US Certified Public Accountant (AICPA Uniform CPA Examination) · Financial Accounting and Reporting
CPA FAR Financial reporting: practice questions with answers
6 free exam-style questions on Financial reporting for CPA FAR Financial Accounting and Reporting. Try each one, then open the answer to read the explanation. Fincora has 90 original questions on this syllabus area.
Question 1
Which of the following is reported in other comprehensive income, rather than in net income, by a for-profit entity under US GAAP?
- A An unrealized holding loss on equity securities that have a readily determinable fair value
- B A foreign currency transaction loss on a euro-denominated account payable at year-end
- C An unrealized holding gain on debt securities classified as trading securities
- D An unrealized holding gain on debt securities classified as available-for-sale
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Answer: D. Other comprehensive income (ASC 220) includes, among other items: unrealized holding gains and losses on available-for-sale debt securities (excluding the credit-loss portion, which is in net income); foreign currency translation adjustments; certain pension and postretirement adjustments; and effective portions of cash flow hedges.
Unrealized gains and losses on equity securities with readily determinable fair values (ASC 321), on trading debt securities (ASC 320) and foreign currency transaction gains and losses (ASC 830-20) are all recognized in net income.
Question 2
Sundial Science Center is a nongovernmental, not-for-profit entity. Which of the following 2026 transactions increases its net assets with donor restrictions?
- A A donor gives $250,000 in cash that must be invested in perpetuity, with the income usable for operations
- B The board designates $100,000 of unrestricted cash as a quasi-endowment to support future exhibits
- C Restricted funds of $60,000 are spent on the exhibit the donor specified, meeting the restriction
- D A volunteer CPA donates audit-preparation services worth $15,000 that would otherwise be purchased
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Answer: A. Net assets with donor restrictions (ASC 958) increase when a donor imposes a purpose, time or perpetual restriction on a contribution. A perpetual endowment gift is the clearest case.
Board designations are not donor restrictions. Spending restricted resources for their purpose is a release that moves net assets from 'with' to 'without' donor restrictions. Contributed services that need specialized skills and would otherwise be purchased are recognized (ASC 958-605) as unrestricted revenue with an equal expense.
Question 3
The City of Ashford runs a central motor pool that buys, maintains and fuels vehicles and charges the police, parks and public works departments for their use on a cost-reimbursement basis. In which fund should Ashford report the motor pool?
- A Internal service fund
- B Enterprise fund
- C General fund
- D Special revenue fund
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Answer: A. Internal service funds (proprietary funds, GASB 34) report activities that provide goods or services to other funds, departments or agencies of the primary government, or to other governments, on a cost-reimbursement basis. A central motor pool, data-processing center or self-insurance pool are typical. They use the economic resources measurement focus and the accrual basis.
If the main users were external customers, an enterprise fund would be used.
Question 4
A city reports each of the following activities. Which pairing of fund and basis of accounting is correct?
- A Assets held in trust for employees' pension benefits: pension trust fund, accrual basis
- B Water utility financed by charges to the public: enterprise fund, modified accrual basis
- C Resources accumulated to pay general long-term debt: debt service fund, accrual basis
- D Bond proceeds for building a new fire station: capital projects fund, accrual basis
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Answer: A. Governmental funds (general, special revenue, capital projects, debt service, permanent) use the current financial resources measurement focus and the modified accrual basis.
Proprietary funds (enterprise, internal service) and fiduciary funds (pension and other employee benefit trust, investment trust, private-purpose trust, custodial) use the economic resources measurement focus and the accrual basis (GASB 34, 84).
Only the pension trust fund pairing is right.
Question 5
On March 9, 2027, the audit committee of Norcross Health Corp., an SEC registrant with a calendar year-end, dismissed its independent registered public accounting firm and engaged a new firm. How must Norcross report the change of auditors to the SEC?
- A Describe it in Part I, Item 2 (MD&A) of the next quarterly Form 10-Q
- B Disclose it only in the Form 10-K for the year in which the dismissal occurred
- C File a Form 8-K within 45 days after the end of the quarter of the dismissal
- D File a Form 8-K, generally within four business days after the dismissal
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Answer: D. Form 8-K is the current report used to announce significant events between periodic reports. It is generally due within four business days after the event. Changes in the registrant's certifying accountant are a specified 8-K item (Item 4.01), as are, for example, entry into a material definitive agreement, completion of a significant acquisition and non-reliance on previously issued financial statements.
Form 10-Q covers the first three fiscal quarters and Form 10-K the year; neither replaces the 8-K.
Question 6
Ashby Rentals LLC prepares its financial statements on the income tax basis (accrual method), a special purpose framework under AU-C 800, instead of US GAAP. Which treatment is appropriate in its tax-basis statements?
- A Deferred tax assets and liabilities are recognized for temporary differences between book and tax bases
- B Bad debts are recognized when specific accounts are written off, with no allowance for expected losses
- C Unrealized gains on equity securities are recognized in income each period as their fair values change
- D A statement of comprehensive income is presented alongside the statement of revenue and expenses
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Answer: B. Income tax basis statements recognize and measure items the way they are reported on the entity's federal income tax return:
- Bad debts: specific charge-off when accounts become worthless (no CECL allowance as under ASC 326).
- Securities: gains and losses generally recognized when realized (no fair value remeasurement as under ASC 321).
- Depreciation: tax methods and lives.
- No deferred income taxes, and no comprehensive income statement.
Nontaxable revenue and nondeductible expenses are still shown, with disclosure, and the basis of accounting and its main differences from GAAP are described in the notes.
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