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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 151
The LIFO reserve is defined as:
Select an option first.
Correct answer: C — FIFO inventory minus LIFO inventory
Explanation: LIFO reserve = FIFO inventory − LIFO inventory. To convert a LIFO company to a FIFO basis for comparison: ADD the reserve to inventory, and REDUCE COGS by the CHANGE in the reserve (the LIFO effect).
Question 152
Lower of cost or net realisable value (LCNRV) applies to inventory measured under:
Select an option first.
Correct answer: B — FIFO and weighted average
Explanation: LCNRV (one ceiling, no floor) applies to FIFO and WEIGHTED AVERAGE. LIFO and the RETAIL method instead use the older LOWER OF COST OR MARKET rule, where 'market' is the MIDDLE of replacement cost, a ceiling (NRV) and a floor (NRV less normal profit). Two methods, two different rules — and the exam relies on candidates conflating them.
Question 153
Straight-line depreciation is computed as:
Select an option first.
Correct answer: B — (Cost − Salvage) / Useful life
Explanation: SL = (Cost − Salvage value) / Useful life. Note that salvage IS deducted here — which is precisely what makes double-declining balance so counterintuitive, since DDB IGNORES salvage in the formula (though depreciation stops once book value reaches salvage).
Question 154
Under the double-declining balance method, salvage value is:
Select an option first.
Correct answer: D — IGNORED in the formula, though depreciation stops when book value reaches salvage
Explanation: DDB applies the rate (2/useful life) to the DECLINING BOOK VALUE, and salvage is IGNORED in the calculation. However, you STOP depreciating once book value reaches salvage. Depreciating all the way to zero, ignoring salvage entirely, is the classic error.
Question 155
Which cost is capitalised as part of LAND (and therefore NOT depreciated)?
Select an option first.
Correct answer: C — Cost of razing an old building, less any salvage proceeds
Explanation: RAZING an old building is a LAND cost — you are preparing the SITE, not constructing the new structure. Land is never depreciated. Options B, D and D (construction-period interest, architect fees, excavation) are all costs of the BUILDING and ARE depreciated.
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Question 156
A cash equivalent must have an original maturity of:
Select an option first.
Correct answer: C — 90 days or less from the acquisition date
Explanation: A cash equivalent must be readily convertible to a known amount of cash AND have an ORIGINAL maturity of 90 days or less FROM THE DATE OF ACQUISITION. A five-year bond with 60 days remaining is NOT a cash equivalent — 'original', not 'remaining', is the word that matters.
Question 157
The allowance method for bad debts using the AGING (percentage-of-receivables) approach computes bad debt expense as:
Select an option first.
Correct answer: D — Estimated uncollectible amount MINUS the existing credit balance in the allowance
Explanation: The AGING method SETS THE ENDING ALLOWANCE to a target, so the expense = target allowance − existing allowance balance. The PERCENTAGE-OF-SALES method (option C) simply ADDS to the allowance, ignoring the existing balance. Mixing the two is the single most common receivables error.
Question 158
Interest expense under the effective-interest method is computed as:
Select an option first.
Correct answer: D — BEGINNING CARRYING VALUE × MARKET (effective) rate
Explanation: Interest EXPENSE = Beginning CARRYING VALUE × MARKET rate. Cash INTEREST = FACE × COUPON rate. The difference is the amortisation. For a DISCOUNT bond, expense > cash, so carrying value RISES toward face; for a PREMIUM, expense < cash, so it FALLS toward face. Both converge on face at maturity.
Question 159
A bond issued when the MARKET rate EXCEEDS the coupon rate will be issued at:
Select an option first.
Correct answer: A — A DISCOUNT
Explanation: If the market demands MORE than the bond pays, the bond is unattractive and must be priced BELOW face — a DISCOUNT. Conversely, market rate BELOW coupon means the bond pays more than the market requires, so it sells at a PREMIUM. Reason from the investor's perspective and you never need to memorise the direction.
Question 160
Net periodic pension cost (SIRAGE) includes which component as a DEDUCTION?
Select an option first.
Correct answer: B — EXPECTED RETURN on plan assets
Explanation: SIRAGE: Service cost + Interest cost − EXPECTED RETURN on plan assets + Amortisation of prior service cost + amortisation of Gains/losses + amortisation of Existing (transition) obligation. The 'R' is the only SUBTRACTION. Note it is the EXPECTED return, not the actual — a generous assumption flatters earnings, which is the earnings-quality angle.
Question 161
A lease is classified as a FINANCE lease if ANY ONE of the OWNES criteria is met. Which is NOT one of them?
Select an option first.
Correct answer: C — The lessee is a public company
Explanation: OWNES: Ownership transfers; Written purchase option reasonably certain to be exercised; Net lease term ≥ ~75% of economic life; Economic present value of payments ≥ ~90% of fair value; Specialised asset with no alternative use. The lessee's PUBLIC status is irrelevant to lease classification.
Question 162
The right-of-use asset at lease commencement equals:
Select an option first.
Correct answer: D — Lease liability + Initial direct costs + Prepayments − Lease incentives
Explanation: ROU asset = Lease liability + Initial direct costs + Prepaid lease payments − Lease incentives received. If there are no IDC, prepayments or incentives, the ROU asset simply EQUALS the lease liability. Note the liability itself is the PRESENT VALUE of the lease payments, not their undiscounted total.
Question 163
Under ASC 842, the initial journal entry for a FINANCE lease compared with an OPERATING lease is:
Select an option first.
Correct answer: C — THE SAME — the difference appears only in SUBSEQUENT expense recognition
Explanation: Both lease types record the SAME entry at commencement: DR Right-of-Use Asset, CR Lease Liability. The difference emerges LATER: a FINANCE lease splits expense into amortisation plus interest (front-loaded), while an OPERATING lease reports a SINGLE straight-line lease expense. Both are ON the balance sheet under ASC 842.
Question 164
Treasury stock is reported as:
Select an option first.
Correct answer: B — A CONTRA-EQUITY account, reducing total stockholders' equity
Explanation: Treasury stock is a CONTRA-EQUITY account — a company cannot own itself, so reacquired shares are not an asset. Critically, NO gain or loss is EVER recognised in income on treasury stock transactions; any difference on reissue or retirement goes to APIC or Retained Earnings.
Question 165
Under the COST method, the repurchase of treasury stock is recorded as:
Select an option first.
Correct answer: B — DR Treasury stock (at repurchase cost) / CR Cash
Explanation: COST method: DR Treasury Stock at the REPURCHASE COST, CR Cash. No gain or loss arises on the buyback itself. The PAR method instead records treasury stock at PAR and immediately reverses the original APIC, recognising the 'loss' at repurchase — same economics, different timing of the equity hit.
Question 166
An asset retirement obligation is initially measured at:
Select an option first.
Correct answer: B — The PRESENT VALUE of the expected retirement cash outflows, discounted at the credit-adjusted risk-free rate
Explanation: ARO = PV of expected retirement cash outflows, discounted at the CREDIT-ADJUSTED RISK-FREE RATE. The entry is DR Asset Retirement Cost (capitalised into PP&E) / CR ARO. Thereafter TWO expenses arise: DEPRECIATION of the capitalised cost, and ACCRETION of the liability.
Question 167
ARO accretion expense is classified as:
Select an option first.
Correct answer: D — An OPERATING expense
Explanation: Accretion expense is an OPERATING expense — even though it is computed exactly like interest (beginning ARO × the credit-adjusted risk-free rate). Classifying it as interest expense is the intended trap.
Question 168
For internal-use software, costs incurred in the PRELIMINARY PROJECT stage are:
Select an option first.
Correct answer: D — EXPENSED as incurred
Explanation: Only the APPLICATION DEVELOPMENT stage is CAPITALISED. The PRELIMINARY PROJECT stage (evaluating alternatives, selecting a vendor) and the POST-IMPLEMENTATION stage (maintenance, support) are EXPENSED. Training costs are expensed in EVERY stage.
Question 169
Under the units-of-production method, depreciation per unit equals:
Select an option first.
Correct answer: D — (Cost − Salvage) / Total estimated units of production
Explanation: Depreciation per unit = (Cost − Salvage) / Total estimated units. Annual depreciation = per-unit rate × units ACTUALLY produced. It is usage-based and ignores time entirely, so an IDLE asset takes NO depreciation — which is the whole point of the method.
Question 170
The recoverability test for impairment of a long-lived asset HELD FOR USE compares carrying value to:
Select an option first.
Correct answer: D — UNDISCOUNTED future cash flows
Explanation: STEP 1 (recoverability) uses UNDISCOUNTED future cash flows. If those exceed carrying value, there is NO impairment and you stop. Only if the test FAILS do you proceed to STEP 2, where the LOSS = Carrying value − FAIR VALUE (usually a discounted figure). Using discounted cash flows in the TEST is the classic error.
Question 171
An impairment loss on an asset HELD FOR USE may be:
Select an option first.
Correct answer: D — NOT reversed under US GAAP
Explanation: Under US GAAP, an impairment on a held-for-use asset may NEVER be restored — the write-down establishes a new cost basis. (HELD-FOR-SALE assets CAN be written back up, but only to the extent of previous write-downs.) IFRS permits reversals (except for goodwill), which is a key GAAP/IFRS divergence.
Question 172
Capitalised interest on a self-constructed asset is limited to:
Select an option first.
Correct answer: B — Avoidable interest, capped at the ACTUAL interest incurred
Explanation: Capitalised interest = the LESSER of AVOIDABLE interest (weighted-average accumulated expenditures × the appropriate rate) and the ACTUAL interest INCURRED. You can never capitalise more than you actually paid. Three conditions must all hold: expenditures made, activities in progress, and interest being incurred.
Question 173
Under the DIRECT WRITE-OFF method (not GAAP), bad debts are recognised:
Select an option first.
Correct answer: C — When a SPECIFIC account is actually written off
Explanation: The DIRECT WRITE-OFF method recognises bad debt expense only when a SPECIFIC account is deemed uncollectible. It is NOT GAAP, because it violates the matching principle (the expense may fall in a different period from the revenue) and does not report receivables at net realisable value. It is permitted for tax and where amounts are immaterial.
Question 174
In a bank reconciliation, DEPOSITS IN TRANSIT are:
Select an option first.
Correct answer: A — Added to the BANK balance
Explanation: Deposits in transit are ADDED to the BANK side — the company has recorded them, but the bank has not yet. Outstanding cheques are SUBTRACTED from the bank side. Only the BOOK-side adjustments (bank collections, interest, NSF cheques, service charges) require JOURNAL ENTRIES; the bank will correct its own side.
Question 175
Which item requires a journal entry in a bank reconciliation?
Select an option first.
Correct answer: B — An NSF cheque returned by the bank
Explanation: Only BOOK-side items require journal entries — an NSF cheque, a bank collection, interest earned, or a service charge, none of which the company knew about until it received the statement. Deposits in transit, outstanding cheques and bank errors are all BANK-side items that will resolve themselves.
Question 176
Cost depletion is charged to COGS based on units:
Select an option first.
Correct answer: B — SOLD
Explanation: Depletion is computed on units EXTRACTED, but that depletion goes first into INVENTORY. Only the portion relating to units SOLD is charged to COGS; the rest sits in ending inventory. Skipping that split — charging all extracted-unit depletion to COGS — is a reliable error.
Question 177
Under the FIFO cost flow assumption in a period of RISING prices, compared with LIFO, net income will be:
Select an option first.
Correct answer: C — HIGHER
Explanation: With RISING prices, FIFO charges the OLDEST (cheapest) costs to COGS, producing a LOWER COGS and therefore a HIGHER net income than LIFO. LIFO charges the newest (most expensive) costs, giving a higher COGS, lower income — and, notably, a lower tax bill, which is why LIFO exists at all.
Question 178
A stock issuance above par is recorded as:
Select an option first.
Correct answer: C — DR Cash (issue price); CR Common Stock (par); CR APIC (the excess)
Explanation: DR Cash at the ISSUE price; CR Common Stock at PAR; CR Additional Paid-In Capital for the EXCESS over par. Par value is a legal artefact with no economic meaning — everything above it is APIC, which is why par is often set at $0.01.
Question 179
The premium liability for sales coupons is accrued based on:
Select an option first.
Correct answer: C — Coupons EXPECTED TO BE REDEEMED
Explanation: The accrual is based on the coupons the company EXPECTS to be REDEEMED — not all coupons issued (most are never used), and not those already redeemed (which have already been settled). It is a matching-principle accrual, estimating the future cost arising from current-period sales.
Question 180
Under the retail inventory method, the cost-to-retail ratio is applied to:
Select an option first.
Correct answer: C — ENDING INVENTORY AT RETAIL, to convert it to cost
Explanation: The retail method computes a COST-TO-RETAIL RATIO, then applies it to ENDING INVENTORY AT RETAIL to estimate ending inventory at COST. It is an estimation technique used where tracking unit costs is impractical.
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