: A PRINCIPAL controls the good or service before transfer and recognises revenue GROSS. An AGENT arranges for another party to provide it and recognises revenue NET (only the fee or commission). The key indicator is CONTROL before transfer — plus responsibility for fulfilment, inventory risk, and pricing discretion.
Question 351
A valuation allowance for a deferred tax ASSET is recorded when:
Select an option first.
Correct answer: B — It is MORE LIKELY THAN NOT (over 50%) that some portion of the DTA will NOT be realised
Explanation: A VALUATION ALLOWANCE reduces a DTA when it is MORE LIKELY THAN NOT (a probability greater than 50%) that some or all of it will NOT be realised — because the entity may not generate enough future taxable income to use it. Note there is NO valuation allowance concept for deferred tax LIABILITIES.
Question 352
Deferred tax assets and liabilities are measured using:
Select an option first.
Correct answer: C — The ENACTED tax rate expected to apply when the temporary difference reverses
Explanation: Deferred taxes use the ENACTED rate expected to apply in the period the difference REVERSES. Proposed or expected legislation is NOT used — only ENACTED law. When a rate change is enacted, the effect on existing deferred balances is recognised immediately in income from continuing operations.
Question 353
All deferred tax assets and liabilities are classified on the balance sheet as:
Select an option first.
Correct answer: D — NON-CURRENT
Explanation: Under current GAAP, ALL deferred tax assets and liabilities are classified as NON-CURRENT — the old current/non-current split based on the underlying asset was eliminated. Amounts within the same tax jurisdiction are netted into a single non-current amount.
Question 354
In a business combination, identifiable assets acquired and liabilities assumed are measured at:
Select an option first.
Correct answer: B — FAIR VALUE at the acquisition date
Explanation: The acquisition method measures identifiable assets and liabilities at their ACQUISITION-DATE FAIR VALUES — not the acquiree's book values. The difference between the consideration (plus NCI and any previously held interest) and the fair value of identifiable net assets is GOODWILL.
Question 355
A non-controlling interest is reported in the consolidated balance sheet:
Select an option first.
Correct answer: B — Within EQUITY, separately from the parent's equity
Explanation: NCI is reported within CONSOLIDATED EQUITY, presented SEPARATELY from the parent's equity. It is NOT a liability — the non-controlling shareholders are owners of the group's net assets, not creditors of it.
Question 356
Goodwill is tested for impairment:
Select an option first.
Correct answer: D — Annually, and more frequently if events indicate impairment
Explanation: Goodwill is tested for impairment at least ANNUALLY at the reporting-unit level, and more frequently if a triggering event occurs. An optional QUALITATIVE assessment ('is it more likely than not that fair value is below carrying value?') may allow the entity to skip the quantitative test.
Question 357
Under current GAAP, the goodwill impairment loss equals:
Select an option first.
Correct answer: B — The reporting unit's CARRYING VALUE minus its FAIR VALUE, capped at the carrying amount of goodwill
Explanation: Post-ASU 2017-04, the old two-step implied-goodwill calculation is GONE. The loss is simply CARRYING VALUE of the reporting unit − its FAIR VALUE, CAPPED at the carrying amount of goodwill. Option A describes the superseded model.
Question 358
A derivative must have all of the following EXCEPT:
Select an option first.
Correct answer: D — PHYSICAL DELIVERY in all cases
Explanation: A derivative requires: (1) an UNDERLYING and a NOTIONAL amount; (2) LITTLE OR NO initial net investment; and (3) NET SETTLEMENT (it can be settled net, without delivering the underlying). Requiring physical delivery would actually cut AGAINST derivative treatment — and may qualify for the normal purchases and sales scope exception.
Question 359
An entity's own credit risk is included in measuring the fair value of:
Select an option first.
Correct answer: D — Its LIABILITIES
Explanation: Fair value of a LIABILITY reflects NON-PERFORMANCE RISK, which includes the entity's OWN CREDIT RISK. Counterintuitively, this means a liability's fair value FALLS as the entity's own credit DETERIORATES — producing a gain. For financial liabilities under the fair value option, that own-credit portion is now reported in OCI.
Question 360
The 'expected value' approach to variable consideration is a:
Select an option first.
Correct answer: D — PROBABILITY-WEIGHTED sum of the possible outcomes
Explanation: EXPECTED VALUE = Σ (probability × outcome) — a probability-weighted average, used when there are MANY possible outcomes. The MOST LIKELY AMOUNT (a single figure) is used when there are essentially two. Either estimate is then CONSTRAINED to the amount highly probable not to reverse.
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