CPA FAR Final Review 2025/2026 | 100
Updated Questions With Step-by-Step Verified
Answers
1. According to the FASB Conceptual Framework, what are the two fundamental qualitative
characteristics that make accounting information useful?
A) Relevance and faithful representation.
B) Consistency and comparability.
C) Understandability and timeliness.
D) Materiality and cost constraint.
Verified Answer: The FASB Conceptual Framework states that the fundamental qualitative
characteristics are Relevance (predictive value, confirmatory value, materiality) and Faithful
Representation (complete, neutral, free from error).
2. A company issues a bond with a stated rate of 8% for $217,062 when the market rate is 5%.
The bond has a 5-year term and pays interest annually. What is the initial journal entry?
A) Debit Cash $217,062; Credit Bonds Payable $217,062.
B) Debit Cash $200,000; Debit Discount on Bonds Payable $17,062; Credit Bonds Payable
$217,062.
C) Debit Cash $217,062; Credit Bonds Payable $200,000; Credit Premium on Bonds Payable
$17,062.
D) Debit Cash $200,000; Credit Bonds Payable $200,000.
Verified Answer: The bond was issued for more than its face value ($200,000 assumed),
meaning it was issued at a premium. The entry is to debit Cash for the proceeds, credit Bonds
Payable for the face value, and credit the difference to Premium on Bonds Payable.
3. Which of the following is an example of an accrual?
A) Recording depreciation expense.
B) Recognizing revenue for services performed but not yet billed.
C) Deferring the recognition of prepaid insurance.
D) Collecting cash from a customer before the service is provided.
Verified Answer: An accrual involves recognizing a revenue or expense before the cash is
received or paid. Option B is an accrued revenue.
,4. Under IFRS, how is a biological asset, such as a herd of dairy cattle, initially measured?
A) Historical cost.
B) Fair value less costs to sell.
C) Lower of cost or net realizable value.
D) Net realizable value.
Verified Answer: IAS 41 requires biological assets to be measured on initial recognition and at
each reporting date at fair value less costs to sell.
5. The primary purpose of the statement of cash flows is to provide information about:
A) The profitability of a company.
B) A company’s financial position at a point in time.
C) A company’s cash receipts and cash payments during a period.
D) The changes in equity during a period.
Verified Answer: Per FASB ASC 230, the statement of cash flows provides relevant information
about a company's cash receipts and cash payments during a period.
6. A company has a defined benefit pension plan. The projected benefit obligation (PBO) at
year-end is $5 million, and the fair value of plan assets is $4.2 million. What is the funded
status reported on the balance sheet?
A) Pension asset of $0.8 million.
B) Pension liability of $0.8 million.
C) Pension expense of $0.8 million.
D) Not reported on the balance sheet.
Verified Answer: The funded status is PBO - Plan Assets. $5M - $4.2M = $0.8 million deficit. This
is reported as a noncurrent liability on the balance sheet.
7. According to the revenue recognition principle under ASC 606, revenue should be
recognized when:
A) Cash is received.
B) A contract is signed.
C) The performance obligation is satisfied.
D) Production is complete.
Verified Answer: The core principle of ASC 606 is that an entity recognizes revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services.
This occurs when (or as) the entity satisfies a performance obligation.
8. What is the correct accounting treatment for a change in depreciation method?
A) Reported as a change in accounting principle, applied retrospectively.
, B) Reported as a change in accounting estimate, applied prospectively.
C) Reported as an error correction, applied retrospectively.
D) It is not permitted.
Verified Answer: A change in depreciation method is considered a change in accounting
estimate effected by a change in accounting principle. It is accounted for prospectively (current
and future periods).
9. Which of the following is not a required financial statement under both U.S. GAAP and
IFRS?
A) Statement of Financial Position.
B) Statement of Comprehensive Income.
C) Statement of Cash Flows.
D) Statement of Retained Earnings.
Verified Answer: Both GAAP and IFRS require a statement of changes in equity. While this
includes retained earnings, a separate "Statement of Retained Earnings" is not required; its
information is part of the broader statement.
10. A company sells a product for $1,000 with a one-year warranty. The estimated cost of
warranty repairs is 3% of sales. What is the journal entry at the time of sale?
A) Debit Warranty Expense $30; Credit Estimated Warranty Liability $30.
B) Debit Estimated Warranty Liability $30; Credit Cash $30.
C) No entry is made until repairs are performed.
D) Debit Warranty Expense $1,000; Credit Sales Revenue $1,000.
Verified Answer: This is an example of a contingent liability that is probable and reasonably
estimable. The expense and liability must be accrued in the period the sale occurs.
11. In a statement of cash flows prepared using the indirect method, which of the following
would be added to net income?
A) An increase in accounts receivable.
B) A decrease in inventory.
C) An increase in accounts payable.
D) A decrease in prepaid expenses.
Verified Answer: A decrease in inventory is a source of cash (you sold more inventory than you
bought). Both B and C/D are correct in principle, but the question asks for an item that is added.
A decrease in inventory is added back to net income. (An increase in accounts payable is also
added back).
12. How is a lease classified as a finance lease by the lessee under ASC 842?
A) The lease term is for a major part of the asset's remaining economic life.
B) The present value of lease payments equals or exceeds substantially all of the asset's fair
Updated Questions With Step-by-Step Verified
Answers
1. According to the FASB Conceptual Framework, what are the two fundamental qualitative
characteristics that make accounting information useful?
A) Relevance and faithful representation.
B) Consistency and comparability.
C) Understandability and timeliness.
D) Materiality and cost constraint.
Verified Answer: The FASB Conceptual Framework states that the fundamental qualitative
characteristics are Relevance (predictive value, confirmatory value, materiality) and Faithful
Representation (complete, neutral, free from error).
2. A company issues a bond with a stated rate of 8% for $217,062 when the market rate is 5%.
The bond has a 5-year term and pays interest annually. What is the initial journal entry?
A) Debit Cash $217,062; Credit Bonds Payable $217,062.
B) Debit Cash $200,000; Debit Discount on Bonds Payable $17,062; Credit Bonds Payable
$217,062.
C) Debit Cash $217,062; Credit Bonds Payable $200,000; Credit Premium on Bonds Payable
$17,062.
D) Debit Cash $200,000; Credit Bonds Payable $200,000.
Verified Answer: The bond was issued for more than its face value ($200,000 assumed),
meaning it was issued at a premium. The entry is to debit Cash for the proceeds, credit Bonds
Payable for the face value, and credit the difference to Premium on Bonds Payable.
3. Which of the following is an example of an accrual?
A) Recording depreciation expense.
B) Recognizing revenue for services performed but not yet billed.
C) Deferring the recognition of prepaid insurance.
D) Collecting cash from a customer before the service is provided.
Verified Answer: An accrual involves recognizing a revenue or expense before the cash is
received or paid. Option B is an accrued revenue.
,4. Under IFRS, how is a biological asset, such as a herd of dairy cattle, initially measured?
A) Historical cost.
B) Fair value less costs to sell.
C) Lower of cost or net realizable value.
D) Net realizable value.
Verified Answer: IAS 41 requires biological assets to be measured on initial recognition and at
each reporting date at fair value less costs to sell.
5. The primary purpose of the statement of cash flows is to provide information about:
A) The profitability of a company.
B) A company’s financial position at a point in time.
C) A company’s cash receipts and cash payments during a period.
D) The changes in equity during a period.
Verified Answer: Per FASB ASC 230, the statement of cash flows provides relevant information
about a company's cash receipts and cash payments during a period.
6. A company has a defined benefit pension plan. The projected benefit obligation (PBO) at
year-end is $5 million, and the fair value of plan assets is $4.2 million. What is the funded
status reported on the balance sheet?
A) Pension asset of $0.8 million.
B) Pension liability of $0.8 million.
C) Pension expense of $0.8 million.
D) Not reported on the balance sheet.
Verified Answer: The funded status is PBO - Plan Assets. $5M - $4.2M = $0.8 million deficit. This
is reported as a noncurrent liability on the balance sheet.
7. According to the revenue recognition principle under ASC 606, revenue should be
recognized when:
A) Cash is received.
B) A contract is signed.
C) The performance obligation is satisfied.
D) Production is complete.
Verified Answer: The core principle of ASC 606 is that an entity recognizes revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services.
This occurs when (or as) the entity satisfies a performance obligation.
8. What is the correct accounting treatment for a change in depreciation method?
A) Reported as a change in accounting principle, applied retrospectively.
, B) Reported as a change in accounting estimate, applied prospectively.
C) Reported as an error correction, applied retrospectively.
D) It is not permitted.
Verified Answer: A change in depreciation method is considered a change in accounting
estimate effected by a change in accounting principle. It is accounted for prospectively (current
and future periods).
9. Which of the following is not a required financial statement under both U.S. GAAP and
IFRS?
A) Statement of Financial Position.
B) Statement of Comprehensive Income.
C) Statement of Cash Flows.
D) Statement of Retained Earnings.
Verified Answer: Both GAAP and IFRS require a statement of changes in equity. While this
includes retained earnings, a separate "Statement of Retained Earnings" is not required; its
information is part of the broader statement.
10. A company sells a product for $1,000 with a one-year warranty. The estimated cost of
warranty repairs is 3% of sales. What is the journal entry at the time of sale?
A) Debit Warranty Expense $30; Credit Estimated Warranty Liability $30.
B) Debit Estimated Warranty Liability $30; Credit Cash $30.
C) No entry is made until repairs are performed.
D) Debit Warranty Expense $1,000; Credit Sales Revenue $1,000.
Verified Answer: This is an example of a contingent liability that is probable and reasonably
estimable. The expense and liability must be accrued in the period the sale occurs.
11. In a statement of cash flows prepared using the indirect method, which of the following
would be added to net income?
A) An increase in accounts receivable.
B) A decrease in inventory.
C) An increase in accounts payable.
D) A decrease in prepaid expenses.
Verified Answer: A decrease in inventory is a source of cash (you sold more inventory than you
bought). Both B and C/D are correct in principle, but the question asks for an item that is added.
A decrease in inventory is added back to net income. (An increase in accounts payable is also
added back).
12. How is a lease classified as a finance lease by the lessee under ASC 842?
A) The lease term is for a major part of the asset's remaining economic life.
B) The present value of lease payments equals or exceeds substantially all of the asset's fair
