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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 91
Which is a required component of a governmental entity's basic financial statements?
Select an option first.
Correct answer: D — Government-wide statements, FUND financial statements, AND the notes
Explanation: The BASIC financial statements comprise: (1) GOVERNMENT-WIDE statements (Statement of Net Position and Statement of Activities), (2) FUND financial statements, and (3) the NOTES. MD&A and certain other schedules are REQUIRED SUPPLEMENTARY INFORMATION — required, but not part of the basic statements.
Question 92
Under IFRS, a company may revalue property, plant and equipment to fair value. Under US GAAP, this is:
Select an option first.
Correct answer: D — NOT permitted — US GAAP uses the historical cost model for PP&E (with impairment write-downs only, never write-ups)
Explanation: US GAAP does NOT permit REVALUATION of PP&E — the historical cost model governs, and assets may only be written DOWN (impairment), never UP. IFRS permits a REVALUATION MODEL, with increases going to a revaluation surplus in OCI. This is one of the most fundamental GAAP/IFRS differences.
Question 93
The 75% test in segment reporting requires that:
Select an option first.
Correct answer: C — The identified reportable segments TOGETHER account for at least 75% of consolidated EXTERNAL revenue; if not, more segments must be added
Explanation: The three 10% tests identify individually significant segments. The 75% test is a COMPLETENESS check: if the reportable segments together account for LESS than 75% of consolidated EXTERNAL revenue, ADDITIONAL segments must be added until the 75% threshold is met — even though they individually fail the 10% tests.
Question 94
An entity's foreign subsidiary operates in a HIGHLY INFLATIONARY economy. The subsidiary's financial statements should be:
Select an option first.
Correct answer: A — REMEASURED as if the functional currency were the PARENT'S reporting currency, with gains and losses in NET INCOME
Explanation: In a HIGHLY INFLATIONARY economy (cumulative inflation of approximately 100% or more over three years), the local currency is NOT considered a stable measuring unit. The subsidiary's statements are REMEASURED as though the functional currency were the PARENT'S reporting currency, sending gains and losses to NET INCOME rather than OCI.
Question 95
A company reports a $2 million gain on the sale of a building and a $3 million loss on the early extinguishment of debt. Both should be reported:
Select an option first.
Correct answer: D — Within INCOME FROM CONTINUING OPERATIONS — the extraordinary item classification was ELIMINATED under US GAAP
Explanation: The EXTRAORDINARY ITEM classification was ELIMINATED from US GAAP (ASU 2015-01). Unusual OR infrequent items are now reported WITHIN income from continuing operations, presented as a separate component if material. (GASB, notably, STILL retains 'extraordinary items' for governments — a genuine divergence.)
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Question 96
The equity method investor's share of the investee's OCI is:
Select an option first.
Correct answer: B — Recorded by the investor as its proportionate share, in the investor's OWN OCI, with a corresponding adjustment to the investment account
Explanation: An equity-method investor records its PROPORTIONATE SHARE of the investee's OTHER COMPREHENSIVE INCOME in the investor's OWN OCI, adjusting the investment account correspondingly. The investment account is a 'one-line consolidation': it reflects the investor's share of everything that changes the investee's equity other than transactions with owners.
Question 97
A company with a 31 December year-end issues its statements on 15 March. A subsequent event occurring on 10 March:
Select an option first.
Correct answer: D — Is WITHIN the evaluation period — the period runs from the balance sheet date THROUGH the date the statements are ISSUED (or available to be issued)
Explanation: The subsequent events evaluation period runs from the BALANCE SHEET DATE (31 December) THROUGH the date the statements are ISSUED (15 March) for an SEC filer, or through the date they are AVAILABLE TO BE ISSUED for a non-filer. A 10 March event falls squarely within it.
Question 98
Under the current expected credit loss (CECL) model, an entity recognises an allowance:
Select an option first.
Correct answer: A — AT INCEPTION, for expected LIFETIME credit losses — even on a newly originated, performing loan
Explanation: CECL requires recognition of LIFETIME expected credit losses AT INCEPTION — a day-one loss allowance even on a brand-new, performing receivable. It replaced the INCURRED-loss model, which recognised losses only once they became probable and was widely criticised for being 'too little, too late' in the financial crisis.
Question 99
Interim financial reporting under US GAAP treats each interim period as:
Select an option first.
Correct answer: A — An INTEGRAL part of the annual period, so certain costs are allocated across interim periods
Explanation: US GAAP takes the INTEGRAL view: each interim period is an integral part of the ANNUAL period, so certain costs (for example, the annual effective tax rate and some volume rebates) are ESTIMATED and ALLOCATED across the interim periods. IFRS takes a more DISCRETE view — another GAAP/IFRS divergence.
Question 100
For interim reporting, income tax expense is computed using:
Select an option first.
Correct answer: B — The estimated ANNUAL EFFECTIVE TAX RATE, applied to year-to-date income
Explanation: Interim tax expense uses the ESTIMATED ANNUAL EFFECTIVE TAX RATE applied to YEAR-TO-DATE pre-tax income, less the tax already provided in prior interim periods. This is a direct application of the INTEGRAL view, and it smooths the effect of items such as tax credits that arise unevenly across the year.
Question 101
An entity's basic EPS is $3.00 and diluted EPS is $3.20. This indicates:
Select an option first.
Correct answer: D — A calculation error or that anti-dilutive securities were wrongly included — diluted EPS can never EXCEED basic EPS
Explanation: Diluted EPS can NEVER exceed basic EPS. Anti-dilutive securities (those that would INCREASE EPS) must be EXCLUDED. A diluted figure above basic means either a computational error or the improper inclusion of anti-dilutive instruments.
Question 102
The treasury stock method assumes option proceeds are used to:
Select an option first.
Correct answer: A — REPURCHASE common shares at the AVERAGE market price during the period
Explanation: The TREASURY STOCK METHOD assumes the option proceeds (shares × exercise price) are used to REPURCHASE shares at the AVERAGE market price for the period. Only the NET incremental shares are added to the diluted denominator. Options are excluded entirely if OUT of the money (anti-dilutive).
Question 103
A government's Statement of Activities presents expenses:
Select an option first.
Correct answer: B — By FUNCTION or programme, with programme revenues deducted to show NET (expense) revenue for each function
Explanation: The government-wide STATEMENT OF ACTIVITIES uses a distinctive NET PROGRAMME COST format: expenses are shown by FUNCTION, and programme revenues (charges for services, operating grants, capital grants) are DEDUCTED to reveal the NET cost of each function borne by taxpayers. General revenues (taxes) are then presented below.
Question 104
Which is reported as a GENERAL revenue in the government-wide Statement of Activities?
Select an option first.
Correct answer: A — PROPERTY TAXES
Explanation: GENERAL revenues are those NOT directly linked to a specific function — chiefly TAXES (property, sales, income), plus unrestricted grants and investment earnings. PROGRAMME revenues (charges for services, operating grants, capital grants) ARE linked to a function and are deducted against it in the net-cost format.
Question 105
An NFP's fundraising expenses are classified as:
Select an option first.
Correct answer: A — SUPPORTING services
Explanation: Expenses are classified as either PROGRAMME services (fulfilling the mission) or SUPPORTING services (management and general, plus FUNDRAISING). Fundraising is a supporting service. The ratio of programme to total expenses is a metric donors watch closely, which creates a real incentive to classify aggressively.
Question 106
Joint costs of an activity that includes both a programme component and a fundraising appeal may be ALLOCATED only if:
Select an option first.
Correct answer: B — The PURPOSE, AUDIENCE and CONTENT criteria are ALL met; otherwise the entire cost is charged to FUNDRAISING
Explanation: To allocate JOINT COSTS between programme and fundraising, ALL THREE criteria must be met: PURPOSE (the activity accomplishes a programme purpose), AUDIENCE (selected on programme need, not donor capacity), and CONTENT (it calls for specific action by the recipient furthering the mission). Fail any one and the ENTIRE cost goes to FUNDRAISING.
Question 107
An entity reports a $500,000 foreign currency TRANSACTION loss and a $300,000 TRANSLATION loss. The income statement effect is:
Select an option first.
Correct answer: D — $500,000 loss — only the TRANSACTION loss hits net income; the TRANSLATION loss goes to OCI
Explanation: A foreign currency TRANSACTION gain/loss (from settling or remeasuring a foreign-currency-denominated receivable or payable) hits NET INCOME. A TRANSLATION adjustment (from converting a foreign subsidiary's statements where the functional currency is local) goes to OCI. Only the $500,000 transaction loss affects net income.
Question 108
A company changes its fiscal year-end. The transition period statements are:
Select an option first.
Correct answer: A — Presented as a separate TRANSITION PERIOD, with disclosure of the change and the reason
Explanation: A change in fiscal year-end requires presentation of the TRANSITION PERIOD (the stub period) as a separate reporting period, with disclosure of the change and the reason for it. It is NOT a change in accounting principle and does not require restatement.
Question 109
Which is an ENHANCING qualitative characteristic under the conceptual framework?
Select an option first.
Correct answer: C — COMPARABILITY
Explanation: The FUNDAMENTAL characteristics are RELEVANCE and FAITHFUL REPRESENTATION. The ENHANCING characteristics are COMPARABILITY, VERIFIABILITY, TIMELINESS and UNDERSTANDABILITY. MATERIALITY (option D) is an entity-specific aspect of RELEVANCE, not a separate characteristic.
Question 110
Under the conceptual framework, an ASSET is defined by:
Select an option first.
Correct answer: A — A PRESENT RIGHT to an economic benefit, controlled by the entity as a result of a past event
Explanation: An asset is a PRESENT RIGHT to an ECONOMIC BENEFIT, CONTROLLED by the entity as a result of a PAST EVENT. Note what is NOT required: legal ownership (a leased ROU asset is an asset) or physical substance (goodwill and patents are assets). CONTROL, not title, is the criterion.
Question 111
An entity presents a classified balance sheet. Which is presented as NON-CURRENT?
Select an option first.
Correct answer: C — ALL deferred tax assets and liabilities
Explanation: ALL deferred tax assets and liabilities are classified as NON-CURRENT under current GAAP, regardless of when the underlying temporary difference reverses. The old current/non-current split was eliminated. Options B, A and D are all ordinary current items.
Question 112
The statement of cash flows must reconcile to:
Select an option first.
Correct answer: A — The change in CASH AND CASH EQUIVALENTS, plus RESTRICTED CASH, during the period
Explanation: The statement reconciles the change in CASH, CASH EQUIVALENTS AND AMOUNTS GENERALLY DESCRIBED AS RESTRICTED CASH. ASU 2016-18 requires restricted cash to be INCLUDED in the total, so transfers between unrestricted and restricted cash are no longer shown as cash flows at all.
Question 113
In a governmental Debt Service Fund, principal and interest expenditures are generally recognised:
Select an option first.
Correct answer: C — WHEN DUE (matured) — an exception to the general modified-accrual rule that expenditures are recorded when the liability is incurred
Explanation: Debt service expenditures are an EXCEPTION: they are recognised when the payment is DUE (matured), not as interest accrues. So no accrual is made for interest between the last payment date and year-end. This exception avoids reporting a liability the fund has no current resources to settle.
Question 114
The government-wide Statement of Net Position reports Net Position in three categories:
Select an option first.
Correct answer: C — NET INVESTMENT IN CAPITAL ASSETS; RESTRICTED; UNRESTRICTED
Explanation: Government-wide NET POSITION has three components: NET INVESTMENT IN CAPITAL ASSETS (capital assets less related debt), RESTRICTED, and UNRESTRICTED. Option D and B describe FUND BALANCE classifications, which apply only in the GOVERNMENTAL FUND statements — a distinction that must be kept sharp.
Question 115
An entity with a 52/53-week fiscal year:
Select an option first.
Correct answer: D — May use it; the extra week in a 53-week year should be disclosed if it materially affects comparability
Explanation: A 52/53-week fiscal year is permitted (common in retail, where the year ends on a fixed weekday). The extra week in a 53-week year affects comparability, and the effect should be DISCLOSED where material — a 53-week year mechanically produces roughly 2% more revenue than a 52-week one.
Question 116
Related party transactions must be disclosed:
Select an option first.
Correct answer: A — Even if they were conducted at ARM'S LENGTH — disclosure includes the nature of the relationship, a description of the transactions, and the amounts
Explanation: Related party transactions must be DISCLOSED regardless of whether the terms were arm's length, because the RELATIONSHIP itself may have influenced the transaction. Disclosure covers the nature of the relationship, a description of the transactions, dollar amounts, and amounts due to/from. An entity may NOT assert that terms were equivalent to arm's length unless that claim can be substantiated.
Question 117
An entity discloses a concentration of credit risk when:
Select an option first.
Correct answer: C — A group of counterparties shares similar activities or economic characteristics such that a single event could affect their ability to meet obligations
Explanation: Concentration disclosures are required when a significant portion of business depends on a small number of customers, suppliers, products, or a geographic region — because a single adverse event could affect them all at once. A customer representing 70% of revenue is the archetype.
Question 118
Net income is $900,000. Preferred dividends are $100,000. Weighted average common shares are 400,000. Basic EPS is:
Select an option first.
Correct answer: C — $2.00
Explanation: Basic EPS = (Net income − Preferred dividends) / Weighted average common shares = ($900,000 − $100,000) / 400,000 = $800,000 / 400,000 = $2.00. Forgetting to deduct the preferred dividend gives $2.25 (option A) — the intended trap.
Question 119
A company has 300,000 shares outstanding all year and 60,000 options with an exercise price of $10. The average market price is $15. Under the treasury stock method, incremental shares added to the diluted denominator are:
Select an option first.
Correct answer: D — 20,000
Explanation: Proceeds = 60,000 × $10 = $600,000. Shares repurchasable at the AVERAGE market price = $600,000 / $15 = 40,000. INCREMENTAL shares = 60,000 issued − 40,000 repurchased = 20,000. Adding all 60,000 (option A) ignores the assumed buyback.
Question 120
Using the prior facts (300,000 shares, 20,000 incremental, net income $960,000, no preferred), diluted EPS is:
Select an option first.
Correct answer: B — $3.00
Explanation: Basic EPS = $960,000 / 300,000 = $3.20. Diluted denominator = 300,000 + 20,000 = 320,000. Diluted EPS = $960,000 / 320,000 = $3.00. Diluted is LOWER than basic, confirming the options are dilutive and correctly included.
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