CPA FAR Exam Questions & Answers 2026 (11–20)

Question 1

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

TheoryPractice · Accepted Answer

LIFO. 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.

Question 2

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:

TheoryPractice · Accepted Answer

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

Question 3

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:

TheoryPractice · Accepted Answer

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

Question 4

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?

TheoryPractice · Accepted Answer

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

Question 5

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?

TheoryPractice · Accepted Answer

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

Question 6

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:

TheoryPractice · Accepted Answer

62.5%. 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.

Question 7

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

TheoryPractice · Accepted Answer

Freight charges paid to deliver the machine to the factory. 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.

Question 8

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

TheoryPractice · Accepted Answer

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

Question 9

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?

TheoryPractice · Accepted Answer

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

Question 10

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?

TheoryPractice · Accepted Answer

$18,000. 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.

CPA FAR Exam Questions & Answers 2026 (11–20)

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