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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 31
The quick (acid-test) ratio EXCLUDES which item from the numerator?
Select an option first.
Correct answer: D — INVENTORY and prepaid expenses
Explanation: Quick ratio = (Cash + Short-term marketable securities + Net receivables) / Current liabilities. INVENTORY and PREPAIDS are excluded because they are the current assets least readily convertible to cash — inventory must first be sold, and prepaids will never become cash at all.
Question 32
Return on assets is computed as:
Select an option first.
Correct answer: B — Net income / AVERAGE total assets
Explanation: ROA = Net income / AVERAGE total assets. An income statement item (a FLOW over a period) divided by a balance sheet item (a STOCK at a point) requires AVERAGING the stock. This rule governs every ratio in FAR.
Question 33
The debt-to-equity ratio equals:
Select an option first.
Correct answer: D — Total liabilities / Total stockholders' equity
Explanation: D/E = Total liabilities / Total stockholders' equity. It measures leverage — how much of the entity is financed by creditors relative to owners. A rising D/E means increasing financial risk.
Question 34
Which fund type is used to account for resources legally restricted so that only the EARNINGS may be spent?
Select an option first.
Correct answer: D — PERMANENT Fund
Explanation: A PERMANENT FUND holds resources whose PRINCIPAL (corpus) is legally restricted and may not be spent — only the INCOME is available, and it must benefit the GOVERNMENT or its citizenry. If the earnings benefit outside individuals or organisations, it is a PRIVATE-PURPOSE TRUST (a fiduciary fund) instead.
Question 35
An ENTERPRISE fund is REQUIRED when:
Select an option first.
Correct answer: C — Debt is secured solely by fee revenue, OR law requires fees to cover costs, OR pricing policy targets cost recovery
Explanation: An Enterprise fund is REQUIRED if ANY of three conditions is met: debt is backed SOLELY by fee revenue; laws require that fees cover costs; or the pricing policy is designed to recover costs. Simply serving external customers does not by itself compel Enterprise treatment.
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Question 36
Fiduciary funds are:
Select an option first.
Correct answer: A — EXCLUDED from the government-wide statements, because the assets are not the government's to spend
Explanation: FIDUCIARY funds are EXCLUDED from the government-wide statements entirely — the resources belong to others, not to the government, and so cannot be used to support its programmes. They use FULL ACCRUAL and the economic resources focus.
Question 37
Encumbrance accounting is used in:
Select an option first.
Correct answer: C — GOVERNMENTAL funds, as a budgetary control
Explanation: ENCUMBRANCES are a BUDGETARY control used in GOVERNMENTAL funds. When a purchase order is issued: DR Encumbrances / CR Reserve for Encumbrances. It reserves spending authority — it is NOT an expenditure. Open encumbrances at year-end reduce the unassigned fund balance.
Question 38
The fund balance classification that can be POSITIVE only in the General Fund is:
Select an option first.
Correct answer: C — UNASSIGNED
Explanation: Only the GENERAL FUND may report a POSITIVE Unassigned fund balance — it is the residual. Other governmental funds can report a NEGATIVE unassigned balance (if expenditures exceed available resources), but never a positive one. The hierarchy: Nonspendable, Restricted, Committed, Assigned, Unassigned.
Question 39
Which fund balance classification requires the government's HIGHEST level of formal action (e.g. a council vote)?
Select an option first.
Correct answer: A — COMMITTED
Explanation: COMMITTED fund balance requires action by the government's HIGHEST decision-making authority (a formal council vote or ordinance), and can only be removed by the same level of action. ASSIGNED requires only an expressed INTENT at a lower level. RESTRICTED comes from EXTERNAL constraints (creditors, grantors, law).
Question 40
MD&A in a governmental annual report is:
Select an option first.
Correct answer: A — REQUIRED SUPPLEMENTARY INFORMATION, presented BEFORE the basic financial statements
Explanation: MD&A is REQUIRED SUPPLEMENTARY INFORMATION (RSI) and — unusually — is presented BEFORE the basic financial statements. As RSI it receives only LIMITED auditor procedures (inquiry and comparison), not an opinion.
Question 41
The 60-day rule in modified accrual relates to:
Select an option first.
Correct answer: D — Whether revenue is AVAILABLE, and therefore recognisable
Explanation: 'AVAILABLE' means collectible within the current period or within 60 DAYS after period end. Revenue must be BOTH MEASURABLE and AVAILABLE to be recognised. Amounts expected more than 60 days out become DEFERRED INFLOWS OF RESOURCES — a category unique to governmental accounting.
Question 42
A health and welfare not-for-profit must present which ADDITIONAL statement?
Select an option first.
Correct answer: C — Statement of FUNCTIONAL EXPENSES
Explanation: All NFPs present a Statement of Financial Position, a Statement of Activities and a Statement of Cash Flows. VOLUNTARY HEALTH AND WELFARE organisations must ADDITIONALLY present a STATEMENT OF FUNCTIONAL EXPENSES, analysing expenses by both NATURE and FUNCTION (programme versus supporting services).
Question 43
An NFP receives an unconditional multi-year pledge. It should be recorded at:
Select an option first.
Correct answer: B — PRESENT VALUE, with the subsequent accretion recognised as contribution revenue
Explanation: An unconditional multi-year pledge is recognised as revenue WHEN THE PROMISE IS MADE, measured at PRESENT VALUE. The unwinding of the discount in later periods is additional CONTRIBUTION REVENUE — not interest income.
Question 44
Under US GAAP, interest RECEIVED is classified in the statement of cash flows as:
Select an option first.
Correct answer: A — An OPERATING activity
Explanation: Under US GAAP: interest RECEIVED, interest PAID and dividends RECEIVED are all OPERATING. Only dividends PAID are FINANCING. IFRS permits far more flexibility, which is a recurring GAAP/IFRS comparison.
Question 45
A non-cash investing and financing transaction (e.g. acquiring equipment by issuing a note) is:
Select an option first.
Correct answer: A — DISCLOSED separately (in a schedule or the notes), NOT reported in the body of the statement of cash flows
Explanation: Non-cash transactions do not belong in the STATEMENT of cash flows, because no cash moved. But they are economically significant, so they must be DISCLOSED separately — in a schedule at the bottom of the statement, or in the notes.
Question 46
Which is a Type 2 (nonrecognised) subsequent event?
Select an option first.
Correct answer: C — A fire destroys a warehouse in January (the fire had not occurred at year-end)
Explanation: A fire that OCCURRED AFTER year-end is a condition that AROSE after the balance sheet date — Type 2, DISCLOSE only, do NOT adjust. Options A, B and D all involve conditions that EXISTED at the balance sheet date, making them Type 1 (adjust).
Question 47
The 10-Q filing deadline for a NON-ACCELERATED filer is:
Select an option first.
Correct answer: B — 45 days after quarter-end
Explanation: 10-Q deadlines: LARGE ACCELERATED and ACCELERATED filers = 40 days; NON-ACCELERATED = 45 days. There is no Q4 10-Q — those results appear in the annual 10-K.
Question 48
Under REMEASUREMENT (functional currency is the parent's), non-monetary assets are translated at:
Select an option first.
Correct answer: B — The HISTORICAL rate
Explanation: REMEASUREMENT: MONETARY items at the CURRENT rate; NON-MONETARY items (inventory, PP&E, intangibles) at HISTORICAL rates; COGS and depreciation at the HISTORICAL rates of the related assets; sales at the AVERAGE rate. The resulting gain or loss goes to NET INCOME.
Question 49
If a foreign currency STRENGTHENS, a foreign-currency-denominated ASSET produces:
Select an option first.
Correct answer: A — A GAIN
Explanation: If the foreign currency STRENGTHENS, an ASSET denominated in it is worth MORE in domestic terms — a GAIN. A LIABILITY in that currency now costs MORE to settle — a LOSS. Reason from whether you are OWED or you OWE, and the matrix builds itself.
Question 50
The multi-step income statement reports discontinued operations:
Select an option first.
Correct answer: D — Below income from continuing operations, NET OF TAX
Explanation: Discontinued operations are presented BELOW income from continuing operations and NET OF TAX. This is intraperiod tax allocation: each component carries its own tax effect so users can see the tax on continuing operations separately.
Question 51
Fairhaven Corp declares a 2-for-1 stock split on 1 October. When computing weighted average shares for basic EPS for the year:
Select an option first.
Correct answer: B — The split is applied RETROACTIVELY to ALL periods presented, including the comparative prior year
Explanation: Stock SPLITS and stock DIVIDENDS are applied RETROACTIVELY to all periods presented. The reasoning: no resources entered or left the entity — the same pie is simply cut into more slices — so comparability demands that all periods be restated as if the split had always existed. Weighting from the split date (option A) would make the EPS trend meaningless.
Question 52
An entity has a net LOSS for the year and 100,000 outstanding stock options that are in the money. Diluted EPS should:
Select an option first.
Correct answer: B — EQUAL basic EPS, because in a loss year all potential common shares are ANTI-DILUTIVE
Explanation: In a NET LOSS year, adding shares to the denominator would make the loss per share SMALLER — i.e. it would IMPROVE the figure — which is by definition ANTI-DILUTIVE. Anti-dilutive securities are excluded. Therefore diluted EPS = basic EPS in any loss year, regardless of how many options are outstanding or how deep in the money.
Question 53
Which situation would cause the CURRENT RATIO to INCREASE?
Select an option first.
Correct answer: A — Issuing long-term bonds for cash
Explanation: Issuing LONG-TERM debt increases CURRENT ASSETS (cash) with no change to current liabilities — the ratio RISES. Option B reduces both numerator and denominator equally, which INCREASES a ratio already above 1 but decreases one below 1 (a subtlety). Option D increases both equally, moving the ratio TOWARD 1. Option C is a swap within current assets — no change at all.
Question 54
A government reports a $2 million capital asset purchase in a Capital Projects Fund. In the FUND statements this appears as:
Select an option first.
Correct answer: A — An EXPENDITURE — governmental funds use the current financial resources focus and do not report capital assets
Explanation: Governmental funds use the CURRENT FINANCIAL RESOURCES focus, so they report an EXPENDITURE, not an asset. The capital asset appears ONLY in the GOVERNMENT-WIDE statements (full accrual), which is precisely why a RECONCILIATION between the two is required at the bottom of the fund statements.
Question 55
An NFP receives $100,000 restricted by the donor for a specific programme. In the year received, the NFP spends $60,000 on that programme. The Statement of Activities reports:
Select an option first.
Correct answer: A — $100,000 of revenue WITH donor restrictions, and a $60,000 RECLASSIFICATION (net assets released from restrictions) to without-donor-restrictions
Explanation: The FULL $100,000 is recognised as REVENUE with donor restrictions when received (a restriction is not a condition). As the restriction is SATISFIED by spending, $60,000 is RECLASSIFIED — reported as 'net assets released from restrictions', decreasing the restricted class and increasing the unrestricted class. The remaining $40,000 stays restricted.
Question 56
Property taxes levied in Year 1 but not expected to be collected until 90 days after year-end should be reported in a governmental fund as:
Select an option first.
Correct answer: D — DEFERRED INFLOWS OF RESOURCES, because the amounts are not AVAILABLE (collectible within 60 days)
Explanation: Modified accrual requires revenue to be MEASURABLE and AVAILABLE. Collections expected MORE than 60 days after year-end are NOT available, so they become DEFERRED INFLOWS OF RESOURCES — a distinct governmental category that is neither revenue nor a liability. They become revenue in the period they do become available.
Question 57
Under the indirect method, an INCREASE in accounts payable is:
Select an option first.
Correct answer: B — ADDED to net income, because expenses were incurred but not yet paid in cash
Explanation: An INCREASE in a current LIABILITY is ADDED. If payables rose, the entity incurred expenses it has not yet paid — so cash outflow was LESS than the accrual expense, and net income UNDERSTATES cash. The general rule: increase in current asset ⇒ subtract; increase in current liability ⇒ add.
Question 58
Which of these would be reported as an OPERATING cash flow under US GAAP but potentially as a FINANCING flow under IFRS?
Select an option first.
Correct answer: C — INTEREST PAID
Explanation: Under US GAAP, INTEREST PAID is always OPERATING. IFRS permits it to be classified as either OPERATING or FINANCING (with a policy election applied consistently). Similarly, interest and dividends RECEIVED are operating under US GAAP but may be operating or investing under IFRS. This flexibility is a recurring GAAP/IFRS comparison.
Question 59
An entity presents comparative statements and discovers a material error in the prior year's inventory. The correction should:
Select an option first.
Correct answer: C — RESTATE the prior period presented and adjust the opening retained earnings of the earliest period presented
Explanation: An ERROR requires RESTATEMENT of the prior periods presented, with the cumulative effect on periods NOT presented adjusted through OPENING RETAINED EARNINGS of the earliest period shown (net of tax). It never runs through current-year income (option A) — that would be the discredited 'catch-up' approach.
Question 60
A company reports a $500,000 unrealised gain on an AFS DEBT security and a $300,000 unrealised gain on an EQUITY security. The effect on NET INCOME is:
Select an option first.
Correct answer: C — $300,000 — only the EQUITY security's gain runs through net income; the AFS debt gain goes to OCI
Explanation: Post-ASU 2016-01: EQUITY securities are measured at fair value through NET INCOME. AFS DEBT securities remain at fair value through OCI. So only the $300,000 equity gain hits net income; the $500,000 debt gain goes to OCI. Candidates relying on pre-2016 material will answer $0 or $800,000.
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