FAR (CPA) 2026 questions and
answers
What does comprehensive income exclude? - AnswerChanges related to owner distribution and
owner investment
How to report gain/loss from unusual and infrequent transaction on the income statement? -
AnswerIt is reported pretax as a separate component of income from continuing operations.
What does selling expense include? - AnswerSelling expense includes advertising, freight out, sales
salaries, any rent expense.
What type of incomes does net income include? - AnswerNet income include incomes from
continuing operations and discontinued operations
When a company can report a discontinued operation? - AnswerWhen it is classified as held-for-sale.
Has a commitment plan to sell, component is available for immediate sale, has an active program to
locate buyer, sale is probable within on year, sale is being actively marketed, unlikely plan to sell is
changed or withdrawn
How is accumulated other comprehensive income reported? - AnswerIt is a balance sheet item and
is reported in the equity section after retained earning
Describe the relationships between net income and retained earning, OCI and accumulated OCI: -
AnswerNet income is closed out to retained earning on balance sheet. OCI is closed out to
accumulated OCI.
Retained earning and accumulated OCI are the undistributed earning of corporation
What is comprehensive income and what does other comprehensive income include? -
AnswerComprehensive income shows all non-owner changes in stockholder's equity. It includes net
income plus OCI. Other comprehensive income includes: pension adj, unrealized gain and loss AFS
debt securities, foreign currency, instrument credit risk.
How are foreign transaction and translation gain/losses reported? - AnswerForeign transaction
gain/loss is reported in net income. Foreign translation gain/loss is reported in OCI
,How does prior service cost not recognized in net periodic pension cost affect OCI? - AnswerIt will
reduce OCI
What is presentation of comprehensive income? - AnswerIt can be presented either on income
statement after net income or in a separate "statement of comprehensive income"
How are components of other comprehensive income regarding to tax issues reported? -
AnswerEither report components net of tax or report components before tax basis with one amount
shown after for the aggregate tax effects.
What are exchange rate direct method and indirect method? - AnswerDirect method is 1 foreign
currency to domestic price.
Indirect method is 1 domestic price to foreign currency
What does form 8-K used for? - AnswerTo report major corporate events like asset
acquisitions/disposals, management changes, accountant changes, financial statement changes
How is cumulative preferred stock treated to calculated basis EPS? - AnswerWhen preferred stock is
cumulative, the accumulative dividend in the period is subtract from net income to calculated basis
EPS, not the amount paid or declared.
What is dliuted EPS? - AnswerDiluted EPS include EPS and any possible conversions security that will
decrease EPS. Any possible conversion security that will increase EPS is not included because of
antidilusion rule.
What are out of the money stock options? How does it affect diluted EPS calculation? - AnswerOut
of the money stock options take place when stock's exercise price is more than market price. It it
antidilute and excluded from diluted EPS calculation.
Which following periods is required to file balance sheets on form 10-Q beside most recent quarter
end? - AnswerBalance sheet of the end of last fiscal year. If seasonal fluctuation present, it may
include corresponding quarter of last fiscal year.
How is EPS reported when an entity has a discontinued operation? - AnswerCompany will show the
basis and diluted EPS on the income statement or in the notes.
, Who requires to disclose EPS? - AnswerCompany has publicly traded common stock, potential
common stock, in the process of filing with regulatory agency
What do we do with interest expense for convertible bonds in diluted EPS calculation? - AnswerWe
need to add back (net tax) to net income because we won't need to pay interest if the bonds are
convertible
What do we do with (convertible) preferred stock dividend paid in diluted EPS calculation? -
AnswerWe will not need to subtract from net income and add number of preferred stock into total
shares for diluted EPS calculation because we assume were converted to common share
What is the numerator in diluted EPS calculation? - AnswerIncome available to common shareholder
plus any after tax interest expense that would not have incurred if the bonds converted
When a bank account's overdraft can be netted against another bank account? - AnswerWhen there
is a legal right to offset exists at a different bank. Otherwise, the overdraft is reported as current
liability
What is appropriated retained earning? - AnswerThe purpose of appropriated retained earning is to
alert/disclose shareholders that some of it retained earning is not available to pay dividends because
they are restricted for certain purposes. When the purpose of appropriation is completed, it will be
reclassed to unappropriated retained earnings
What is the cost method in equity transaction accounting? And how does it affect income
statement/balance sheet? - AnswerCalculation of paid-in capital for its treasury stock is based on the
amount treasury stock were bought. It doesn't affect income statement but it is recorded on balance
sheet as APIC-T/S and losses are first eliminated in APIC-T/S then decrease retained earnings
How does owned treasury stock affect stockholder's equity? - AnswerOwning its own stock reduces
stockholder's equity
How are cumulative preferred stock dividends are paid? - AnswerThey are paid on par value and
have a preference over common stock dividend
How are dividends in arrears reported and when are dividends reported as liability? -
AnswerDividends in arrears are not yet declared are only disclosed in financial statements.
They are recorded as liability when they are declared
answers
What does comprehensive income exclude? - AnswerChanges related to owner distribution and
owner investment
How to report gain/loss from unusual and infrequent transaction on the income statement? -
AnswerIt is reported pretax as a separate component of income from continuing operations.
What does selling expense include? - AnswerSelling expense includes advertising, freight out, sales
salaries, any rent expense.
What type of incomes does net income include? - AnswerNet income include incomes from
continuing operations and discontinued operations
When a company can report a discontinued operation? - AnswerWhen it is classified as held-for-sale.
Has a commitment plan to sell, component is available for immediate sale, has an active program to
locate buyer, sale is probable within on year, sale is being actively marketed, unlikely plan to sell is
changed or withdrawn
How is accumulated other comprehensive income reported? - AnswerIt is a balance sheet item and
is reported in the equity section after retained earning
Describe the relationships between net income and retained earning, OCI and accumulated OCI: -
AnswerNet income is closed out to retained earning on balance sheet. OCI is closed out to
accumulated OCI.
Retained earning and accumulated OCI are the undistributed earning of corporation
What is comprehensive income and what does other comprehensive income include? -
AnswerComprehensive income shows all non-owner changes in stockholder's equity. It includes net
income plus OCI. Other comprehensive income includes: pension adj, unrealized gain and loss AFS
debt securities, foreign currency, instrument credit risk.
How are foreign transaction and translation gain/losses reported? - AnswerForeign transaction
gain/loss is reported in net income. Foreign translation gain/loss is reported in OCI
,How does prior service cost not recognized in net periodic pension cost affect OCI? - AnswerIt will
reduce OCI
What is presentation of comprehensive income? - AnswerIt can be presented either on income
statement after net income or in a separate "statement of comprehensive income"
How are components of other comprehensive income regarding to tax issues reported? -
AnswerEither report components net of tax or report components before tax basis with one amount
shown after for the aggregate tax effects.
What are exchange rate direct method and indirect method? - AnswerDirect method is 1 foreign
currency to domestic price.
Indirect method is 1 domestic price to foreign currency
What does form 8-K used for? - AnswerTo report major corporate events like asset
acquisitions/disposals, management changes, accountant changes, financial statement changes
How is cumulative preferred stock treated to calculated basis EPS? - AnswerWhen preferred stock is
cumulative, the accumulative dividend in the period is subtract from net income to calculated basis
EPS, not the amount paid or declared.
What is dliuted EPS? - AnswerDiluted EPS include EPS and any possible conversions security that will
decrease EPS. Any possible conversion security that will increase EPS is not included because of
antidilusion rule.
What are out of the money stock options? How does it affect diluted EPS calculation? - AnswerOut
of the money stock options take place when stock's exercise price is more than market price. It it
antidilute and excluded from diluted EPS calculation.
Which following periods is required to file balance sheets on form 10-Q beside most recent quarter
end? - AnswerBalance sheet of the end of last fiscal year. If seasonal fluctuation present, it may
include corresponding quarter of last fiscal year.
How is EPS reported when an entity has a discontinued operation? - AnswerCompany will show the
basis and diluted EPS on the income statement or in the notes.
, Who requires to disclose EPS? - AnswerCompany has publicly traded common stock, potential
common stock, in the process of filing with regulatory agency
What do we do with interest expense for convertible bonds in diluted EPS calculation? - AnswerWe
need to add back (net tax) to net income because we won't need to pay interest if the bonds are
convertible
What do we do with (convertible) preferred stock dividend paid in diluted EPS calculation? -
AnswerWe will not need to subtract from net income and add number of preferred stock into total
shares for diluted EPS calculation because we assume were converted to common share
What is the numerator in diluted EPS calculation? - AnswerIncome available to common shareholder
plus any after tax interest expense that would not have incurred if the bonds converted
When a bank account's overdraft can be netted against another bank account? - AnswerWhen there
is a legal right to offset exists at a different bank. Otherwise, the overdraft is reported as current
liability
What is appropriated retained earning? - AnswerThe purpose of appropriated retained earning is to
alert/disclose shareholders that some of it retained earning is not available to pay dividends because
they are restricted for certain purposes. When the purpose of appropriation is completed, it will be
reclassed to unappropriated retained earnings
What is the cost method in equity transaction accounting? And how does it affect income
statement/balance sheet? - AnswerCalculation of paid-in capital for its treasury stock is based on the
amount treasury stock were bought. It doesn't affect income statement but it is recorded on balance
sheet as APIC-T/S and losses are first eliminated in APIC-T/S then decrease retained earnings
How does owned treasury stock affect stockholder's equity? - AnswerOwning its own stock reduces
stockholder's equity
How are cumulative preferred stock dividends are paid? - AnswerThey are paid on par value and
have a preference over common stock dividend
How are dividends in arrears reported and when are dividends reported as liability? -
AnswerDividends in arrears are not yet declared are only disclosed in financial statements.
They are recorded as liability when they are declared
