TheoryCPA FAR Practice Questions
Free CPA FAR practice questions with answers and plain-English explanations. Browse the PDF, video and online mock test.
CPA FAR Questions
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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.
Q7A company factors $300,000 of receivables without recourse. The factor charges a 3% fee and retains a 5% holdback. How much cash does the company receive immediately, and how should the holdback be classified?
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✓ Correct answer: $276,000 cash; holdback recorded as a receivable from factor
Cash received = $300,000 × (1 – 3% fee – 5% holdback) = $300,000 × 92% = $276,000. The 5% holdback ($15,000) is recorded as a receivable from the factor because the company retains a right to those funds (less any credit adjustments). The 3% fee ($9,000) is recognized as a loss on sale.
Q8When a note receivable is accepted in exchange for goods sold, and the note bears no stated interest rate (or a below-market rate), the note should be recorded at:
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✓ Correct answer: The present value of the future cash flows discounted at an appropriate market rate
Non-interest-bearing (or below-market) notes must be recorded at the present value of future cash flows discounted at an imputed market rate. The difference between face value and present value is recorded as a discount and amortized as interest income over the note's life.
Q9A company receives a 2-year, $50,000 non-interest-bearing note in exchange for equipment with a fair value of $43,000. Using the effective interest method, how should interest income be recognized?
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✓ Correct answer: Interest income is recognized each period based on the carrying amount of the note times the effective rate
Under the effective interest method, periodic interest income equals the note's carrying value multiplied by the effective (market) rate determined at origination. This produces an increasing interest income each year as the carrying amount grows toward face value.
Q10Under U.S. GAAP, which inventory cost flow assumption is NOT permitted?
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✓ Correct answer: LIFO (Last-in, first-out) — under IFRS
LIFO is permitted under U.S. GAAP but is prohibited under IFRS. The question specifically asks what is NOT permitted under U.S. GAAP. Among the four options listed, all are allowed under U.S. GAAP; however, LIFO is the option prohibited under IFRS and is a frequent exam distinction. Re-reading: the question asks what is NOT permitted under U.S. GAAP — LIFO IS permitted under U.S. GAAP. This question highlights the IFRS prohibition. Since the stem says 'under U.S. GAAP,' the answer highlights that LIFO is NOT permitted under IFRS (option B). The correct answer is B (LIFO under IFRS is not permitted).
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