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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 181
Goods held on CONSIGNMENT by the entity (from another party) should be:
Select an option first.
Correct answer: D — EXCLUDED from the entity's inventory — they belong to the consignor
Explanation: Goods held on consignment FROM others belong to the CONSIGNOR and must be EXCLUDED from the consignee's inventory. Conversely, goods the entity has shipped OUT on consignment remain in ITS inventory until the consignee sells them.
Question 182
Goods shipped FOB SHIPPING POINT and in transit at year-end belong in the inventory of:
Select an option first.
Correct answer: B — The BUYER, because title passed when the goods left the seller
Explanation: FOB SHIPPING POINT: title and control pass when the goods LEAVE THE SELLER. Goods in transit at year-end therefore belong to the BUYER. FOB DESTINATION: title passes on DELIVERY, so goods in transit still belong to the SELLER.
Question 183
Sum-of-the-years'-digits depreciation uses a denominator of:
Select an option first.
Correct answer: A — n(n + 1) / 2
Explanation: SYD denominator = n(n + 1)/2, where n is the useful life. The numerator in year t is (n − t + 1). It is an ACCELERATED method, and — unlike DDB — salvage IS deducted from cost before applying the fraction.
Question 184
An intangible asset with an INDEFINITE life is:
Select an option first.
Correct answer: D — NOT amortised, but tested for impairment at least annually
Explanation: An INDEFINITE-life intangible (goodwill, some trademarks) is NOT amortised. It is tested for IMPAIRMENT at least ANNUALLY, and more often if events indicate impairment. FINITE-life intangibles ARE amortised over their useful lives.
Question 185
Under the effective-interest method, the carrying value of a bond issued at a DISCOUNT will:
Select an option first.
Correct answer: C — INCREASE toward face value
Explanation: For a DISCOUNT bond, interest EXPENSE (carrying value × market rate) EXCEEDS the cash interest paid, so the difference is added to the carrying value — which therefore RISES toward face. For a PREMIUM, the reverse occurs. Both converge on face at maturity, which is your sanity check.
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Question 186
Bond issue COSTS under current GAAP are:
Select an option first.
Correct answer: C — Presented as a DIRECT DEDUCTION from the carrying amount of the debt (like a discount)
Explanation: Debt issuance costs are presented as a DIRECT DEDUCTION from the carrying amount of the liability — the same presentation as a discount — and amortised into interest expense using the effective-interest method. They are no longer recorded as a separate deferred asset.
Question 187
A liability is classified as CURRENT if it is expected to be settled within:
Select an option first.
Correct answer: B — One year OR the operating cycle, whichever is LONGER
Explanation: Current = due within ONE YEAR or the entity's OPERATING CYCLE, whichever is LONGER. For most companies the year governs, but for a distillery or shipbuilder with a multi-year operating cycle, the cycle does.
Question 188
Refinancing a short-term obligation on a long-term basis AFTER the balance sheet date but BEFORE issuance permits classification as NON-CURRENT if:
Select an option first.
Correct answer: A — The entity has BOTH the INTENT and the ABILITY to refinance (demonstrated by an actual refinancing or a firm agreement)
Explanation: Both INTENT and ABILITY are required. Ability is demonstrated by ACTUALLY refinancing before the statements are issued, or by entering a FIRM non-cancellable financing AGREEMENT. Intent alone (option A) is not enough.
Question 189
A defined benefit plan's FUNDED STATUS equals:
Select an option first.
Correct answer: D — Plan assets minus the projected benefit obligation
Explanation: Funded status = FAIR VALUE OF PLAN ASSETS − PROJECTED BENEFIT OBLIGATION. A NEGATIVE figure (PBO exceeds assets) is an UNDERFUNDED plan, reported as a LIABILITY. The funded status is reported on the balance sheet in full.
Question 190
Under ASC 842, an OPERATING lease results in:
Select an option first.
Correct answer: A — A right-of-use asset and lease liability, with a SINGLE straight-line lease expense
Explanation: ASC 842 puts BOTH lease types ON the balance sheet. An OPERATING lease reports a SINGLE straight-line LEASE EXPENSE. A FINANCE lease splits it into AMORTISATION and INTEREST, producing a FRONT-LOADED total expense.
Question 191
Short-term leases (12 months or less) may be:
Select an option first.
Correct answer: C — EXEMPTED from balance sheet recognition, by policy election, with payments recognised on a straight-line basis
Explanation: A lessee may make an ACCOUNTING POLICY ELECTION (by class of underlying asset) to exclude SHORT-TERM leases — 12 months or less with no purchase option reasonably certain of exercise — from balance sheet recognition, expensing the payments straight-line.
Question 192
Preferred stock that is MANDATORILY REDEEMABLE is classified as:
Select an option first.
Correct answer: A — A LIABILITY, because the entity has an unavoidable obligation to transfer assets
Explanation: MANDATORILY REDEEMABLE preferred stock is a LIABILITY. Despite its name and legal form, the entity has an UNCONDITIONAL OBLIGATION to redeem it — to transfer assets — which is the definition of a liability. Substance prevails over legal form.
Question 193
The APIC — Treasury Stock account can be reduced to:
Select an option first.
Correct answer: A — ZERO, but no further; further losses go to Retained Earnings
Explanation: 'Gains' on treasury stock go to APIC — Treasury Stock. 'Losses' are first charged AGAINST any existing balance in that account; once it reaches ZERO, further losses are charged to RETAINED EARNINGS. APIC — T/S can never go negative.
Question 194
A contingent liability that is PROBABLE and estimable is:
Select an option first.
Correct answer: A — ACCRUED (recorded as a liability) and disclosed
Explanation: PROBABLE + ESTIMABLE = ACCRUE the liability AND disclose. REASONABLY POSSIBLE = disclose only. REMOTE = nothing (except DOG). Both conditions must be met for accrual.
Question 195
Deferred revenue (unearned revenue) is:
Select an option first.
Correct answer: D — A LIABILITY, representing the obligation to deliver goods or services
Explanation: Deferred/unearned revenue is a LIABILITY — cash has been received but the performance obligation has not yet been satisfied, so the entity owes the customer goods or services (or a refund). It becomes revenue only as the obligation is satisfied.
Question 196
Under the allowance method, WRITING OFF a specific uncollectible account:
Select an option first.
Correct answer: D — Has NO effect on net income or net receivables — it reduces both the allowance and gross receivables
Explanation: The write-off entry is DR Allowance / CR Accounts Receivable. Both the ALLOWANCE (a contra-asset) and GROSS receivables decrease by the same amount, so NET receivables are UNCHANGED and there is NO income statement effect. The expense was recognised earlier, when the allowance was established.
Question 197
Available-for-sale DEBT securities are reported at:
Select an option first.
Correct answer: D — FAIR VALUE, with unrealised gains and losses in OCI
Explanation: AFS DEBT securities: FAIR VALUE, with unrealised gains/losses in OCI. HELD-TO-MATURITY debt: AMORTISED COST. TRADING debt: fair value through NET INCOME. And EQUITY securities: fair value through NET INCOME (post ASU 2016-01) — no more AFS classification for equities.
Question 198
Held-to-maturity debt securities are reported at:
Select an option first.
Correct answer: A — AMORTISED COST
Explanation: HTM debt securities are carried at AMORTISED COST, because the entity has both the POSITIVE INTENT and the ABILITY to hold them to maturity — so interim fair value changes are irrelevant to the outcome. Only DEBT securities can be classified HTM; equity securities have no maturity.
Question 199
Equity securities with a readily determinable fair value are measured at:
Select an option first.
Correct answer: B — FAIR VALUE, with changes in NET INCOME
Explanation: Since ASU 2016-01, equity securities are measured at FAIR VALUE with changes flowing through NET INCOME. The old available-for-sale (OCI) treatment for equities is GONE — a change that catches candidates relying on older material.
Question 200
Under dollar-value LIFO, a new layer is added ONLY when:
Select an option first.
Correct answer: D — Ending inventory at BASE-YEAR dollars EXCEEDS the prior year's base-year amount — i.e. a real QUANTITY increase occurred
Explanation: Dollar-value LIFO converts ending inventory to BASE-YEAR dollars using a price index. A new LAYER exists only if the BASE-YEAR amount ROSE — meaning real QUANTITIES increased. If ending inventory rose only because PRICES rose, the base-year amount is unchanged and NO layer is added. Confusing a price increase with a quantity increase is the central trap in the method.
Question 201
An entity uses LIFO. During the year it LIQUIDATES an old, low-cost LIFO layer. The effect on income is:
Select an option first.
Correct answer: A — An INCREASE, because old, LOW-cost layers are charged to COGS, reducing COGS and inflating margins
Explanation: A LIFO LIQUIDATION charges OLD, LOW-cost layers to COGS. In an inflationary environment those costs are far below current replacement cost, so COGS is artificially LOW and gross margin is artificially HIGH — an unsustainable, non-operating boost to income. GAAP requires DISCLOSURE of the effect, precisely because it misleads about underlying profitability.
Question 202
Woodmere Inc. capitalises interest on a self-constructed building. Weighted-average accumulated expenditures are $2,000,000; specific construction borrowing is $1,500,000 at 6%; other debt is $3,000,000 at 8%. Avoidable interest is:
Select an option first.
Correct answer: D — $130,000
Explanation: Apply the SPECIFIC borrowing rate first, up to the amount of that borrowing: $1,500,000 × 6% = $90,000. Then apply the WEIGHTED-AVERAGE rate on OTHER debt to the remaining expenditures: ($2,000,000 − $1,500,000) × 8% = $500,000 × 8% = $40,000. Avoidable interest = $90,000 + $40,000 = $130,000. Capitalise the LESSER of this and actual interest incurred.
Question 203
An asset with a carrying value of $900,000 has undiscounted future cash flows of $950,000 and a fair value of $700,000. The impairment loss is:
Select an option first.
Correct answer: C — $0 — the asset PASSES the recoverability test, because undiscounted cash flows ($950,000) EXCEED carrying value ($900,000)
Explanation: STEP 1 (recoverability): undiscounted cash flows of $950,000 EXCEED the $900,000 carrying value, so the asset is RECOVERABLE and there is NO IMPAIRMENT. You never reach Step 2. Candidates who jump straight to fair value and record $900,000 − $700,000 = $200,000 have skipped the test that determines whether an impairment exists at all.
Question 204
Change the facts: carrying value $900,000; undiscounted cash flows $850,000; fair value $700,000. The impairment loss is:
Select an option first.
Correct answer: C — $200,000 — the test FAILS ($850,000 < $900,000), so the loss = carrying value MINUS FAIR VALUE
Explanation: Now the recoverability test FAILS ($850,000 undiscounted < $900,000 carrying). Proceed to STEP 2: Loss = Carrying value − FAIR VALUE = $900,000 − $700,000 = $200,000. Note the loss is measured against FAIR VALUE, not against the undiscounted cash flows used in the test — answering $50,000 (option A) confuses the two figures.
Question 205
A company has a bond with a face value of $100,000, a 5% coupon (paid annually) and a market rate of 6% at issuance. The bond was issued at a DISCOUNT. In the first year, interest EXPENSE will be:
Select an option first.
Correct answer: D — MORE than $5,000, because expense = carrying value × the 6% MARKET rate, and the discount amortisation is added
Explanation: Interest EXPENSE = carrying value × MARKET rate. Because the market rate (6%) exceeds the coupon (5%), expense exceeds the $5,000 cash interest. The difference is the DISCOUNT AMORTISATION, which increases the carrying value toward face. (It is not exactly $6,000, because the carrying value is BELOW $100,000 — so expense is 6% of something less than face.)
Question 206
An entity elects the FAIR VALUE OPTION for a financial liability. The portion of the fair value change attributable to the entity's OWN CREDIT RISK is reported in:
Select an option first.
Correct answer: C — Other comprehensive income
Explanation: Under the fair value option for financial liabilities, the change attributable to the entity's OWN CREDIT RISK is reported in OCI, not net income. The rule exists because it is perverse for a company's earnings to IMPROVE as its own creditworthiness DETERIORATES — a result that occurred, notoriously, during the financial crisis.
Question 207
A company purchases equipment for $50,000, paying $10,000 cash and signing a $40,000 note. Under the indirect method statement of cash flows, this transaction:
Select an option first.
Correct answer: B — Shows a $10,000 INVESTING outflow, with the $40,000 note disclosed as a NON-CASH investing and financing activity
Explanation: Only the CASH portion ($10,000) appears in the statement of cash flows, as an INVESTING outflow. The $40,000 financed by the note involved NO CASH, so it is DISCLOSED separately as a non-cash investing and financing transaction. Reporting the full $50,000 (option A) would overstate cash flows in both directions.
Question 208
Under ASC 842, the lease liability is measured at the present value of lease payments, discounted at:
Select an option first.
Correct answer: A — The rate IMPLICIT in the lease if readily determinable; otherwise the lessee's INCREMENTAL BORROWING RATE
Explanation: The discount rate is the rate IMPLICIT IN THE LEASE if it is readily determinable — but it usually is not, because the lessee rarely knows the lessor's expected residual value. So in practice the INCREMENTAL BORROWING RATE is generally used. (Private companies may elect a risk-free rate as a practical expedient — a policy election, not the default.)
Question 209
A defined benefit pension plan is UNDERFUNDED by $2,000,000. The balance sheet should report:
Select an option first.
Correct answer: A — A $2,000,000 pension LIABILITY (the funded status is recognised in full)
Explanation: The FUNDED STATUS (plan assets − PBO) is recognised IN FULL on the balance sheet. An underfunded plan gives a LIABILITY; an overfunded plan gives an ASSET. Unrecognised gains, losses and prior service costs sit in AOCI and are amortised into pension expense over time — but the funded status itself is fully recognised.
Question 210
Fenwick Ltd. writes down inventory from $100,000 to $80,000 under LCNRV. In the next period, the NRV recovers to $95,000. Under US GAAP, the entity should:
Select an option first.
Correct answer: B — NOT reverse the write-down — US GAAP prohibits reversal of an inventory write-down
Explanation: US GAAP PROHIBITS reversing an inventory write-down — the reduced amount becomes the new COST BASIS. IFRS, by contrast, REQUIRES reversal (up to the original cost) when the NRV recovers. This is one of the sharpest GAAP/IFRS divergences and a favourite exam comparison.
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