CPA BAR: Business Analysis and Reporting Practice Test

Use this page when you are preparing for the Certified Public Accountant Business Analysis and Reporting section and want a direct practice route. The public preview gives you sample questions and a full-length MCQ diagnostic; the web app adds mixed sets, topic drills, timed mocks, progress tracking, and full practice.

Mastery Exam Prep is independent exam-prep software. These are original practice questions, not official CPA Exam questions from AICPA, NASBA, or any state board.

What this CPA BAR page gives you

• a direct web route into Certified Public Accountant Business Analysis and Reporting practice
• 24 public sample questions with detailed explanations before you subscribe
• a free 50-question multiple-choice question (MCQ) diagnostic across the BAR blueprint areas
• focused topic pages for each major blueprint area
• timed mixed practice for pacing, review discipline, and exam-day readiness
• explanations written to show why the reasoning is right, not just which answer is marked correct

CPA BAR exam snapshot

Abbreviation guide for this page

Topic coverage for CPA BAR practice

What CPA BAR is really testing

CPA BAR rewards candidates who can interpret business data, assumptions, variances, forecasts, reporting facts, and governmental accounting distinctions. Strong answers explain the decision consequence, not just the formula label.

CPA BAR versus other CPA sections

High-yield CPA BAR traps

• reading a ratio or variance without checking the driver, benchmark, or assumption
• treating forecast output as reliable before testing source data and assumptions
• mixing technical accounting conclusions with business-analysis conclusions
• missing government fund measurement basis or reporting perspective

Simulation-style skills to pair with MCQs

Use multiple-choice practice to sharpen the decision logic, then pair it with small exhibit-style exercises. For CPA BAR, that means reading variance tables, forecast assumptions, ratio trends, financial-statement excerpts, and governmental reporting facts before choosing the accounting or business implication. When you miss an MCQ, note whether the real weakness was data interpretation, assumption testing, accounting model selection, or reporting perspective.

How to use CPA BAR practice efficiently

1. Start with focused topic drills until you can explain the rule, objective, or calculation setup behind each answer.
2. Use the free 50-question diagnostic once as a baseline rather than as a memorization set.
3. Review misses by weakness type and return to the matching topic page before another timed set.
4. Move into timed mixed practice when topic-level accuracy is stable and you need pacing discipline.
5. If several unseen timed attempts are above roughly 75%, schedule or proceed instead of trying to memorize the full bank.

Miss pattern to next drill

CPA section routes

• CPA AUD : Auditing and Attestation
• CPA FAR : Financial Accounting and Reporting
• CPA REG : Taxation and Regulation
• CPA BAR: Business Analysis and Reporting
• CPA ISC : Information Systems and Controls
• CPA TCP : Tax Compliance and Planning

Free review resources

Need concept review before timed practice? Read the CPA BAR guide on CPAExamsMastery.com, then return here for sample questions, topic drills, timed mocks, and the full practice route.

Focused sample questions

Use these child pages when you want focused Mastery Exam Prep practice before returning to mixed sets and timed mocks.

• Free CPA BAR Full-Length Practice Exam
• CPA BAR: Business Analysis
• CPA BAR: Technical Accounting and Reporting
• CPA BAR: State and Local Governments

Free samples and full practice

• Live now: CPA BAR practice is available on web.
• On-page sample set: this page includes 24 public sample questions for the BAR route.
• Full practice: open the web route for mixed sets, topic drills, timed mocks, progress tracking, and detailed explanations.

24 CPA BAR sample questions with detailed explanations

These are original Mastery Exam Prep practice questions aligned to the live CPA BAR route and the main blueprint areas shown above. Use them to test readiness here, then continue in Mastery Exam Prep with mixed sets, topic drills, and timed mocks.

Question 1

Topic: Technical Accounting and Reporting

A defined contribution 401(k) plan is preparing its December 31, 20X5 statement of net assets available for benefits. The draft statement includes cash of $42,000, investments at fair value of $7,860,000, participant contributions receivable of $28,000, employer matching contributions receivable of $35,000, and accrued administrative expenses of $18,000, for net assets available for benefits of $7,947,000. Which source-data validation result best supports the conclusion that the draft statement is properly supported?

• A. The certified year-end trustee statement and bank reconciliation agree to cash and investment fair values, payroll remittance records and the plan matching formula support contribution receivables, and unpaid vendor invoices support accrued administrative expenses.
• B. The plan sponsor’s general ledger shows total retirement plan expense for the year, and human resources records support the number of active participants at year-end.
• C. The recordkeeper’s participant statement summary agrees to total participant account balances, but it excludes employer contributions accrued after the final payroll remittance.
• D. The prior-year audited plan financial statements agree to the opening balances, and current-year investment returns approximate a market benchmark for similar retirement plans.

Best answer: A

Explanation: The best support validates all statement components from current, plan-level source records. A statement of net assets available for benefits should be prepared from current plan-level evidence supporting the existence, completeness, and measurement of assets and liabilities. For a defined contribution plan, investments generally are reported at fair value, cash should reconcile to bank or trustee records, contribution receivables should be supported by payroll remittance data and plan terms, and accrued expenses should be supported by unpaid invoices or similar obligations. The correct validation result ties each draft line item to relevant source data and reconciles those sources to the draft statement. Evidence that is stale, indirect, incomplete, or focused on participant counts, sponsor expense, or investment performance does not adequately support the net assets available for benefits amount.

Question 2

Topic: Business Analysis

A BAR analyst is reviewing a public company’s proposed earnings-release schedule for “Adjusted operating income.” The analyst has verified the arithmetic but has not yet evaluated the quality of the adjustments.

Which procedure should the analyst perform next?

• A. Benchmark the proposed adjusted operating income against peer companies before assessing the individual adjustments.
• B. Issue the schedule as presented because the adjusted measure reconciles mathematically to GAAP operating income.
• C. Evaluate and document each adjustment against source evidence and non-GAAP presentation criteria, revising the schedule to retain the supported plant-closure costs and exclude the recurring payroll and unsupported estimated profit.
• D. Recast the prior-year adjusted operating income using the same three adjustments to make the measure consistent across periods.

Best answer: C

Explanation: The next step is to test whether each non-GAAP adjustment is supported and not misleading. A non-GAAP performance measure can be useful only if it is reconciled to the most directly comparable GAAP measure and the adjustments are supportable, consistently described, and not misleading. The plant-closure costs appear potentially supportable because they are tied to a board-approved event and source records. However, ordinary payroll for a sales team that is expected to continue is a recurring operating cost, so excluding it may overstate performance. Estimated profit on orders not shipped or contracted is not supported by recognized revenue or enforceable source data. After arithmetic is verified, the analyst should evaluate each adjustment’s evidence and presentation quality, then revise the schedule to remove misleading or unsupported items.

Question 3

Topic: State and Local Governments

A city is preparing the General Fund budgetary comparison schedule for the year ended June 30. The finance director provided a 10-year capital improvement plan that lists a $4 million police facility planned for the current year and asks that the unspent amount be shown as unused current-year budget authority. No annual appropriation ordinance or budget amendment has been provided. What should be done next?

• A. Obtain the legally adopted annual operating budget and any amendments to determine current-year appropriations.
• B. Record an encumbrance for the full $4 million planned facility amount.
• C. Prepare performance budget measures for the police department before reviewing appropriations.
• D. Use the 10-year capital improvement plan as the final budget for current-year General Fund expenditures.

Best answer: A

Explanation: The next step is to verify the legally adopted current-year budget authority. State and local governments often use different budget types for different purposes. An annual operating budget is typically the legally adopted budget that authorizes current-year revenues, appropriations, expenditures, and encumbrance control for governmental funds. A capital improvement plan or capital budget identifies major long-term projects and financing plans, but it does not automatically create current-year General Fund budget authority unless adopted through an appropriation or amendment. Before including an amount in a budgetary comparison schedule or treating it as available spending authority, the CPA should obtain the legally adopted budget documents and amendments.

Question 4

Topic: Technical Accounting and Reporting

Orbit Co. granted equity-classified employee stock options with only a service vesting condition. Orbit estimates forfeitures, and no award modification occurred.

What amount of compensation cost should Orbit recognize for the year ended December 31, 20X2?

• A. $95,000
• B. $169,000
• C. $81,000
• D. $176,000

Best answer: C

Explanation: Orbit should recognize $81,000 of compensation cost in 20X2. For equity-classified share-based payment awards with a service condition, compensation cost is generally measured using the grant-date fair value and recognized over the requisite service period for awards expected to vest. Changes in the fair value of the unvested options after grant date do not remeasure compensation cost when there has been no modification. Orbit revises its forfeiture estimate from 5% to 12%, so the cumulative compensation cost through December 31, 20X2 is 50,000 options × 88% expected to vest × \(6 grant-date fair value × 2/3 of the service period =\)176,000. Because Orbit already recognized $95,000 in 20X1, the 20X2 compensation cost is $176,000 − \(95,000 =\)81,000.

Question 5

Topic: Business Analysis

Raven Co. is evaluating a robotic packing cell. The CFO requires discounted cash-flow cost-benefit analysis: approve projects with a positive NPV, but flag any project for additional support if removing an unsupported benefit would change the accept/reject conclusion. The project life is 4 years, with no salvage value and no tax effects. The required return is 8%, and the present value annuity factor for 4 years at 8% is 3.312. All recurring amounts occur at each year-end.

Which is the best interpretation of the proposal?

• A. The proposal should be approved without further analysis because the present value of total benefits exceeds the present value of total costs.
• B. The proposal should be rejected because the $480,000 implementation cost exceeds the first-year net benefit.
• C. The proposal should be rejected because unsupported benefits must be excluded from every base-case cost-benefit analysis.
• D. The base case supports approval with a positive NPV, but the proposal should be flagged because excluding the unsupported throughput benefit would make NPV negative.

Best answer: D

Explanation: The base case is positive, but the decision is sensitive to an unsupported benefit. Cost-benefit analysis should compare incremental benefits and costs over the relevant project life, using the required return when management specifies discounted cash-flow analysis. Here, annual benefits are $355,000 and annual recurring costs are $135,000, so annual net benefit is $220,000. The present value is \(220,000 × 3.312 =\)728,640; after the immediate $480,000 cost, NPV is $248,640. However, the $105,000 throughput benefit is unsupported by customer commitments. If that benefit is removed, annual net benefit falls to $115,000, with present value of $380,880 and NPV of $(99,120). Therefore, the base case is favorable, but the recommendation depends on a data-quality-sensitive assumption that should be supported or sensitivity-tested.

Question 6

Topic: State and Local Governments

Norwood City is preparing its governmental funds balance sheet for the General Fund at June 30, 20X6. All property taxes are for the fiscal year ended June 30, 20X6. The adjusted trial balance includes property taxes receivable of $360,000 and an allowance for uncollectible taxes of $18,000. The city uses a 60-day availability period for property tax revenue in governmental funds. The preparer concluded that the General Fund balance sheet should report net property taxes receivable of $342,000 and a deferred inflow of resources—unavailable property tax revenue of $95,000. Which source support best supports this conclusion?

• A. A government-wide conversion worksheet showing that all net property taxes receivable are recognized as revenue under the accrual basis
• B. A tax collector aging and subsequent-collections schedule reconciled to the subsidiary ledger and general ledger, showing the $360,000 receivable, $18,000 allowance, $247,000 collected within 60 days, and $95,000 remaining unavailable
• C. A prior-year audit schedule showing that approximately 28% of outstanding property taxes were unavailable at the prior fiscal year-end
• D. A cash receipts listing for the 60 days after year-end showing $247,000 of property tax collections deposited by the treasurer

Best answer: B

Explanation: The best support reconciles the trial balance to tax records and identifies the portion unavailable under modified accrual. Governmental funds use the current financial resources measurement focus and modified accrual basis. Property taxes receivable are reported net of estimated uncollectible amounts, so the $360,000 receivable less the $18,000 allowance supports a \(342,000 net receivable. Revenue recognition also depends on availability. Because the city uses a 60-day availability period, the portion not collected soon enough to be available to finance current-period expenditures is reported as a deferred inflow of resources, not as current-period revenue. The best support is therefore not just a cash receipt listing or a high-level conversion entry; it must reconcile to the general ledger and show the aging/subsequent collection details needed to support the\)95,000 unavailable amount.

Question 7

Topic: Technical Accounting and Reporting

On March 1, Year 1, Cobalt Analytics signed a noncancelable contract to provide a customer with a distinct on-premise software license and 12 months of unspecified updates and technical support. The fixed contract price is $120,000, due at signing. The license is functional without future updates, and electronic access was delivered on March 5, Year 1. Cobalt’s controller concludes that $96,000 of revenue should be recognized on March 5 and $2,000 per month should be recognized for support over the 12-month service period. Which source support best supports that conclusion?

• A. The executed contract showing the fixed consideration and support term, the March 5 delivery log for license access, and the current standalone selling price schedule showing $96,000 for the license and $24,000 for support.
• B. A sales forecast showing that similar customers are expected to renew support after the first 12 months.
• C. A prior-year bundled software quote showing a $120,000 package price with no separate standalone selling prices.
• D. The March 1 invoice and cash receipt showing that the customer paid the full $120,000 contract price at signing.

Best answer: A

Explanation: The best support ties contract terms, delivery evidence, and standalone selling prices to the revenue conclusion. Under the five-step revenue model, the company must identify the contract, identify distinct performance obligations, determine the transaction price, allocate that price based on relative standalone selling prices, and recognize revenue when or as each obligation is satisfied. Here, the software license is functional without future updates, so the license revenue is recognized at the point in time when access is delivered. The support and unspecified updates are a stand-ready service recognized over the 12-month service period. The best support therefore must include the executed contract terms, evidence of license delivery, and a current standalone selling price schedule supporting the $96,000 and $24,000 allocation.

Question 8

Topic: Business Analysis

Pine Ridge Manufacturing plans a $60 million production-line expansion. Project cash inflows are expected to be modest for the first two years and higher after commercialization. Management concludes that issuing convertible preferred stock is a better financing strategy than issuing straight debt or common stock. Which source support best supports that conclusion?

• A. A five-year revenue forecast showing the expansion’s expected sales growth but excluding interest, preferred dividends, issuance costs, and share dilution.
• B. A draft accounting memo concluding the convertible preferred stock would be classified outside current liabilities on the balance sheet.
• C. A peer benchmark report showing Pine Ridge’s current debt-to-equity ratio is below the industry median before considering the expansion financing.
• D. A pro forma financing comparison based on current lender and underwriter term sheets showing straight debt would strain covenant headroom in years 1 and 2, common stock would cause larger immediate ownership dilution, and convertible preferred would keep projected coverage ratios acceptable at a lower expected cost than common stock.

Best answer: D

Explanation: The best support is a current, comparative pro forma analysis of the financing alternatives and their effects on cost, covenants, and dilution. A financing strategy conclusion should be supported by source data that compares the relevant alternatives on decision-useful factors. Straight debt may have a lower explicit cost but increases fixed charges and leverage risk, especially when early project cash flows are weak. Common equity avoids required payments and covenant pressure but may create significant ownership and EPS dilution. A hybrid instrument such as convertible preferred can reduce near-term covenant pressure while offering investors conversion upside, potentially lowering cost compared with common equity. The strongest support is therefore a current pro forma comparison using actual market terms and the approved cash flow forecast, not an isolated benchmark or accounting classification memo.

Question 9

Topic: State and Local Governments

A city is preparing its General Fund balance sheet for June 30, 20X6. Total fund balance before classification is $4,800,000. Relevant year-end facts are:

• Inventory is $275,000 and prepaid insurance is $125,000.
• Unspent federal grant proceeds of $810,000 must be used only for public safety equipment under the grant agreement.
• The city charter requires $290,000 of hotel tax resources to be used only for tourism promotion.
• The city council, the city’s highest level of decision-making authority, enacted an ordinance on June 20 committing $950,000 for emergency stabilization. The ordinance can be changed only by another ordinance.
• The finance director, under delegated authority, assigned $600,000 for next year’s technology purchases.
• Outstanding purchase orders for routine supplies total $150,000, and the city reports encumbrances without a higher constraint as assigned.
• On July 15, the council approved using $300,000 for vehicle replacement.

What amount should the city report as unassigned fund balance in the General Fund?

• A. $1,750,000
• B. $1,600,000
• C. $1,300,000
• D. $2,550,000

Best answer: B

Explanation: The General Fund unassigned fund balance is $1,600,000. Governmental fund balance classifications are applied in order based on the nature of constraints. Inventory and prepaid insurance are nonspendable because they are not in spendable form, totaling $400,000. The grant proceeds and charter-restricted hotel tax resources are restricted, totaling $1,100,000. The council ordinance creates a committed fund balance of $950,000 because it was formal action by the highest decision-making authority before year-end. The finance director’s designation and routine encumbrances are assigned, totaling $750,000. The July 15 council action occurred after year-end and does not affect June 30 classifications. Therefore, unassigned fund balance is $4,800,000 − $400,000 − $1,100,000 − $950,000 − \(750,000 =\)1,600,000.

Question 10

Topic: Technical Accounting and Reporting

On July 1, Ridge Co., a public business entity, entered into a pay-fixed, receive-SOFR interest-rate swap with the same notional amount, reset dates, and maturity as Ridge’s existing variable-rate SOFR debt. Ridge’s July 1 hedge file included the signed swap confirmation, identified the specific debt, stated that the objective was to stabilize interest payments, and designated the relationship as a cash flow hedge. The file did not document the method Ridge would use to assess hedge effectiveness; the controller planned to select that method at quarter-end. Assume the swap, the debt, and the SOFR interest-rate risk are otherwise eligible hedging items. How should Ridge characterize the relationship at inception under U.S. GAAP?

• A. A natural hedge that does not require derivative fair value recognition while cash flows offset.
• B. A nondesignated derivative because the hedge effectiveness assessment method was not documented at inception.
• C. A qualifying cash flow hedge because the swap terms match the variable-rate debt terms.
• D. A qualifying fair value hedge because changes in the swap’s fair value relate to the debt.

Best answer: B

Explanation: The relationship does not qualify for hedge accounting at inception because required documentation was incomplete. A derivative relationship qualifies for hedge accounting only if strict designation and documentation criteria are met at hedge inception. The documentation must identify the hedging instrument, hedged item or transaction, hedged risk, risk management objective and strategy, and the method that will be used to assess hedge effectiveness. Even though Ridge’s swap economically matches the variable-rate debt and the intended hedge type is a cash flow hedge, the missing effectiveness assessment method is a qualifying defect at inception. Therefore, the swap is treated as a nondesignated derivative until a qualifying hedging relationship is properly designated prospectively. A nondesignated derivative is recognized at fair value, with changes in fair value generally recognized in earnings.

Question 11

Topic: Business Analysis

Sawyer Components is choosing a financing alternative for a (23 million acquisition. Management will select an alternative only if it satisfies all stated constraints. Amounts are in millions; covenant calculations use the EBITDA, funded debt, and cash interest shown.

Base facts and constraints:

Financing alternatives:

Which alternative is most consistent with Sawyer’s liquidity, leverage, covenant, and strategic constraints?

• A. Issue the unsecured notes.
• B. Issue the convertible note.
• C. Issue the convertible nonvoting preferred stock.
• D. Issue the common stock.

Best answer: C

Explanation: The convertible nonvoting preferred stock is the only alternative that satisfies all constraints. Each financing option must be tested against all constraints, not just whether it funds the acquisition. Ending cash equals beginning cash plus net proceeds minus the $23 million outlay. Covenant leverage equals total funded debt divided by EBITDA, and interest coverage equals EBITDA divided by total cash interest. The convertible nonvoting preferred stock produces ending cash of \(9 million, funded debt/EBITDA of\)70 ÷ \(30 = 2.33x, and interest coverage of\)30 ÷ $4 = 7.50x. Its expected voting dilution is 4%, within the 5% strategic limit. Therefore, it is the only alternative consistent with the liquidity, leverage, covenant, and dilution constraints.

Question 12

Topic: State and Local Governments

A city maintains a pension trust fund for its employees. The following information relates to the fund for the year ended June 30, 2026:

What amount should the pension trust fund report as ending net position restricted for pensions?

• A. $12,485,000
• B. $12,875,000
• C. $13,085,000
• D. $12,695,000

Best answer: B

Explanation: Ending net position is $12,875,000. Fiduciary fund financial statements use the economic resources measurement focus and accrual basis of accounting. Therefore, the pension trust fund recognizes contributions earned through year-end even if collected shortly after year-end, recognizes benefits incurred through year-end even if paid after year-end, and includes investment earnings as well as changes in fair value of investments. Additions are employer contributions received of $1,300,000, employee contributions of $520,000, employer contributions receivable of $180,000, interest and dividends of $640,000, and fair value increases of $390,000, totaling $3,030,000. Deductions are benefits paid of $1,850,000, benefits incurred but unpaid of $210,000, and administrative expenses of $95,000, totaling $2,155,000. Ending net position is $12,000,000 + $3,030,000 - \(2,155,000 =\)12,875,000.

Question 13

Topic: Technical Accounting and Reporting

Riley Manufacturing sold a customized production line to Oak Bank for $9.0 million and immediately leased it back for five years. Riley’s controller concluded that, under U.S. GAAP, the transaction is not a valid sale and leaseback and should be accounted for as a financing arrangement. Which source support best supports that conclusion?

• A. A bank confirmation showing Oak Bank paid the full $9.0 million to Riley at closing.
• B. A lease classification memo concluding that the five-year leaseback is not a finance lease for Riley.
• C. A valuation report dated the transfer date showing the $9.0 million price approximated the production line’s fair value.
• D. The executed agreement giving Riley a unilateral option to repurchase the exact production line at a fixed price during the leaseback term.

Best answer: D

Explanation: The repurchase option is the decisive support for failed sale accounting. For a sale and leaseback to be accounted for as a sale under U.S. GAAP, the transfer must qualify as a sale under the revenue recognition control model. A seller-lessee repurchase right generally prevents the buyer-lessor from obtaining control of the asset, unless narrow conditions are met, such as a fair value repurchase price and readily available alternative assets. Here, the executed agreement gives Riley the unilateral right to repurchase the exact customized production line at a fixed price during the leaseback term. That contract term directly supports the controller’s conclusion that the transaction is a failed sale and should be accounted for as a financing arrangement rather than as a sale and leaseback.

Question 14

Topic: Business Analysis

Calder Co. is evaluating a three-year automation project. Annual cash amounts occur at the end of each year. One-time startup costs occur immediately, except for the decommissioning cost, which occurs at the end of year 3. Ignore taxes, depreciation, financing effects, and qualitative factors.

What is the net present benefit or cost of the proposed project, rounded to the nearest dollar?

• A. $24,178 net present benefit
• B. $16,322 net present benefit
• C. $7,322 net present benefit
• D. $9,178 net present benefit

Best answer: D

Explanation: The proposal has a positive net present benefit of $9,178. Cost-benefit analysis should compare incremental benefits and incremental costs on the same measurement basis. Here, the recurring annual net benefit is labor savings and avoided penalties, less support fees and cybersecurity monitoring: ($95,000 + $12,000) − ($18,000 + \(7,000) =\)82,000. Because those amounts occur annually at year-end for three years, multiply by the annuity present value factor: \(82,000 × 2.5771 =\)211,322. The immediate costs are equipment, implementation, and training: $180,000 + \(15,000 =\)195,000. The decommissioning cost occurs at the end of year 3, so it must be discounted separately: \(9,000 × 0.7938 =\)7,144. Net present value is $211,322 − $195,000 − \(7,144 =\)9,178, a net present benefit.

Question 15

Topic: State and Local Governments

A county is preparing its government-wide statement of net position from governmental-fund trial balances and conversion entries. The following governmental activities information is available at year-end:

The unspent proceeds have not yet been used to acquire or construct capital assets, and there are no bond-related deferred outflows or deferred inflows. What amount should the county present as net investment in capital assets?

• A. $10,900,000
• B. $18,400,000
• C. $10,780,000
• D. $11,800,000

Best answer: D

Explanation: Net investment in capital assets is $18,400,000 − ($7,500,000 − \(900,000) =\)11,800,000. In the government-wide statement of net position, net investment in capital assets generally equals capital assets, net of accumulated depreciation, less outstanding debt attributable to acquiring or constructing those capital assets. Debt related to unspent bond proceeds is excluded from this component because those proceeds have not yet been invested in capital assets. Here, only $6,600,000 of the $7,500,000 bonds payable relates to capital assets already acquired or constructed. The $900,000 unspent proceeds and related debt would be considered in the appropriate restricted or unrestricted net position component, not in net investment in capital assets. Accrued interest payable is also not deducted in computing this component.

Question 16

Topic: Technical Accounting and Reporting

A calendar-year company prepares financial statements under U.S. GAAP. During 20X6, the company incurred the following costs related to product development activities:

What amount should the company report as research and development expense for 20X6?

• A. $701,000
• B. $846,000
• C. $665,000
• D. $965,000

Best answer: A

Explanation: The correct R&D expense is $701,000. Under U.S. GAAP, R&D costs generally are expensed as incurred. Direct R&D labor, materials consumed in R&D, and equipment acquired for R&D with no alternative future use are included in R&D expense. Equipment that has alternative future use is capitalized, but depreciation related to its use in R&D is included in R&D expense. The depreciable equipment has annual straight-line depreciation of $60,000 ($300,000 ÷ 5 years), of which 60%, or $36,000, relates to R&D. Total R&D expense is $420,000 + $85,000 + $160,000 + \(36,000 =\)701,000. Market research, routine quality control, and patent application legal fees are not classified as R&D expense.

Question 17

Topic: Business Analysis

A company currently sells 50,000 units per month at $20 per unit. Management is considering a 5% price reduction for next month. Market research estimates own-price elasticity of demand at -1.4 over the relevant price range. Due to supplier limits, the company can obtain and produce no more than 52,000 units next month, and it has no beginning inventory. What monthly sales volume should the company use in its forecast?

• A. 46,500 units
• B. 53,500 units
• C. 47,500 units
• D. 52,000 units

Best answer: D

Explanation: Demand would rise by 7%, but sales are limited by available supply. Price elasticity of demand measures the percentage change in quantity demanded for a percentage change in price. With elasticity of -1.4 and a 5% price decrease, expected quantity demanded changes by -1.4 × -5% = +7%. Unconstrained demand would be 50,000 × 1.07 = 53,500 units. However, the company can obtain and produce only 52,000 units and has no beginning inventory. Because forecast sales volume cannot exceed available supply when backorders are not included, the appropriate forecast sales volume is 52,000 units.

Question 18

Topic: State and Local Governments

Harbor City’s General Fund system tracks the original budget and legally approved amendments separately, and the city requires purchase orders to be recorded as encumbrances when issued. Routine supplies are recorded as current-period expenditures. The following FY 20X6 source documents have been approved but have not yet been posted:

Payment will occur next month. What should be done next to complete the General Fund budgetary and expenditure entries?

• A. Debit estimated revenues $1,000,000; credit appropriations $960,000 and budgetary fund balance $40,000; debit estimated revenues $20,000 and budgetary fund balance $15,000; credit appropriations $35,000; record and reverse the $50,000 encumbrance; debit expenditures and credit vouchers payable $49,000.
• B. Debit estimated revenues $1,000,000; credit appropriations $960,000 and budgetary fund balance $40,000; debit estimated revenues $35,000; credit appropriations $20,000 and budgetary fund balance $15,000; record and reverse a $49,000 encumbrance; debit expenditures and credit vouchers payable $49,000.
• C. Debit estimated revenues $1,000,000; credit appropriations $960,000 and budgetary fund balance $40,000; debit estimated revenues $20,000 and budgetary fund balance $15,000; credit appropriations $35,000; record a $50,000 encumbrance and leave it open; debit expenditures and credit cash $50,000.
• D. Debit estimated revenues $1,020,000; credit appropriations $995,000 and budgetary fund balance $25,000; skip encumbrance entries because the purchase order was closed; debit expenditures and credit vouchers payable $49,000.

Best answer: A

Explanation: The correct next step records the original budget, the final budget amendment, the required encumbrance and reversal, and the actual invoice as an expenditure and payable. General Fund budgetary accounts are recorded for the legal budget and later amendments so the original budget and final budget can be tracked. The original budget has estimated revenues exceeding appropriations by $40,000, so budgetary fund balance is credited. The amendment increases appropriations by $35,000 but estimated revenues by only $20,000, so the $15,000 difference is an authorized use of fund balance and is debited to budgetary fund balance. Because the city requires encumbrance accounting, the purchase order is recorded at the $50,000 commitment amount. Once the supplies are received and the purchase order is closed, that encumbrance is reversed at $50,000, and the actual approved invoice is recorded as an expenditure and vouchers payable for $49,000. Cash is not credited until payment occurs.

Question 19

Topic: Technical Accounting and Reporting

On January 1, Year 1, Apex Leasing, a calendar-year lessor, entered into a 4-year lease classified by Apex as an operating lease. The lease has no nonlease components, no initial direct costs, and straight-line recognition of fixed consideration is appropriate.

Fixed payments due each December 31 are:

Apex paid the lessee an $8,000 lease incentive at commencement. The lessee also must pay variable rent equal to 2% of annual sales from the leased property. Year 1 sales were $500,000, and the related variable rent was earned and billed on December 31, Year 1.

What amount of lease income should Apex recognize in its Year 1 income statement?

• A. $37,500
• B. $30,000
• C. $35,500
• D. $25,500

Best answer: C

Explanation: Fixed operating lease consideration is recognized straight-line, net of incentives, and sales-based variable rent is recognized when earned. For a lessor’s operating lease, fixed lease payments are generally recognized as lease income on a straight-line basis over the lease term unless another systematic basis is more representative. Lease incentives paid to the lessee reduce the total fixed consideration to be recognized. Apex’s total scheduled fixed payments are $110,000. After subtracting the $8,000 lease incentive, net fixed consideration is $102,000, or $25,500 per year over 4 years. The sales-based variable rent is not included in the straight-line fixed-payment pool; it is recognized in the period in which the related sales occur. Year 1 variable rent is \(500,000 × 2% =\)10,000. Therefore, Year 1 lease income is $25,500 + \(10,000 =\)35,500.

Question 20

Topic: Business Analysis

Parker Co. uses activity-based costing to allocate manufacturing overhead. The annual activity cost pools and driver quantities are:

Deluxe product activity for the year was 800 units, 24 setup batches, 3,000 machine-hours, and 700 purchase orders. What is the manufacturing overhead allocated to each Deluxe unit under activity-based costing?

• A. $255.00
• B. $202.50
• C. $159.00
• D. $198.75

Best answer: A

Explanation: Deluxe is allocated $72,000 for setups, $90,000 for machining, and $42,000 for purchasing, totaling $204,000, or $255.00 per unit. Under activity-based costing, each overhead cost pool is assigned using its own activity rate. The setup rate is \(180,000 ÷ 60 =\)3,000 per setup batch. The machining rate is \(360,000 ÷ 12,000 =\)30 per machine-hour. The purchasing rate is \(96,000 ÷ 1,600 =\)60 per purchase order. Deluxe uses 24 setup batches, 3,000 machine-hours, and 700 purchase orders, so allocated overhead is $72,000 + $90,000 + \(42,000 =\)204,000. Because 800 Deluxe units were produced, overhead per unit is \(204,000 ÷ 800 =\)255.00.

Question 21

Topic: State and Local Governments

A city’s General Fund uses modified accrual accounting and records encumbrances for budgetary control. At December 31, the fiscal year-end, the finance department noted the following:

• Equipment purchase orders totaling $500,000 were issued and encumbered during December.
• Equipment with invoices totaling $460,000 was received and accepted by December 31; payment will be made from available current financial resources on January 10.
• The remaining $40,000 of ordered equipment was not received by December 31.
• Employee wages of $55,000 were earned by December 31 and will be paid from available current financial resources on January 3.

What amount should the General Fund recognize as expenditures for the current year?

• A. $500,000
• B. $555,000
• C. $515,000
• D. $460,000

Best answer: C

Explanation: Recognized expenditures are $460,000 + \(55,000 =\)515,000. Under modified accrual accounting, governmental funds generally recognize expenditures when the related fund liability is incurred and will be paid from current financial resources. The city received and accepted $460,000 of equipment before year-end, so that amount is an expenditure even though payment occurs in January. The $55,000 of wages was earned before year-end and will be paid from available current financial resources, so it also is recognized as an expenditure. Encumbrances are budgetary commitments, not expenditures. Therefore, the $40,000 of ordered equipment not received by year-end is not included in current-year expenditures.

Question 22

Topic: Technical Accounting and Reporting

Bayport Systems, a calendar-year company, records revenue on the invoice date. The controller is reviewing year-end revenue discrepancies for invoices that were fully included in 20X5 revenue. Assume collectibility is probable, billed amounts equal transaction prices, no returns or price concessions exist, and stand-ready services are recognized ratably over time.

Which adjustment to 20X5 revenue is supported by the source documentation?

• A. Decrease 20X5 revenue by $50,000.
• B. Decrease 20X5 revenue by $116,000.
• C. No adjustment to 20X5 revenue is required.
• D. Decrease 20X5 revenue by $122,000.

Best answer: B

Explanation: Bayport should defer $66,000 of support revenue and all $50,000 of the FOB destination sale, for a total revenue decrease of $116,000. Revenue is recognized when, or as, the related performance obligation is satisfied—not merely when an invoice is issued. Invoice A-117 is properly included in 20X5 revenue because the goods were shipped before year-end under FOB shipping point terms, with no acceptance provision delaying transfer of control. Invoice C-309 is a stand-ready support service over 12 months. Only one month of service was provided by December 31, so Bayport should recognize $6,000 and defer $66,000. Invoice D-412 is FOB destination, so control does not transfer until delivery on January 2, 20X6; the full $50,000 should be deferred from 20X5 revenue. The total decrease is $66,000 plus $50,000, or $116,000.

Question 23

Topic: Business Analysis

A U.S. company has the following unhedged euro-denominated monetary balances due in 60 days:

The current spot rate is $1.10 per euro. Management’s stress scenario assumes the euro will decline to $1.04 per euro. Forecast quarterly operating income before foreign currency effects is $850,000. Management measures currency risk as the potential transaction loss under the stress scenario divided by forecast quarterly operating income. What is the currency risk measure?

• A. 14.1%
• B. 4.9%
• C. 9.2%
• D. 19.1%

Best answer: C

Explanation: Net the euro monetary asset and liability exposure before applying the adverse exchange-rate movement. Currency transaction risk is measured on the net exposed monetary position, not just the gross receivable. The company is long euros because euro receivables of €2,000,000 exceed euro payables of €700,000, leaving a net exposure of €1,300,000. If the euro declines from $1.10 to $1.04, each euro is worth $0.06 less. The expected transaction loss is €1,300,000 × \(0.06 =\)78,000. Dividing that loss by forecast quarterly operating income of $850,000 gives $78,000 ÷ $850,000 = 9.18%, or approximately 9.2%.

Question 24

Topic: State and Local Governments

A city is preparing the governmental activities column of its government-wide statement of net position. The finance department provided the following year-end capital asset excerpt:

The city also has a $1,180,000 year-end lease liability related to the leased equipment. What amount should the city report as governmental activities capital assets, net?

• A. $23,200,000
• B. $24,380,000
• C. $21,080,000
• D. $23,100,000

Best answer: B

Explanation: Net capital assets are $24,380,000. In the government-wide statement of net position, capital assets are reported net of accumulated depreciation or amortization. Nondepreciable assets are included at cost: land of $2,400,000 plus construction in progress of $900,000 equals $3,300,000. Depreciable and amortizable assets total $34,100,000, and related accumulated depreciation and amortization total \(13,020,000, producing net depreciable/amortizable assets of\)21,080,000. Total capital assets, net are therefore $3,300,000 + \(21,080,000 =\)24,380,000. The lease liability is reported as a liability; it does not reduce the capital assets, net line item.

In this section

• CPA BAR: Business Analysis
  Try 10 focused Certified Public Accountant Business Analysis and Reporting (CPA BAR) questions on ratios, variance analysis, forecasts, assumptions, and decision support.
• CPA BAR: Technical Accounting and Reporting
  Try 10 focused Certified Public Accountant Business Analysis and Reporting (CPA BAR) questions on technical accounting, complex reporting, recognition, measurement, and disclosures.
• CPA BAR: State and Local Governments
  Try 10 focused Certified Public Accountant Business Analysis and Reporting (CPA BAR) questions on governmental funds, modified accrual, government-wide statements, and reporting differences.
• Free CPA BAR Full-Length Practice Exam: 50 Questions
  Try 50 free Certified Public Accountant Business Analysis and Reporting (CPA BAR) questions across the BAR blueprint areas, with answers and explanations, then continue in Mastery Exam Prep.