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Free CPA FAR PDF with 30 questions
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The PDF includes 30 CPA FAR questions with answers and explanations.
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Q1Which of the following is classified as a cash equivalent on the balance sheet?
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✓ Correct answer: A 3-month commercial paper purchased today
Cash equivalents are short-term, highly liquid investments with original maturities of three months or less. A 3-month commercial paper purchased today qualifies because its original maturity is 90 days or fewer. The 6-month T-bill was purchased when it had more than 3 months remaining.
Q2A company has a bank overdraft of $5,000 in one bank account and a positive balance of $12,000 in another account at a different bank. How should the overdraft be reported?
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✓ Correct answer: As a current liability, because the accounts are at different banks
Bank overdrafts are generally reported as current liabilities. Overdrafts at one bank may only be offset against positive balances at the SAME bank, not at different institutions. Since these are different banks, the overdraft must appear as a liability.
Q3A company holds a compensating balance of $50,000 that it is legally restricted from using. The compensating balance relates to a long-term loan. Where should this amount be reported?
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✓ Correct answer: As a non-current asset (other assets) on the balance sheet
Legally restricted compensating balances related to long-term borrowing arrangements should be classified as non-current assets (often under 'Other Assets'), not as cash. They cannot be used freely, so they do not meet the definition of cash or cash equivalents.
Q4Under U.S. GAAP, which method of accounting for uncollectible accounts is required for financial reporting purposes?
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✓ Correct answer: Allowance method (any systematic approach)
U.S. GAAP requires the allowance method for financial reporting because it matches bad debt expense to the period of the related sale. The direct write-off method is only acceptable for tax purposes. Both the aging and percentage-of-sales approaches are acceptable allowance-method implementations.
Q5A company has gross accounts receivable of $200,000 and an allowance for doubtful accounts of $15,000. It writes off a specific account of $3,000 as uncollectible. What is the net realizable value of accounts receivable after the write-off?
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✓ Correct answer: $185,000
After the write-off, gross receivables decrease by $3,000 to $197,000 and the allowance also decreases by $3,000 to $12,000. Net realizable value = $197,000 – $12,000 = $185,000. A write-off does not change NRV; it was $185,000 before ($200,000 – $15,000) and remains $185,000 after.
Q6A company uses the percentage-of-sales method to estimate bad debts. Credit sales for the year are $800,000, and the company estimates 2% will be uncollectible. The allowance for doubtful accounts has a debit balance of $4,000 before adjustment. What is the bad debt expense for the year?
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✓ Correct answer: $16,000
Under the percentage-of-sales (income-statement) approach, bad debt expense equals the percentage applied to credit sales regardless of the allowance balance: $800,000 × 2% = $16,000. The existing debit balance in the allowance does not affect this calculation.
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