A 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?

As a current liability, because the accounts are at different banks

Netted against the positive balance, showing $7,000 cash

As a contra-asset reducing total cash

Disclosed only in the notes to the financial statements

A 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?

As a non-current asset (other assets) on the balance sheet

As part of cash and cash equivalents

As a non-current asset (other assets) on the balance sheet

Netted against the related long-term debt

Disclosed in notes only, with no balance sheet reclassification

Under U.S. GAAP, which method of accounting for uncollectible accounts is required for financial reporting purposes?

Allowance method (any systematic approach)

Aging-of-receivables method only

Percentage-of-sales method only

Allowance method (any systematic approach)

A 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?

$276,000 cash; holdback recorded as a receivable from factor

$291,000 cash; holdback recognized as a gain contingency

$276,000 cash; holdback recorded as a receivable from factor

$282,000 cash; holdback recorded as a liability

$291,000 cash; holdback reduces the loss on sale

When 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:

The present value of the future cash flows discounted at an appropriate market rate

The fair value of the goods surrendered or the note, whichever is higher

Zero, because no interest income is recognized

The present value of the future cash flows discounted at an appropriate market rate

A 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?

Interest income is recognized each period based on the carrying amount of the note times the effective rate

Interest income is recognized in equal annual installments over 2 years

No interest income is recognized because the note bears no stated interest

Interest income is recognized entirely in year 1 when cash is expected

Under U.S. GAAP, which inventory cost flow assumption is NOT permitted?

LIFO (Last-in, first-out) — under IFRS

During a period of rising prices, which inventory cost flow assumption will result in the LOWEST ending inventory balance?

Specific identification matched to newest units

A company using LIFO has a LIFO reserve of $40,000. A competitor uses FIFO. To compare the companies on an equivalent FIFO basis, an analyst would:

Add $40,000 to the LIFO company's ending inventory

Subtract $40,000 from the LIFO company's ending inventory

Add $40,000 to the LIFO company's cost of goods sold

Subtract $40,000 from the LIFO company's pretax income

Add $40,000 to the LIFO company's ending inventory

Under U.S. GAAP (ASC 330) for a company using LIFO or retail inventory, 'market' in the lower-of-cost-or-market rule is defined as:

Replacement cost, subject to a ceiling of NRV and a floor of NRV minus normal profit margin

Fair value as determined by an active market

The lower of replacement cost or selling price

A company has inventory with a cost of $10,000, a replacement cost of $7,500, an NRV of $9,000, and a normal profit margin of $1,500. Under U.S. GAAP LCM (for a LIFO company), what is the 'market' value used to test inventory?

$7,500 (replacement cost, constrained by floor/ceiling)

$7,500 (floor, since NRV – profit = $7,500)

Under ASC 330 (post-2015 update applying LCNRV to FIFO/average-cost companies), a company has inventory: cost $20,000, NRV $17,000. The prior year the inventory was written down from $22,000 to $19,000. Which statement is correct?

Inventory is written down to $17,000; previously established write-downs are not reversed under U.S. GAAP

The inventory can be written back up to $20,000 because NRV recovered

The write-down is reversed to $19,000 because that was the previous written-down value

No write-down is needed this year because NRV exceeds cost

Inventory is written down to $17,000; previously established write-downs are not reversed under U.S. GAAP

Which of the following costs should be capitalized as part of the cost of a new piece of machinery?

Freight charges paid to deliver the machine to the factory

Training costs for employees to operate the machine

Repair costs incurred after the machine was placed in service

Insurance premiums on the machine after it is in operation

A company constructs a building for its own use. Which of the following interest costs should be capitalized?

Avoidable interest on funds used during active construction, up to actual interest incurred

All interest expense incurred during the construction period on all outstanding debt

Avoidable interest on funds used during active construction, up to actual interest incurred

Only interest on the specific construction loan, regardless of the construction period

No interest; interest on self-constructed assets is always expensed

A company acquires land by issuing 10,000 shares of its $1 par common stock. The stock is publicly traded at $25/share. The land was independently appraised at $260,000. At what amount should the land be recorded?

$250,000 (fair value of shares given up)

$10,000 (par value of shares issued)

$260,000 (appraised value as more reliable)

$275,000 (average of market price and appraisal)

$250,000 (fair value of shares given up)

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Finance & Accounting · 2026 question bank

CPA FAR
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Free sample · CPA FARQ1 / 30

Which of the following is classified as a cash equivalent on the balance sheet?

Correct — C. 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.

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Assets & Liabilities

Which of the following is classified as a cash equivalent on the balance sheet?

Correct — C. 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.
Assets & Liabilities

A 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?

Correct — A. 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.
Assets & Liabilities

A 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?

Correct — B. 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.
Assets & Liabilities

Under U.S. GAAP, which method of accounting for uncollectible accounts is required for financial reporting purposes?

Correct — D. 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.
Assets & Liabilities

A 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?

Correct — B. 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.
Assets & Liabilities

A 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?

Correct — C. 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.
Assets & Liabilities

A 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?

Correct — B. 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.
Assets & Liabilities

When 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:

Correct — D. 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.
Assets & Liabilities

A 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?

Correct — A. 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.
Assets & Liabilities

Under U.S. GAAP, which inventory cost flow assumption is NOT permitted?

Correct — B. 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).
Assets & Liabilities

During a period of rising prices, which inventory cost flow assumption will result in the LOWEST ending inventory balance?

Correct — C. Under LIFO during rising prices, the most recently purchased (and most expensive) items are assumed sold first, leaving older, cheaper units in ending inventory. This produces the lowest ending inventory balance and the highest cost of goods sold compared to FIFO or weighted-average.
Assets & Liabilities

A company using LIFO has a LIFO reserve of $40,000. A competitor uses FIFO. To compare the companies on an equivalent FIFO basis, an analyst would:

Correct — D. The LIFO reserve represents the cumulative difference between FIFO and LIFO inventory. Adding the LIFO reserve to LIFO ending inventory converts it to an approximate FIFO value, making the two companies comparable. This also reduces COGS and increases pretax income for analysis purposes.
Assets & Liabilities

Under U.S. GAAP (ASC 330) for a company using LIFO or retail inventory, 'market' in the lower-of-cost-or-market rule is defined as:

Correct — A. Under U.S. GAAP's LCM rule for LIFO/retail companies, 'market' means current replacement cost, but it cannot exceed the ceiling (NRV) nor be below the floor (NRV minus a normal profit margin). IFRS and FIFO/average cost companies under ASC 330-10 use NRV directly.
Assets & Liabilities

A company has inventory with a cost of $10,000, a replacement cost of $7,500, an NRV of $9,000, and a normal profit margin of $1,500. Under U.S. GAAP LCM (for a LIFO company), what is the 'market' value used to test inventory?

Correct — B. Ceiling = NRV = $9,000; Floor = NRV – normal profit = $9,000 – $1,500 = $7,500. Replacement cost = $7,500. Since replacement cost equals the floor, market = $7,500. Inventory is carried at market ($7,500) because $7,500 < $10,000 cost.
Assets & Liabilities

Under ASC 330 (post-2015 update applying LCNRV to FIFO/average-cost companies), a company has inventory: cost $20,000, NRV $17,000. The prior year the inventory was written down from $22,000 to $19,000. Which statement is correct?

Correct — D. Under U.S. GAAP, inventory write-downs are permanent — recoveries are NOT permitted. The inventory must now be carried at the lower of current cost ($20,000) or NRV ($17,000), so it is written down to $17,000. The prior write-down to $19,000 established a new cost basis of $19,000, but since NRV is now $17,000 a further write-down is required.
Assets & Liabilities

A retailer uses the average-cost retail inventory method. Beginning inventory: cost $30,000 / retail $50,000. Net purchases: cost $120,000 / retail $190,000. Cost ratio for the period is:

Correct — C. Under the average-cost retail method, the cost ratio = Total cost available / Total retail available. Total cost = $30,000 + $120,000 = $150,000. Total retail = $50,000 + $190,000 = $240,000. Cost ratio = $150,000 / $240,000 = 62.5%. Ending inventory at retail × 62.5% = cost of ending inventory.
Assets & Liabilities

Which of the following costs should be capitalized as part of the cost of a new piece of machinery?

Correct — A. All costs necessary to bring an asset to its intended location and condition for use should be capitalized. Freight to deliver the machine qualifies as a capitalized cost. Employee training, post-acquisition repairs, and insurance are period costs expensed as incurred.
Assets & Liabilities

A company constructs a building for its own use. Which of the following interest costs should be capitalized?

Correct — B. Under ASC 835-20, the amount of interest to capitalize is the lesser of (1) avoidable interest (weighted-average accumulated expenditures × applicable rate) or (2) actual interest incurred. Capitalization applies only during active construction. Not all interest on all debt is capitalized.
Assets & Liabilities

A company acquires land by issuing 10,000 shares of its $1 par common stock. The stock is publicly traded at $25/share. The land was independently appraised at $260,000. At what amount should the land be recorded?

Correct — D. When assets are acquired by issuing equity, the transaction is recorded at the fair value of the consideration given (shares) if reliably determinable, or the fair value of the asset received if more reliable. The market price of publicly traded shares ($25 × 10,000 = $250,000) is typically more objectively determinable than an appraisal.
Assets & Liabilities

A company purchases equipment for $100,000 with a $10,000 salvage value and a 5-year useful life. Using the straight-line method, what is the annual depreciation expense?

Correct — B. Straight-line depreciation = (Cost – Salvage) / Useful life = ($100,000 – $10,000) / 5 = $18,000 per year. The depreciable base excludes salvage value; $20,000 would be wrong because it ignores salvage value.
Assets & Liabilities

Using the double-declining balance (DDB) method, a company depreciates equipment costing $80,000 with a 4-year life and $8,000 salvage value. What is the depreciation expense in Year 2?

Correct — A. DDB rate = 2/4 = 50%. Year 1: $80,000 × 50% = $40,000; book value = $40,000. Year 2: $40,000 × 50% = $20,000; book value = $20,000. Since $20,000 > $8,000 salvage, the full $20,000 is recorded. Annual depreciation in Year 2 is $20,000.
Assets & Liabilities

A company uses the units-of-production method. Equipment costs $50,000, has a salvage value of $5,000, and is expected to produce 90,000 units. In Year 1 it produces 18,000 units. What is Year 1 depreciation?

Correct — A. Depreciation per unit = ($50,000 – $5,000) / 90,000 = $0.50/unit. Year 1 depreciation = 18,000 × $0.50 = $9,000. The units-of-production method ties depreciation directly to actual usage rather than the passage of time.
Assets & Liabilities

A company acquires a machine on April 1, Year 1, for $120,000 (no salvage, 5-year life, straight-line). On January 1, Year 3, the company revises the remaining useful life to 2 more years (from January 1, Year 3). What is depreciation expense for Year 3?

Correct — D. Using a full-year convention: Year 1 and Year 2 depreciation = $24,000 each ($120,000 / 5 years). Book value at January 1, Year 3 = $120,000 – $24,000 – $24,000 = $72,000. With the revised remaining life of 2 years: new annual depreciation = $72,000 / 2 = $36,000. Changes in useful life estimates are applied prospectively (no catch-up adjustment).
Assets & Liabilities

Under ASC 360, a two-step impairment test for long-lived assets held and used requires that in Step 1, impairment is indicated when:

Correct — C. In the recoverability test (Step 1) under ASC 360, impairment is indicated when the sum of undiscounted future cash flows expected from the asset is less than its carrying amount. Only if Step 1 indicates impairment does Step 2 measure the loss as carrying amount minus fair value.
Assets & Liabilities

A long-lived asset has a carrying amount of $500,000, undiscounted future cash flows of $480,000, and a fair value of $420,000. What is the impairment loss to be recognized?

Correct — A. Step 1: Undiscounted cash flows ($480,000) < Carrying amount ($500,000) → impairment is indicated. Step 2: Impairment loss = Carrying amount – Fair value = $500,000 – $420,000 = $80,000. The undiscounted shortfall ($20,000) is NOT the loss; fair value is used to measure the impairment.
Assets & Liabilities

Under U.S. GAAP, after an impairment loss is recognized on a long-lived asset held and used, can the asset be written back up if fair value subsequently recovers?

Correct — D. U.S. GAAP (ASC 360) prohibits the reversal of impairment losses on long-lived assets held and used. The written-down amount becomes the new cost basis and is depreciated going forward. This differs from IFRS, which allows impairment reversals in certain circumstances.
Assets & Liabilities

For a long-lived asset to be classified as 'held for sale' under ASC 360, which of the following criteria must be met?

Correct — B. ASC 360 requires six criteria for held-for-sale classification, including management commitment, asset availability for immediate sale in present condition, active marketing at a reasonable price, and the sale being probable within 12 months. Simply completing the sale or identifying a buyer is insufficient.
Assets & Liabilities

An asset classified as held for sale has a carrying amount of $200,000, a fair value of $180,000, and estimated selling costs of $12,000. How is this asset measured?

Correct — A. Assets held for sale are measured at the lower of carrying amount or fair value less costs to sell. Fair value less costs to sell = $180,000 – $12,000 = $168,000, which is less than the $200,000 carrying amount. An impairment loss of $32,000 is recognized.
Assets & Liabilities

Which of the following intangible assets with an indefinite useful life is NOT amortized under U.S. GAAP?

Correct — C. Intangible assets with indefinite useful lives (no foreseeable limit to cash-generating period) are not amortized; they are tested for impairment at least annually. A trade name with no foreseeable end qualifies. Assets with finite lives (patents, customer lists, franchise terms) are amortized over their useful lives.
Assets & Liabilities

A company purchases a patent for $120,000. The patent has a remaining legal life of 15 years but the company estimates it will be economically useful for only 8 years. What is annual amortization?

Correct — D. Intangible assets are amortized over their useful economic life, not necessarily their legal life, if the economic life is shorter. $120,000 / 8 years = $15,000 per year. The legal life ceiling of 15 years is not binding here because economic obsolescence is expected in 8 years.

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Sample questions

CPA FAR sample questions

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Assets & Liabilities Company A acquires Company B in a business combination. Company B had an internally developed customer list that was never recognized on its books. Under U.S. GAAP, how is this customer list treated in the acquisition?

A. It is subsumed into goodwill because it was never separately recognized

B. It is recognized as a separate intangible asset at fair value if it meets the separability or contractual-legal criterion ✓

C. It is expensed immediately as it has no reliable fair value

D. It is recognized only if a third-party appraisal exists at the acquisition date

Correct — B. Under ASC 805, identifiable intangible assets acquired in a business combination must be recognized separately from goodwill if they meet the separability criterion (can be sold/transferred) or the contractual-legal criterion, regardless of whether the acquiree recognized them. A customer list typically meets the separability criterion.

Equity & EPS Which of the following is NOT a component of stockholders' equity on a corporate balance sheet?

A. Retained earnings

B. Additional paid-in capital

C. Bonds payable ✓

D. Accumulated other comprehensive income

Correct — C. Bonds payable is a liability, not an equity component. Stockholders' equity consists of paid-in capital (common stock + APIC), retained earnings, treasury stock (as a deduction), and AOCI.

Conceptual Framework According to the FASB Conceptual Framework, the primary objective of general-purpose financial reporting is to provide information useful to:

A. Management in planning and controlling entity operations

B. Government regulators in assessing compliance with applicable laws

C. Internal auditors in evaluating the effectiveness of internal controls

D. Existing and potential investors, lenders, and other creditors in making resource allocation decisions ✓

Correct — D. The Conceptual Framework (CON 8) states that the primary objective of general-purpose financial reporting is to provide information useful to existing and potential investors, lenders, and other creditors. Management, regulators, and auditors have other channels for obtaining the information they need.

Governmental Accounting Which fund type is used by a state government to account for general operations and services not required to be accounted for in another fund?

A. General Fund ✓

B. Special Revenue Fund

C. Capital Projects Fund

D. Debt Service Fund

Correct — A. The General Fund accounts for all financial resources not required to be accounted for in another fund, serving as the primary operating fund of a governmental entity.

Nonprofit Accounting Which financial statements are required for a nongovernmental not-for-profit organization under U.S. GAAP (ASC 958)?

A. Statement of financial position, statement of activities, and statement of cash flows ✓

B. Balance sheet, income statement, and statement of retained earnings

C. Statement of net assets, statement of revenues and expenses, and statement of cash flows

D. Statement of financial position and statement of activities only

Correct — A. ASC 958-205 requires three statements: a statement of financial position, a statement of activities, and a statement of cash flows. Retained earnings is a for-profit concept; not-for-profits have net assets, not retained earnings.

Revenue Recognition Under ASC 606, which of the following correctly states Step 1 of the five-step revenue recognition model?

A. Determine the transaction price

B. Identify the performance obligations in the contract

C. Identify the contract with a customer ✓

D. Allocate the transaction price to performance obligations

Correct — C. The five steps begin with Step 1: Identify the contract with a customer. Steps 2–5 then address performance obligations, transaction price, allocation, and recognition.

Financial Statements On a classified balance sheet, which of the following would be presented as a current liability?

A. Accounts payable due within 60 days ✓

B. Bonds payable maturing in 5 years

C. Deferred tax liability (long-term portion)

D. Finance lease obligation due in 3 years

Correct — A. Current liabilities are obligations expected to be settled within one year or the operating cycle, whichever is longer. Accounts payable due within 60 days clearly qualifies. The other items mature or are classified beyond one year.

Select Transactions Which of the following items is EXCLUDED from cash and cash equivalents on the balance sheet?

A. Demand deposits at commercial banks

B. Treasury bills purchased three weeks before maturity

C. Postdated checks received from customers ✓

D. Money market funds with immediate redemption

Correct — C. Postdated checks cannot be deposited until the date written on them, so they are not yet cash. They are recorded as receivables until the date arrives. Demand deposits, near-maturity T-bills, and immediately redeemable money market funds all qualify as cash or cash equivalents.

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