CPA FAR Exam: Sample 100 Q&A (2026
Focus)
Conceptual Framework & Financial Reporting (1-15)
1. Q: What are the two fundamental qualitative characteristics of useful financial
information per the Conceptual Framework?
A: Relevance and Faithful Representation.
2. Q: What are the four enhancing qualitative characteristics?
A: Comparability, Verifiability, Timeliness, and Understandability.
3. Q: Which basis of measurement is used for most assets and liabilities under U.S. GAAP?
A: Historical Cost. (Though many are subsequently measured at fair value or amortized
cost).
4. Q: What is the objective of general-purpose financial reporting?
A: To provide financial information about the reporting entity that is useful to existing
and potential investors, lenders, and other creditors in making decisions about providing
resources.
5. Q: What are the elements directly related to financial position (the balance sheet)?
A: Assets, Liabilities, and Equity.
6. Q: What are the elements directly related to performance (the income statement)?
A: Revenues, Expenses, Gains, and Losses.
7. Q: What is the primary difference between a loss and an expense?
A: Expenses arise from an entity's ongoing major operations, while losses arise from
peripheral or incidental transactions.
8. Q: When should an entity prepare financial statements on a going concern basis?
A: When it has neither the intention nor the need to liquidate or cease operations in the
foreseeable future.
9. Q: What is the purpose of notes to the financial statements?
A: To provide additional information not presented on the face of the statements that is
essential for fair presentation.
, 10. Q: What is the role of the Securities and Exchange Commission (SEC) in financial
reporting?
A: The SEC has the legal authority to prescribe accounting standards for publicly traded
companies but has historically delegated this responsibility to the FASB.
11. Q: Define "accrual basis" accounting.
A: Transactions are recognized when they occur (revenue when earned, expenses when
incurred), regardless of when cash is received or paid.
12. Q: What is the primary source of authoritative U.S. GAAP for nongovernmental entities?
A: The FASB Accounting Standards Codification (ASC).
13. Q: What is a change in accounting estimate? Provide an example.
A: A revision of a previous estimate based on new information. Example: Changing the
useful life or salvage value of a depreciable asset.
14. Q: How is a change in accounting estimate reported?
A: Prospectively—in the period of change and future periods. No restatement of prior
periods.
15. Q: Distinguish between a correction of an error and a change in accounting principle.
A: An error correction is fixing a mistake from a prior period (requires restatement). A
change in principle is a voluntary switch from one GAAP method to another (generally
applied retrospectively).
Financial Statements: Balance Sheet & Income Statement (16-30)
16. Q: What are the major line items typically found on a classified balance sheet?
A: Current Assets; Noncurrent Assets; Current Liabilities; Long-term Liabilities; and
Equity.
17. Q: Define "current assets."
A: Cash and other assets expected to be converted to cash, sold, or consumed within
one year or the operating cycle, whichever is longer.
18. Q: How are trading securities reported on the balance sheet?
A: At fair value. Unrealized gains/losses are reported in net income.
19. Q: What is Comprehensive Income?
A: The change in equity from non-owner sources. It includes Net Income + Other
Comprehensive Income (OCI).
20. Q: What items are typically included in Other Comprehensive Income (OCI)?
A: Unrealized gains/losses on Available-for-Sale debt securities, certain pension
, adjustments, cash flow hedge gains/losses, and foreign currency translation
adjustments.
21. Q: What is the formula for the Income Statement under a multi-step format?
A: Net Sales - COGS = Gross Profit - Operating Expenses = Operating Income +/- Other
Items = Pretax Income - Tax = Net Income.
22. Q: Where are earnings per share (EPS) required to be presented?
A: On the face of the income statement for entities with publicly traded common stock.
23. Q: How are unusual or infrequent items disclosed on the income statement?
A: They are included in income from continuing operations and disclosed separately, but
not net of tax.
24. Q: What is a discontinued operation?
A: A component of an entity that has been disposed of or is held for sale, representing a
strategic shift with a major effect on operations and financial results.
25. Q: How are discontinued operations reported?
A: Results of the component are reported net of tax in a separate line item below
Income from Continuing Operations.
26. Q: Define "intraperiod tax allocation."
A: The process of allocating total income tax expense for a period to different parts of
the financial statements (continuing operations, discontinued operations, OCI).
27. Q: What is the purpose of a statement of cash flows?
A: To provide information about the cash receipts and cash payments during a period,
categorized by operating, investing, and financing activities.
28. Q: Under the indirect method for operating activities, what is the starting point and a
primary adjustment?
A: Start with Net Income. Add back non-cash expenses like depreciation and adjust for
changes in working capital accounts.
29. Q: Are dividends paid reported in operating activities under U.S. GAAP?
A: No, dividends paid are a financing activity. (Dividends received and interest
paid/received are operating).
30. Q: What is included in the statement of changes in equity?
A: Beginning equity balance, plus net income, minus dividends, plus/minus other
comprehensive income, effects of changes in accounting principles, and
contributions/distributions.
, Assets: Recognition, Measurement, & Impairment (31-50)
31. Q: At what amount should inventory be reported on the balance sheet?
A: The lower of cost or net realizable value (NRV). (NRV = Estimated Selling Price -
Completion/Disposal Costs).
32. Q: What are the acceptable cost flow assumptions for inventory?
A: Specific Identification, FIFO, LIFO (for tax purposes, must also use for books), and
Weighted Average.
33. Q: Under the LIFO method, what is the LIFO Reserve?
A: The difference between inventory reported under FIFO and inventory reported under
LIFO. (FIFO Inventory - LIFO Inventory = LIFO Reserve).
34. Q: What costs are capitalized for self-constructed assets?
A: Direct materials, direct labor, and an allocated portion of indirect overhead. Interest
during construction is also capitalized.
35. Q: What is the accounting for a change in depreciation method?
A: Treated as a change in accounting estimate effected by a change in principle. Applied
prospectively.
36. Q: How is an impairment loss on Property, Plant & Equipment (held and used)
determined and recorded?
A: Trigger: When book value exceeds undiscounted future cash flows. Loss amount =
Book Value - Fair Value. Loss is recorded in income from continuing operations.
37. Q: What is the accounting for an asset held for sale?
A: Report at the lower of book value or fair value less cost to sell. Depreciation ceases.
Presented separately on balance sheet.
38. Q: For intangible assets with finite lives, how is amortization recorded?
A: Amortized over useful life using a method reflecting the pattern of consumption. If
pattern cannot be reliably determined, use straight-line.
39. Q: How are intangible assets with indefinite lives tested for impairment?
A: Tested at least annually for impairment by comparing fair value to carrying amount.
Impairment loss = Carrying Amount - Fair Value.
40. Q: What is the primary test for goodwill impairment under ASC 350?
A: Step 1: Compare the fair value of the reporting unit to its carrying amount (including
goodwill). If fair value < carrying amount, proceed to Step 2. Step 2: Measure
impairment loss as the carrying amount of goodwill minus its implied fair value.
Focus)
Conceptual Framework & Financial Reporting (1-15)
1. Q: What are the two fundamental qualitative characteristics of useful financial
information per the Conceptual Framework?
A: Relevance and Faithful Representation.
2. Q: What are the four enhancing qualitative characteristics?
A: Comparability, Verifiability, Timeliness, and Understandability.
3. Q: Which basis of measurement is used for most assets and liabilities under U.S. GAAP?
A: Historical Cost. (Though many are subsequently measured at fair value or amortized
cost).
4. Q: What is the objective of general-purpose financial reporting?
A: To provide financial information about the reporting entity that is useful to existing
and potential investors, lenders, and other creditors in making decisions about providing
resources.
5. Q: What are the elements directly related to financial position (the balance sheet)?
A: Assets, Liabilities, and Equity.
6. Q: What are the elements directly related to performance (the income statement)?
A: Revenues, Expenses, Gains, and Losses.
7. Q: What is the primary difference between a loss and an expense?
A: Expenses arise from an entity's ongoing major operations, while losses arise from
peripheral or incidental transactions.
8. Q: When should an entity prepare financial statements on a going concern basis?
A: When it has neither the intention nor the need to liquidate or cease operations in the
foreseeable future.
9. Q: What is the purpose of notes to the financial statements?
A: To provide additional information not presented on the face of the statements that is
essential for fair presentation.
, 10. Q: What is the role of the Securities and Exchange Commission (SEC) in financial
reporting?
A: The SEC has the legal authority to prescribe accounting standards for publicly traded
companies but has historically delegated this responsibility to the FASB.
11. Q: Define "accrual basis" accounting.
A: Transactions are recognized when they occur (revenue when earned, expenses when
incurred), regardless of when cash is received or paid.
12. Q: What is the primary source of authoritative U.S. GAAP for nongovernmental entities?
A: The FASB Accounting Standards Codification (ASC).
13. Q: What is a change in accounting estimate? Provide an example.
A: A revision of a previous estimate based on new information. Example: Changing the
useful life or salvage value of a depreciable asset.
14. Q: How is a change in accounting estimate reported?
A: Prospectively—in the period of change and future periods. No restatement of prior
periods.
15. Q: Distinguish between a correction of an error and a change in accounting principle.
A: An error correction is fixing a mistake from a prior period (requires restatement). A
change in principle is a voluntary switch from one GAAP method to another (generally
applied retrospectively).
Financial Statements: Balance Sheet & Income Statement (16-30)
16. Q: What are the major line items typically found on a classified balance sheet?
A: Current Assets; Noncurrent Assets; Current Liabilities; Long-term Liabilities; and
Equity.
17. Q: Define "current assets."
A: Cash and other assets expected to be converted to cash, sold, or consumed within
one year or the operating cycle, whichever is longer.
18. Q: How are trading securities reported on the balance sheet?
A: At fair value. Unrealized gains/losses are reported in net income.
19. Q: What is Comprehensive Income?
A: The change in equity from non-owner sources. It includes Net Income + Other
Comprehensive Income (OCI).
20. Q: What items are typically included in Other Comprehensive Income (OCI)?
A: Unrealized gains/losses on Available-for-Sale debt securities, certain pension
, adjustments, cash flow hedge gains/losses, and foreign currency translation
adjustments.
21. Q: What is the formula for the Income Statement under a multi-step format?
A: Net Sales - COGS = Gross Profit - Operating Expenses = Operating Income +/- Other
Items = Pretax Income - Tax = Net Income.
22. Q: Where are earnings per share (EPS) required to be presented?
A: On the face of the income statement for entities with publicly traded common stock.
23. Q: How are unusual or infrequent items disclosed on the income statement?
A: They are included in income from continuing operations and disclosed separately, but
not net of tax.
24. Q: What is a discontinued operation?
A: A component of an entity that has been disposed of or is held for sale, representing a
strategic shift with a major effect on operations and financial results.
25. Q: How are discontinued operations reported?
A: Results of the component are reported net of tax in a separate line item below
Income from Continuing Operations.
26. Q: Define "intraperiod tax allocation."
A: The process of allocating total income tax expense for a period to different parts of
the financial statements (continuing operations, discontinued operations, OCI).
27. Q: What is the purpose of a statement of cash flows?
A: To provide information about the cash receipts and cash payments during a period,
categorized by operating, investing, and financing activities.
28. Q: Under the indirect method for operating activities, what is the starting point and a
primary adjustment?
A: Start with Net Income. Add back non-cash expenses like depreciation and adjust for
changes in working capital accounts.
29. Q: Are dividends paid reported in operating activities under U.S. GAAP?
A: No, dividends paid are a financing activity. (Dividends received and interest
paid/received are operating).
30. Q: What is included in the statement of changes in equity?
A: Beginning equity balance, plus net income, minus dividends, plus/minus other
comprehensive income, effects of changes in accounting principles, and
contributions/distributions.
, Assets: Recognition, Measurement, & Impairment (31-50)
31. Q: At what amount should inventory be reported on the balance sheet?
A: The lower of cost or net realizable value (NRV). (NRV = Estimated Selling Price -
Completion/Disposal Costs).
32. Q: What are the acceptable cost flow assumptions for inventory?
A: Specific Identification, FIFO, LIFO (for tax purposes, must also use for books), and
Weighted Average.
33. Q: Under the LIFO method, what is the LIFO Reserve?
A: The difference between inventory reported under FIFO and inventory reported under
LIFO. (FIFO Inventory - LIFO Inventory = LIFO Reserve).
34. Q: What costs are capitalized for self-constructed assets?
A: Direct materials, direct labor, and an allocated portion of indirect overhead. Interest
during construction is also capitalized.
35. Q: What is the accounting for a change in depreciation method?
A: Treated as a change in accounting estimate effected by a change in principle. Applied
prospectively.
36. Q: How is an impairment loss on Property, Plant & Equipment (held and used)
determined and recorded?
A: Trigger: When book value exceeds undiscounted future cash flows. Loss amount =
Book Value - Fair Value. Loss is recorded in income from continuing operations.
37. Q: What is the accounting for an asset held for sale?
A: Report at the lower of book value or fair value less cost to sell. Depreciation ceases.
Presented separately on balance sheet.
38. Q: For intangible assets with finite lives, how is amortization recorded?
A: Amortized over useful life using a method reflecting the pattern of consumption. If
pattern cannot be reliably determined, use straight-line.
39. Q: How are intangible assets with indefinite lives tested for impairment?
A: Tested at least annually for impairment by comparing fair value to carrying amount.
Impairment loss = Carrying Amount - Fair Value.
40. Q: What is the primary test for goodwill impairment under ASC 350?
A: Step 1: Compare the fair value of the reporting unit to its carrying amount (including
goodwill). If fair value < carrying amount, proceed to Step 2. Step 2: Measure
impairment loss as the carrying amount of goodwill minus its implied fair value.
