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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 61
In a governmental fund, the issuance of long-term bonds is reported as:
Select an option first.
Correct answer: C — An OTHER FINANCING SOURCE, because the fund records the cash inflow but not the long-term liability
Explanation: Governmental funds use the current financial resources focus, so they cannot report LONG-TERM DEBT. The bond proceeds appear as an OTHER FINANCING SOURCE (not revenue), and the long-term liability appears ONLY in the government-wide statements. This is one of the two most common reconciling items.
Question 62
An entity's functional currency is the LOCAL currency of its foreign subsidiary. On consolidation, the subsidiary's INCOME STATEMENT is translated at:
Select an option first.
Correct answer: A — The AVERAGE rate for the period
Explanation: Under the TRANSLATION method: assets and liabilities at the CURRENT (year-end) rate; equity at HISTORICAL rates; and income statement items at the AVERAGE rate for the period (a practical approximation of the rates on the transaction dates). The resulting adjustment goes to OCI as the CTA.
Question 63
A parent consolidates a subsidiary in which it holds 80%. Consolidated net income attributable to the PARENT excludes:
Select an option first.
Correct answer: B — The 20% share of the subsidiary's income attributable to the NON-CONTROLLING INTEREST
Explanation: Consolidation combines 100% of the subsidiary's assets, liabilities, revenues and expenses. The portion of NET INCOME belonging to the NCI (20% here) is then presented SEPARATELY, so that 'net income attributable to the parent' excludes it. NCI is an EQUITY interest, and its share of income is an ALLOCATION, not an expense.
Question 64
Which is a REQUIRED disclosure about a reportable segment?
Select an option first.
Correct answer: C — A measure of segment PROFIT OR LOSS and total ASSETS, as regularly reviewed by the chief operating decision maker
Explanation: Segment disclosures follow the MANAGEMENT APPROACH: the entity reports the measures of segment profit or loss and total assets AS REVIEWED BY THE CHIEF OPERATING DECISION MAKER — even if those measures are not GAAP figures. That is the whole point: users see the business as management sees it.
Question 65
A subsequent event occurring after the balance sheet date but before issuance reveals that inventory on hand at year-end was obsolete at that date. This should be:
Select an option first.
Correct answer: B — Used to ADJUST the year-end inventory valuation (a Type 1 event)
Explanation: The obsolescence CONDITION EXISTED at the balance sheet date — the subsequent evidence merely REVEALED it. That makes it a TYPE 1 (recognised) event requiring ADJUSTMENT of the year-end inventory carrying amount. Post-year-end evidence about a year-end CONDITION is among the best evidence available for valuing estimates.
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Question 66
An entity issues 100,000 shares on 1 April and repurchases 12,000 as treasury on 1 October. Beginning shares were 500,000. Weighted average shares for the year (assume a 12-month year) are:
Select an option first.
Correct answer: D — 572,000
Explanation: Beginning 500,000 × 12/12 = 500,000. New issue 100,000 × 9/12 (April–December) = 75,000. Treasury repurchase 12,000 × 3/12 (October–December) = 3,000, SUBTRACTED. Total = 500,000 + 75,000 − 3,000 = 572,000. Treasury shares reduce OUTSTANDING shares from the repurchase date, weighted for the portion of the year they were held.
Question 67
Which change would INCREASE the receivable turnover ratio?
Select an option first.
Correct answer: D — TIGHTENING credit terms and collecting faster, reducing average receivables
Explanation: AR turnover = Net credit sales / Average net AR. Collecting FASTER reduces the DENOMINATOR, raising the ratio. Extending terms (options A and D) increases average receivables and LOWERS turnover. Increasing the allowance reduces NET receivables and would mechanically raise the ratio — but it signals deteriorating collectability, so it is not a genuine improvement.
Question 68
An entity's Statement of Activities (NFP) reports 'net assets released from restrictions'. This line:
Select an option first.
Correct answer: B — Has NO effect on TOTAL net assets — it decreases the restricted class and increases the unrestricted class by the same amount
Explanation: A RECLASSIFICATION between net asset classes is a TRANSFER, not a transaction with an outside party. Total net assets are UNCHANGED: the 'with donor restrictions' class decreases and 'without donor restrictions' increases by the same amount. It appears as a separate line within the Statement of Activities.
Question 69
A government's General Fund transfers $500,000 to its Debt Service Fund. In the General Fund this is reported as:
Select an option first.
Correct answer: A — An OTHER FINANCING USE (a transfer out)
Explanation: An INTERFUND TRANSFER is not an expenditure — no goods or services were received. It is reported as an OTHER FINANCING USE (transfer out) in the sending fund and an OTHER FINANCING SOURCE (transfer in) in the receiving fund. In the government-wide statements, transfers within the primary government ELIMINATE entirely.
Question 70
A component unit is BLENDED (rather than discretely presented) when:
Select an option first.
Correct answer: B — The governing bodies are substantively the same, OR it serves the primary government almost exclusively, OR its debt is expected to be repaid by the primary government
Explanation: BLENDING treats the component unit as if it were part of the primary government. It applies when the governing body is SUBSTANTIVELY THE SAME, when services are provided ALMOST EXCLUSIVELY to the primary government, or when the DEBT is expected to be repaid by it. DISCRETE presentation (a separate column) is the default.
Question 71
An entity with a 30 June year-end learns in August (before issuance) that a major customer's receivable is uncollectible; the customer had been in severe distress since May. The entity should:
Select an option first.
Correct answer: C — ADJUST the allowance for doubtful accounts at 30 June — the condition existed at the balance sheet date
Explanation: The distress EXISTED at the balance sheet date (since May). The August news merely CONFIRMED a condition already present, making this a TYPE 1 event requiring ADJUSTMENT of the year-end allowance. If the customer had been healthy at 30 June and failed only afterwards, it would be Type 2 (disclose only).
Question 72
In the statement of cash flows, the purchase of TRADING securities is classified as:
Select an option first.
Correct answer: B — An OPERATING activity, because trading securities are acquired principally for resale in the near term
Explanation: TRADING securities are bought and held principally for RESALE in the near term, so cash flows from them are OPERATING. Purchases of AVAILABLE-FOR-SALE and HELD-TO-MATURITY securities are INVESTING. The classification follows the PURPOSE for which the security is held.
Question 73
Under the DIRECT method of presenting operating cash flows, the entity must:
Select an option first.
Correct answer: C — Also provide a RECONCILIATION of net income to net cash from operating activities (effectively the indirect method)
Explanation: An entity using the DIRECT method must ALSO present a RECONCILIATION of net income to net cash from operations — which is essentially the indirect method. This dual requirement is one reason so few companies choose the direct method despite the FASB's preference for it.
Question 74
An entity has 200,000 common shares and 50,000 convertible preferred shares (each convertible into 2 common shares), with preferred dividends of $100,000. Net income is $600,000. If the preferred is DILUTIVE, diluted EPS is:
Select an option first.
Correct answer: A — $2.00
Explanation: BASIC EPS = ($600,000 − $100,000) / 200,000 = $2.50. IF-CONVERTED: add back the $100,000 preferred dividend to the numerator, and add 50,000 × 2 = 100,000 shares to the denominator. Diluted = $600,000 / 300,000 = $2.00. Since $2.00 < $2.50, the preferred IS dilutive and is included.
Question 75
Which entity would be reported under GASB rather than FASB standards?
Select an option first.
Correct answer: A — A public hospital whose board is appointed by a county government, which can also levy a tax
Explanation: GASB applies if ANY of three conditions is met: a majority of the governing body is APPOINTED by a government; unilateral dissolution with assets reverting to a government; or the POWER TO ENACT AND ENFORCE A TAX LEVY. The public hospital meets two. Most public hospitals and universities are GASB — which surprises candidates who assume 'non-profit' means FASB.
Question 76
The reconciliation between governmental FUND balances and government-wide NET POSITION would ADD:
Select an option first.
Correct answer: C — CAPITAL ASSETS (net of accumulated depreciation), which are not reported in governmental funds
Explanation: Governmental funds report no CAPITAL ASSETS and no LONG-TERM DEBT. The reconciliation therefore ADDS BACK capital assets (net of depreciation) and SUBTRACTS long-term debt to convert fund balance (current financial resources) into government-wide net position (economic resources).
Question 77
An NFP's Statement of Activities must report expenses by:
Select an option first.
Correct answer: C — FUNCTION (programme services and supporting services), with an analysis by both nature AND function presented somewhere in the financials
Explanation: NFPs must report expenses by FUNCTION on the face of the Statement of Activities — separating PROGRAMME services from SUPPORTING services (management and general, and fundraising). An analysis by BOTH nature and function must appear somewhere: on the face, in a separate statement, or in the notes.
Question 78
A donor gives an NFP a building with the stipulation that it be used for 10 years. In the absence of an explicit policy, the NFP should:
Select an option first.
Correct answer: A — Recognise a contribution WITH donor restrictions, releasing the restriction over the 10-year useful life as the building is used
Explanation: An implied time restriction on a long-lived asset is released OVER the asset's useful life as it is used (unless the NFP has a policy of releasing it immediately on placing the asset in service, which is also permitted if disclosed). The contribution revenue is recognised at FAIR VALUE when received.
Question 79
An entity restates prior-period financial statements to correct an error. The disclosure must include:
Select an option first.
Correct answer: B — The NATURE of the error AND the EFFECT of the correction on each financial statement line item and on EPS for each period presented
Explanation: Error correction disclosure requires: the NATURE of the error; the EFFECT of the correction on each financial statement LINE ITEM and on EPS for EACH period presented; and the cumulative effect on retained earnings as of the beginning of the earliest period presented. Users must be able to reconcile what was previously reported to what is now reported.
Question 80
Which statement about the operating cycle is TRUE?
Select an option first.
Correct answer: A — It is the average time between acquiring inventory and CONVERTING it back into cash; if longer than a year, it — not the year — defines 'current'
Explanation: The OPERATING CYCLE runs from the acquisition of inventory to its conversion back into cash. Current assets and liabilities are defined by ONE YEAR OR THE OPERATING CYCLE, WHICHEVER IS LONGER. For a distillery or shipbuilder with a multi-year cycle, that cycle governs — so inventory maturing in three years can still be a CURRENT asset.
Question 81
Comprehensive income may be presented as:
Select an option first.
Correct answer: D — A single continuous statement of comprehensive income, OR two consecutive statements (income statement followed by a statement of comprehensive income)
Explanation: Comprehensive income must be presented either in a SINGLE CONTINUOUS statement, or in TWO CONSECUTIVE statements (an income statement followed immediately by a statement of comprehensive income beginning with net income). Presenting it ONLY within the equity statement is NO LONGER permitted.
Question 82
An entity's OCI includes an unrealised loss on an AFS debt security. When the security is SOLD, the accumulated amount in AOCI is:
Select an option first.
Correct answer: B — RECLASSIFIED out of AOCI into net income (a reclassification adjustment), to avoid double-counting
Explanation: When the security is sold, the previously deferred unrealised amount is RECLASSIFIED from AOCI into NET INCOME. Without this RECLASSIFICATION ADJUSTMENT, the gain or loss would be counted twice — once in OCI while held, and again in net income on sale. Reclassification adjustments must be disclosed.
Question 83
A discontinued operation's results are presented:
Select an option first.
Correct answer: B — SEPARATELY, net of tax, including both the operating results AND any gain or loss on disposal
Explanation: Discontinued operations are presented as a SEPATE component below income from continuing operations, NET OF TAX. The presentation includes BOTH the component's operating results for the period AND any gain or loss on the actual disposal (or on remeasurement to fair value less costs to sell).
Question 84
A parent owns 70% of a subsidiary. The subsidiary reports net income of $1,000,000. There are no intercompany transactions. Net income attributable to the NCI is:
Select an option first.
Correct answer: B — $300,000
Explanation: NCI's share = 30% × $1,000,000 = $300,000. Consolidation combines 100% of the subsidiary's revenues and expenses; the NCI's share of net income is then presented as an ALLOCATION (not an expense) so that 'net income attributable to the parent' shows $700,000.
Question 85
A company changes from FIFO to LIFO. This change is applied:
Select an option first.
Correct answer: B — PROSPECTIVELY — a change TO LIFO is one of the two exceptions, because prior LIFO layers cannot be reconstructed
Explanation: A change TO LIFO is applied PROSPECTIVELY: the opening inventory in the year of change becomes the base-year LIFO layer. Reconstructing what the LIFO layers WOULD have been historically is impracticable, which is why the exception exists. (Changing FROM LIFO to another method IS retrospective.)
Question 86
The FASB Conceptual Framework's fundamental qualitative characteristics are:
Select an option first.
Correct answer: A — RELEVANCE and FAITHFUL REPRESENTATION
Explanation: The FUNDAMENTAL characteristics are RELEVANCE (predictive value, confirmatory value, materiality) and FAITHFUL REPRESENTATION (complete, neutral, free from error). The ENHANCING characteristics are Comparability, Verifiability, Timeliness and Understandability. The pervasive CONSTRAINT is cost.
Question 87
Under the conceptual framework, an item is RECOGNISED in the financial statements when it:
Select an option first.
Correct answer: A — Meets the DEFINITION of an element, is MEASURABLE, is RELEVANT, and can be FAITHFULLY REPRESENTED
Explanation: Recognition requires that the item meet the DEFINITION of a financial statement element (asset, liability, equity, revenue, expense), be MEASURABLE with sufficient reliability, be RELEVANT to users, and be capable of FAITHFUL REPRESENTATION. Legal certainty (option A) is not the standard — many recognised items rest on estimates.
Question 88
An entity's inventory turnover FELL from 8 to 5 while gross margin rose. The MOST likely explanation is:
Select an option first.
Correct answer: B — Inventory is building up — possibly obsolete stock, or costs are being capitalised into inventory rather than expensed through COGS, which would inflate margin
Explanation: Falling turnover means inventory is sitting LONGER. When that coincides with a RISING gross margin, a red flag emerges: costs that should have hit COGS may be sitting in INVENTORY instead, inflating both the inventory balance and the margin. It can also signal obsolescence that has not yet been written down.
Question 89
The measurement focus of PROPRIETARY funds is:
Select an option first.
Correct answer: B — ECONOMIC RESOURCES, with FULL accrual accounting — the same basis as a commercial enterprise
Explanation: PROPRIETARY funds (Internal Service and Enterprise) use ECONOMIC RESOURCES and FULL ACCRUAL — they report capital assets, long-term debt, and depreciation, exactly like a business. That is appropriate, because they operate on a fee-for-service basis.
Question 90
An NFP receives a promise to give that is CONDITIONAL on the NFP raising matching funds. Before the match is achieved, the NFP should:
Select an option first.
Correct answer: A — Recognise NOTHING (or, if cash was received, a REFUNDABLE ADVANCE liability) — the barrier has not been overcome
Explanation: A MATCHING requirement is a BARRIER, making the promise CONDITIONAL. No revenue is recognised until the barrier is overcome. If cash was received in advance, it is a REFUNDABLE ADVANCE (a liability), not revenue. Contrast this with a mere donor RESTRICTION on use, which does NOT delay recognition.
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