You’re on a roll
Create a free account to save your CPA progress, track your accuracy by topic, and pick up right where you left off.
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 121
Net income $500,000; depreciation $80,000; gain on equipment sale $30,000; AR increased $40,000; AP increased $25,000. Cash from operations is:
Select an option first.
Correct answer: C — $535,000
Explanation: $500,000 + $80,000 (depreciation added back) − $30,000 (GAIN subtracted) − $40,000 (AR increase, a use of cash) + $25,000 (AP increase, a source) = $535,000. The gain is SUBTRACTED because the full proceeds appear in investing — the most commonly missed sign.
Question 122
A company sells equipment (cost $200,000; accumulated depreciation $150,000) for $70,000 cash. The INVESTING cash inflow is:
Select an option first.
Correct answer: B — $70,000 — the full CASH PROCEEDS, regardless of the $20,000 gain
Explanation: The INVESTING section reports the CASH PROCEEDS of $70,000. The $20,000 gain (proceeds $70,000 − book value $50,000) is SUBTRACTED in the OPERATING section under the indirect method, to prevent double-counting. Reporting only the gain or only the book value are both errors.
Question 123
Total revenue $2,000,000; COGS $1,200,000; operating expenses $400,000; interest expense $50,000; tax rate 25%. Net income is:
Select an option first.
Correct answer: A — $262,500
Explanation: Gross profit = $2,000,000 − $1,200,000 = $800,000. Operating income = $800,000 − $400,000 = $400,000. Pre-tax income = $400,000 − $50,000 = $350,000. Tax = 25% × $350,000 = $87,500. Net income = $350,000 − $87,500 = $262,500. Answering $350,000 (option B) forgets the tax.
Question 124
Current assets $600,000 (including inventory $200,000 and prepaids $50,000); current liabilities $300,000. The QUICK ratio is:
Select an option first.
Correct answer: D — 1.17
Explanation: Quick assets = Current assets − Inventory − Prepaids = $600,000 − $200,000 − $50,000 = $350,000. Quick ratio = $350,000 / $300,000 = 1.17. The CURRENT ratio would be $600,000/$300,000 = 2.00 (option A) — the intended distractor.
Question 125
Net credit sales $3,600,000; beginning AR $400,000; ending AR $500,000. Days sales outstanding (365-day year) is approximately:
Select an option first.
Correct answer: D — 45.6 days
Explanation: Average AR = ($400,000 + $500,000)/2 = $450,000. AR turnover = $3,600,000 / $450,000 = 8.0. DSO = 365 / 8.0 = 45.6 days. Using ENDING AR instead of the average gives 50.7 days (option B) — a common shortcut error.
Get the full CPA question bank — free
Drop your email and we'll send you fresh CPA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 126
COGS $2,400,000; beginning inventory $500,000; ending inventory $700,000. Days in inventory is approximately:
Select an option first.
Correct answer: C — 91.3 days
Explanation: Average inventory = ($500,000 + $700,000)/2 = $600,000. Inventory turnover = $2,400,000 / $600,000 = 4.0. Days in inventory = 365 / 4.0 = 91.3 days.
Question 127
Using DSO of 45 days, days inventory 90 days, and DPO of 30 days, the cash conversion cycle is:
Select an option first.
Correct answer: B — 105 days
Explanation: CCC = DSO + DIO − DPO = 45 + 90 − 30 = 105 days. Note the MINUS on DPO — paying suppliers more slowly SHORTENS the cycle. Adding all three (option A) is the intended error.
Question 128
A foreign subsidiary has net assets of €1,000,000. The rate moved from $1.10/€ at the start of the year to $1.20/€ at year-end. The translation adjustment is approximately:
Select an option first.
Correct answer: C — $100,000 CREDIT to OCI (the net assets are worth $100,000 more in dollars)
Explanation: Net assets translate at $1.10 × €1,000,000 = $1,100,000 at the start and $1.20 × €1,000,000 = $1,200,000 at year-end. The €100,000 × $0.10 = $100,000 increase (before considering income effects) is a CREDIT to the CUMULATIVE TRANSLATION ADJUSTMENT in OCI — not net income.
Question 129
A government's General Fund has assets $800,000, deferred outflows $50,000, liabilities $300,000 and deferred inflows $100,000. Fund balance is:
Select an option first.
Correct answer: B — $450,000
Explanation: Fund balance = Assets + Deferred outflows − Liabilities − Deferred inflows = $800,000 + $50,000 − $300,000 − $100,000 = $450,000. DEFERRED OUTFLOWS and DEFERRED INFLOWS are distinct governmental elements — neither is an asset nor a liability, and both must be included in the equation.
Question 130
An NFP receives $500,000 with donor restrictions. It spends $200,000 on the restricted programme. Net assets WITH donor restrictions increased by:
Select an option first.
Correct answer: D — $300,000 — $500,000 of restricted revenue, less $200,000 released from restrictions
Explanation: The full $500,000 is recognised as revenue WITH donor restrictions. As the restriction is satisfied, $200,000 is RECLASSIFIED (released) to the without-donor-restrictions class. The net increase in the RESTRICTED class = $500,000 − $200,000 = $300,000.
Question 131
A company's segments have revenues of $50m, $30m, $12m and $8m (total $100m). Applying the 10% test, the reportable segments are:
Select an option first.
Correct answer: C — The $50m, $30m and $12m segments (each ≥ 10% of $100m)
Explanation: The 10% revenue threshold is 10% × $100m = $10m. Segments with revenue of $50m, $30m and $12m all EXCEED $10m and are reportable; the $8m segment does not. Check the 75% test: the three reportable segments total $92m, comfortably above 75% of external revenue.
Question 132
Beginning retained earnings $2,000,000; net income $600,000; cash dividends declared $150,000; a prior-period error correction reducing prior income by $80,000 (net of tax). Ending retained earnings is:
Select an option first.
Correct answer: B — $2,370,000
Explanation: Beginning RE $2,000,000, ADJUSTED for the prior-period error: $2,000,000 − $80,000 = $1,920,000 (the restated opening balance). Then + $600,000 net income − $150,000 dividends = $2,370,000. Error corrections adjust OPENING retained earnings, never current-year income.
Question 133
Net income $1,200,000. Convertible bonds: $2,000,000 face, 6%, convertible into 100,000 shares. Tax rate 25%. Weighted average shares 500,000. Diluted EPS is:
Select an option first.
Correct answer: D — $2.15
Explanation: If-converted: add back after-tax interest = $2,000,000 × 6% × (1 − 0.25) = $120,000 × 0.75 = $90,000. Numerator = $1,200,000 + $90,000 = $1,290,000. Denominator = 500,000 + 100,000 = 600,000. Diluted = $1,290,000/600,000 = $2.15. Basic was $2.40, so the bonds ARE dilutive.
Question 134
Same facts but the bonds convert into only 30,000 shares. Diluted EPS is:
Select an option first.
Correct answer: A — $2.40 — the bonds are ANTI-DILUTIVE and must be EXCLUDED
Explanation: Test: ($1,200,000 + $90,000) / (500,000 + 30,000) = $1,290,000/530,000 = $2.434. That EXCEEDS basic EPS of $2.40, so the bonds are ANTI-DILUTIVE and are EXCLUDED. Diluted EPS = basic = $2.40. Each potential security must be tested separately, and anti-dilutive ones dropped.
Question 135
Sales $5,000,000; beginning AR $600,000; ending AR $900,000; beginning deferred revenue $100,000; ending deferred revenue $250,000. Cash COLLECTED from customers is:
Select an option first.
Correct answer: C — $4,850,000
Explanation: Cash collected = Sales − increase in AR + increase in deferred revenue = $5,000,000 − $300,000 + $150,000 = $4,850,000. Receivables rising means you billed more than you collected (subtract); deferred revenue rising means you collected cash you have not yet earned (add).
Question 136
A company's income statement shows tax expense of $250,000. Income taxes payable rose $40,000 and the deferred tax liability rose $30,000. Cash paid for taxes is:
Select an option first.
Correct answer: B — $180,000
Explanation: Cash paid = Tax expense − increase in taxes payable − increase in DTL = $250,000 − $40,000 − $30,000 = $180,000. Both an increase in the payable and an increase in the deferred liability represent tax EXPENSED but NOT PAID in cash.
Question 137
Beginning AOCI $200,000 credit. Current-year OCI: unrealised gain on AFS debt $150,000; reclassification of a $60,000 prior gain into net income on sale. Ending AOCI is:
Select an option first.
Correct answer: C — $290,000
Explanation: Ending AOCI = $200,000 + $150,000 (new unrealised gain) − $60,000 (RECLASSIFICATION out of AOCI into net income on sale) = $290,000. The reclassification adjustment prevents double-counting: the gain was in OCI while held, and now moves to net income on realisation.
Question 138
A government's Enterprise Fund has operating revenues $2,000,000, operating expenses $1,700,000, interest expense $80,000 and a capital grant of $500,000. The CHANGE IN NET POSITION is:
Select an option first.
Correct answer: D — $720,000
Explanation: Operating income = $2,000,000 − $1,700,000 = $300,000. Less interest expense $80,000 = $220,000. Plus the capital grant of $500,000 (reported BELOW non-operating, as a capital contribution) = $720,000. Capital grants are not operating revenue but DO increase net position.
Question 139
An NFP has net assets without donor restrictions of $3,000,000 and with donor restrictions of $1,200,000. It receives $400,000 of unrestricted contributions and $600,000 restricted; $250,000 of restrictions are satisfied. Ending net assets WITHOUT restrictions is:
Select an option first.
Correct answer: C — $3,650,000
Explanation: Without-restriction net assets = $3,000,000 + $400,000 (unrestricted contributions) + $250,000 (released from restrictions) = $3,650,000. The $250,000 release INCREASES the unrestricted class and decreases the restricted class — a reclassification with no effect on TOTAL net assets.
Question 140
Deighton Corp has net income of $2,000,000, 800,000 weighted average shares, and $3,000,000 of 5% convertible bonds (convertible into 150,000 shares). The tax rate is 25%. Diluted EPS is:
Select an option first.
Correct answer: D — $2.22
Explanation: Basic = $2,000,000/800,000 = $2.50. If-converted: add back after-tax interest = $3,000,000 × 5% × 0.75 = $112,500. Numerator = $2,112,500; denominator = 950,000. Diluted = $2.224 ≈ $2.22. Test: $2.22 < $2.50, so DILUTIVE and included. Two concepts collide here — the after-tax add-back AND the dilution test.
Question 141
A company reports pre-tax income from continuing operations of $1,000,000 and a pre-tax loss from discontinued operations of $400,000. The tax rate is 25%. The income statement shows:
Select an option first.
Correct answer: A — Net income of $450,000, with continuing ops of $750,000 and discontinued ops of $(300,000) — each shown NET OF ITS OWN TAX
Explanation: INTRAPERIOD tax allocation. Continuing ops: $1,000,000 × 75% = $750,000. Discontinued ops: $(400,000) × 75% = $(300,000) — the loss generates a TAX BENEFIT. Net income = $750,000 − $300,000 = $450,000. Each component is presented NET OF ITS OWN TAX, so the tax benefit of the discontinued loss does NOT reduce the tax on continuing operations.
Question 142
A subsidiary in a highly inflationary economy has a foreign-currency-denominated payable. Its statements must be REMEASURED. The resulting exchange gain/loss and the payable's remeasurement gain/loss are both reported in:
Select an option first.
Correct answer: B — NET INCOME — remeasurement (not translation) applies, so all exchange effects flow through earnings
Explanation: In a HIGHLY INFLATIONARY economy, the local currency is not a stable measuring unit, so the functional currency is deemed to be the PARENT'S — triggering REMEASUREMENT. Under remeasurement, ALL exchange gains and losses go to NET INCOME, not OCI. Both effects therefore hit earnings. This chains two concepts: the highly-inflationary trigger AND the remeasurement destination.
Question 143
A government's General Fund reports a $200,000 expenditure for a vehicle purchase and $50,000 of depreciation is NOT recorded. In the GOVERNMENT-WIDE reconciliation, the adjustment is to:
Select an option first.
Correct answer: D — ADD the $200,000 capital outlay back (it is an asset, not an expense) and SUBTRACT $50,000 of depreciation — a net $150,000 increase to the change in net position
Explanation: Governmental funds EXPENSE the full $200,000 capital outlay and record NO depreciation. Government-wide (full accrual) CAPITALISES the asset and records $50,000 of depreciation. The reconciliation therefore ADDS BACK the $200,000 expenditure and SUBTRACTS the $50,000 depreciation — a net $150,000 INCREASE to the change in net position. Two adjustments, opposite directions.
Question 144
An NFP receives a $1,000,000 pledge CONDITIONAL on raising $1,000,000 in matching funds, and receives the cash in advance. By year-end it has raised $400,000 of matching funds. It should report:
Select an option first.
Correct answer: A — A $1,000,000 REFUNDABLE ADVANCE (liability) — the barrier has not been overcome, and partial progress does NOT permit partial recognition
Explanation: A MATCHING requirement is a BARRIER, making the pledge CONDITIONAL. Revenue is recognised only when the barrier is OVERCOME — and a barrier requiring $1,000,000 of matching is NOT overcome by raising $400,000. Cash received in advance is a REFUNDABLE ADVANCE (a liability). Recognising pro rata (option C) is the intended trap.
Question 145
A company's diluted EPS calculation includes options AND convertible preferred. Options add 30,000 shares (no numerator effect). Preferred: dividends $80,000, converts to 50,000 shares. Net income $700,000; basic shares 400,000. Basic EPS is $1.55. Which security is included first in the diluted sequence?
Select an option first.
Correct answer: D — The OPTIONS, because they have the LOWEST incremental EPS (zero) — securities are ranked MOST DILUTIVE FIRST
Explanation: Potential shares are ranked by INCREMENTAL EPS (numerator effect / denominator effect), MOST DILUTIVE FIRST. Options have an incremental EPS of $0 (no numerator effect), while the preferred's incremental EPS is $80,000/50,000 = $1.60. So OPTIONS enter first. Sequencing matters, because a security that is dilutive alone can become anti-dilutive once a more dilutive one is already included.
Question 146
An entity changes from the completed-contract method to percentage-of-completion. This change is:
Select an option first.
Correct answer: A — A CHANGE IN ACCOUNTING PRINCIPLE applied RETROSPECTIVELY — restating prior periods and adjusting opening retained earnings
Explanation: A change in the method of accounting for long-term contracts is a CHANGE IN PRINCIPLE, applied RETROSPECTIVELY. It is NOT one of the two prospective exceptions (change to LIFO; change in depreciation method). Candidates who lump all changes into one bucket miss the distinction between principle (retrospective), estimate (prospective) and error (restatement).
Question 147
A company reports basic EPS of $4.00 and has 100,000 in-the-money options with an average market price ABOVE the exercise price. It also reports a net LOSS in the FOURTH quarter. For the ANNUAL diluted EPS:
Select an option first.
Correct answer: C — The options ARE included if dilutive to the ANNUAL figure — the diluted EPS test is applied to the ANNUAL result, not quarter by quarter
Explanation: The dilution test is applied to the period being reported. For the ANNUAL statements, the test is against ANNUAL income — the entity has annual PROFIT (basic EPS $4.00), so dilutive options are INCLUDED. A quarterly loss does not exclude them from the annual computation. (In the Q4 statements themselves, the options WOULD be anti-dilutive and excluded.) The period of measurement governs.
Question 148
An entity's OCI includes a $100,000 unrealised gain on an AFS debt security. The tax rate is 25%. The amount reported in OCI is:
Select an option first.
Correct answer: D — $75,000 — each OCI component is presented NET OF ITS OWN TAX under intraperiod allocation
Explanation: INTRAPERIOD tax allocation requires each OCI component to be presented NET of its own tax effect: $100,000 × (1 − 0.25) = $75,000. The $25,000 tax goes to a DEFERRED TAX LIABILITY, and it does NOT appear in income tax expense on the income statement — otherwise tax expense would include tax on an item that never touched net income.
Question 149
A company's Year 1 statements are issued. In Year 2, it discovers the Year 1 depreciation was calculated using a 10-year life when the policy required 8 years. This is:
Select an option first.
Correct answer: D — An ERROR — the wrong life was applied contrary to policy — requiring RESTATEMENT of Year 1
Explanation: Applying a life CONTRARY TO THE ENTITY'S OWN POLICY is a mathematical/application ERROR, not a change in estimate. Errors require RESTATEMENT of the prior period and adjustment of opening retained earnings. Contrast a genuine REVISION of the estimated life based on new information, which WOULD be a change in estimate applied prospectively. The distinction is whether the original figure was WRONG or merely SUPERSEDED.
Question 150
Under FIFO, ending inventory consists of:
Select an option first.
Correct answer: A — The MOST RECENT costs
Explanation: FIFO expenses the OLDEST costs first (into COGS), leaving the MOST RECENT costs in ending inventory. Consequently, in a period of RISING prices, FIFO produces a HIGHER ending inventory, a LOWER COGS, and therefore HIGHER net income than LIFO. Reason from which costs are LEFT BEHIND.
More free CPA topics
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.