[CPA FINANCIAL ACCOUNTING AND REPORTING (FAR) EXAM] – EXAM-STYLE
QUESTIONS AND ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | PLUS
RATIONALES | GUARANTEED PASS | 2026/27 LATEST UPDATE | EXAM PREP |
STUDY GUIDE | PRACTICE TEST
1. According to the conceptual framework, which qualitative characteristic
requires that financial information be complete, neutral, and free from error?
A. Relevance
B. Faithful representation
C. Comparability
D. Understandability
Correct Answer: B. Faithful representation
Rationale: Faithful representation is the qualitative characteristic that ensures
financial information accurately reflects the economic substance of transactions. It
requires completeness, neutrality, and freedom from error. Relevance pertains to
information's capacity to make a difference in decisions. Comparability allows users
to identify similarities and differences. Understandability requires information to be
presented clearly and concisely.
2. A company receives a government grant related to the purchase of a
depreciable asset. Under U.S. GAAP, how should the grant be recognized?
A. As a reduction of the asset's carrying amount
B. As a deferred credit to be recognized over the asset's useful life
C. As income in the period the grant is received
D. As a direct credit to retained earnings
,Correct Answer: A. As a reduction of the asset's carrying amount
Rationale: Under U.S. GAAP, government grants are generally treated as a reduction
of the related asset's cost, which results in a lower depreciable base. The guidance
does not permit the deferral of grant income over the asset's useful life, nor does it
allow immediate recognition as income or a direct credit to retained earnings.
3. An investor holds 35% of the voting common stock of an investee. Which of
the following factors would most likely indicate the investor does NOT have
significant influence?
A. Representation on the investee's board of directors
B. Material intercompany transactions
C. The investee is a foreign entity with strict government regulations
D. Participation in the investee's policy-making processes
Correct Answer: C. The investee is a foreign entity with strict government
regulations
Rationale: While a 20-50% ownership level creates a presumption of significant
influence, this presumption can be overcome by evidence to the contrary. Strict
government regulations can significantly limit the investor's ability to exercise
influence over the investee's operations, such as setting prices or controlling exports,
which outweighs the ownership percentage. The other options are indicators that
generally support the existence of significant influence.
4. On January 1, Year 1, a company issued a five-year, zero-coupon bond with a
face value of $1,000,000 for $620,920 when the market rate was 10%. What is
,the carrying amount of the bond on December 31, Year 1, using the effective
interest method?
A. $620,920
B. $683,012
C. $1,000,000
D. $751,315
Correct Answer: B. $683,012
Rationale: The effective interest method requires interest expense to be calculated
as the carrying amount at the beginning of the period multiplied by the market
rate. The initial carrying amount is the issue price. For Year 1, interest expense is
$620,920 × 10% = $62,092. Since it is a zero-coupon bond, the carrying amount
increases by this amount, resulting in a new carrying amount of $683,012 on
December 31, Year 1. Option A is the initial carrying amount. Option C is the face
value, not the carrying amount during the term.
5. A company includes in its inventory all goods in transit that were shipped
FOB shipping point. Is this treatment correct?
A. Yes, because title passes to the buyer at the point of shipment.
B. Yes, because the goods are insured by the seller.
C. No, because title passes to the buyer only upon delivery.
D. No, because the seller retains title until the buyer receives the goods.
Correct Answer: A. Yes, because title passes to the buyer at the point of shipment.
Rationale: Under FOB shipping point terms, the seller fulfills its obligation at the
point of shipment. Title and risk of loss transfer to the buyer at that moment.
, Therefore, goods in transit under FOB shipping point are properly included in the
buyer's inventory. The other options incorrectly describe the point of title transfer for
FOB shipping point transactions.
6. A company has a current ratio of 2.0 and a quick ratio of 1.5. Which of the
following transactions would increase both the current and quick ratios?
A. Paying off a current liability with cash
B. Purchasing inventory with cash
C. Collecting accounts receivable
D. Writing off an uncollectible account against the allowance
Correct Answer: A. Paying off a current liability with cash
Rationale: Paying a current liability with cash reduces both current assets and
current liabilities by the same amount. For a current ratio > 1.0, this transaction
will increase the ratio. Since cash is part of the quick assets, the quick ratio will also
increase. Purchasing inventory with cash decreases both ratios. Collecting accounts
receivable is an exchange of assets with no net effect on either ratio. Writing off an
uncollectible account against the allowance has no effect on the net realizable
value of accounts receivable and therefore does not change the ratios.
7. A company leases a machine for a five-year period, which is 75% of the
asset's useful life. The present value of the lease payments is 85% of the fair
value of the asset. The lease contains no transfer of ownership or purchase
option. How should this lease be classified by the lessee under U.S. GAAP?
A. Operating lease
QUESTIONS AND ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | PLUS
RATIONALES | GUARANTEED PASS | 2026/27 LATEST UPDATE | EXAM PREP |
STUDY GUIDE | PRACTICE TEST
1. According to the conceptual framework, which qualitative characteristic
requires that financial information be complete, neutral, and free from error?
A. Relevance
B. Faithful representation
C. Comparability
D. Understandability
Correct Answer: B. Faithful representation
Rationale: Faithful representation is the qualitative characteristic that ensures
financial information accurately reflects the economic substance of transactions. It
requires completeness, neutrality, and freedom from error. Relevance pertains to
information's capacity to make a difference in decisions. Comparability allows users
to identify similarities and differences. Understandability requires information to be
presented clearly and concisely.
2. A company receives a government grant related to the purchase of a
depreciable asset. Under U.S. GAAP, how should the grant be recognized?
A. As a reduction of the asset's carrying amount
B. As a deferred credit to be recognized over the asset's useful life
C. As income in the period the grant is received
D. As a direct credit to retained earnings
,Correct Answer: A. As a reduction of the asset's carrying amount
Rationale: Under U.S. GAAP, government grants are generally treated as a reduction
of the related asset's cost, which results in a lower depreciable base. The guidance
does not permit the deferral of grant income over the asset's useful life, nor does it
allow immediate recognition as income or a direct credit to retained earnings.
3. An investor holds 35% of the voting common stock of an investee. Which of
the following factors would most likely indicate the investor does NOT have
significant influence?
A. Representation on the investee's board of directors
B. Material intercompany transactions
C. The investee is a foreign entity with strict government regulations
D. Participation in the investee's policy-making processes
Correct Answer: C. The investee is a foreign entity with strict government
regulations
Rationale: While a 20-50% ownership level creates a presumption of significant
influence, this presumption can be overcome by evidence to the contrary. Strict
government regulations can significantly limit the investor's ability to exercise
influence over the investee's operations, such as setting prices or controlling exports,
which outweighs the ownership percentage. The other options are indicators that
generally support the existence of significant influence.
4. On January 1, Year 1, a company issued a five-year, zero-coupon bond with a
face value of $1,000,000 for $620,920 when the market rate was 10%. What is
,the carrying amount of the bond on December 31, Year 1, using the effective
interest method?
A. $620,920
B. $683,012
C. $1,000,000
D. $751,315
Correct Answer: B. $683,012
Rationale: The effective interest method requires interest expense to be calculated
as the carrying amount at the beginning of the period multiplied by the market
rate. The initial carrying amount is the issue price. For Year 1, interest expense is
$620,920 × 10% = $62,092. Since it is a zero-coupon bond, the carrying amount
increases by this amount, resulting in a new carrying amount of $683,012 on
December 31, Year 1. Option A is the initial carrying amount. Option C is the face
value, not the carrying amount during the term.
5. A company includes in its inventory all goods in transit that were shipped
FOB shipping point. Is this treatment correct?
A. Yes, because title passes to the buyer at the point of shipment.
B. Yes, because the goods are insured by the seller.
C. No, because title passes to the buyer only upon delivery.
D. No, because the seller retains title until the buyer receives the goods.
Correct Answer: A. Yes, because title passes to the buyer at the point of shipment.
Rationale: Under FOB shipping point terms, the seller fulfills its obligation at the
point of shipment. Title and risk of loss transfer to the buyer at that moment.
, Therefore, goods in transit under FOB shipping point are properly included in the
buyer's inventory. The other options incorrectly describe the point of title transfer for
FOB shipping point transactions.
6. A company has a current ratio of 2.0 and a quick ratio of 1.5. Which of the
following transactions would increase both the current and quick ratios?
A. Paying off a current liability with cash
B. Purchasing inventory with cash
C. Collecting accounts receivable
D. Writing off an uncollectible account against the allowance
Correct Answer: A. Paying off a current liability with cash
Rationale: Paying a current liability with cash reduces both current assets and
current liabilities by the same amount. For a current ratio > 1.0, this transaction
will increase the ratio. Since cash is part of the quick assets, the quick ratio will also
increase. Purchasing inventory with cash decreases both ratios. Collecting accounts
receivable is an exchange of assets with no net effect on either ratio. Writing off an
uncollectible account against the allowance has no effect on the net realizable
value of accounts receivable and therefore does not change the ratios.
7. A company leases a machine for a five-year period, which is 75% of the
asset's useful life. The present value of the lease payments is 85% of the fair
value of the asset. The lease contains no transfer of ownership or purchase
option. How should this lease be classified by the lessee under U.S. GAAP?
A. Operating lease
