Try 10 focused Certified Public Accountant Financial Accounting and Reporting (CPA FAR) questions on statement presentation, classification, cash flows, OCI, and reporting adjustments.
CPA means Certified Public Accountant. FAR means Financial Accounting and Reporting. Use this focused page when your CPA FAR misses are about statement presentation, classification, cash flows, other comprehensive income, or reporting adjustments. Drill this topic before returning to mixed practice.
| Field | Detail |
|---|---|
| Exam route | CPA FAR |
| Issuer | American Institute of Certified Public Accountants (AICPA) |
| Topic area | Financial Reporting |
| Blueprint weight | 35% |
| Page purpose | Statement-presentation practice for classification, cash flows, OCI, reporting adjustments, and disclosure logic |
This topic tests whether you can turn source facts, trial-balance details, account classifications, and reporting requirements into the right statement presentation. Strong answers usually decide the statement, basis of accounting, classification, and period effect before doing any arithmetic.
Use a reporting checklist: identify the statement, identify the account or transaction, decide recognition and classification, then compute only the amount that belongs in that presentation line. If an answer skips the classification step, it is often a trap even when the calculation looks familiar.
Use this page to isolate Financial Reporting for CPA FAR. Work through the 10 questions first, then review the explanations and return to mixed practice in Mastery Exam Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 35% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
These questions are original Mastery Exam Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: Financial Reporting
After completing the year-end close, the controller of a nongovernmental not-for-profit entity has a reconciled adjusted trial balance and is beginning to prepare the statement of financial position. To align the preparation work with the objective of that statement, what should the controller do next?
Best answer: C
What this tests: Financial Reporting
Explanation: A nongovernmental not-for-profit statement of financial position reports what the entity has, owes, and its residual net assets at a reporting date. Its preparation should focus on assets, liabilities, and net assets, including whether net assets are with or without donor restrictions.
The objective of a nongovernmental not-for-profit statement of financial position is to provide information about the organization’s assets, liabilities, and net assets and their relationships at a point in time. This helps users assess liquidity, financial flexibility, and the organization’s ability to continue providing services and meet obligations. Therefore, once the adjusted trial balance is ready, the next preparation step is to organize account balances into statement of financial position elements and required net asset classifications. Revenues, expenses, functional expense allocation, and cash flows relate to other financial statements or disclosures, not the primary objective of the statement of financial position.
The statement of financial position is intended to report a not-for-profit’s financial position at a point in time through its assets, liabilities, and net asset classes.
Topic: Financial Reporting
Granite Co. is preparing its multi-step income statement for the year ended December 31, 20X6. Selected adjusted trial balance amounts before income taxes and closing entries are as follows:
| Account | Debit | Credit |
|---|---|---|
| Sales revenue | $850,000 | |
| Sales returns and allowances | $30,000 | |
| Cost of goods sold | $480,000 | |
| Selling expenses | $90,000 | |
| General and administrative expenses | $110,000 | |
| Interest income | $6,000 | |
| Interest expense | $12,000 | |
| Foreign currency transaction gain | $9,000 | |
| Loss from discontinued operations, net of tax | $25,000 | |
| Unrealized gain on available-for-sale debt securities | $14,000 |
Supporting documentation states that the foreign currency transaction gain is from settlement of a non-hedging euro-denominated vendor payable, the discontinued component was disposed of during 20X6, and the available-for-sale debt security gain is reported in other comprehensive income. What amount should Granite report as income from continuing operations before income taxes?
Best answer: B
What this tests: Financial Reporting
Explanation: Income from continuing operations before income taxes includes revenues, expenses, gains, and losses from continuing operations, including the non-hedging foreign currency transaction gain. Discontinued operations and other comprehensive income items are excluded from this subtotal.
In a multi-step income statement, sales revenue is reduced by sales returns to determine net sales. Granite’s net sales are $820,000, gross profit is $340,000 after cost of goods sold, and income from operations is $140,000 after selling and administrative expenses. Other income and expense from continuing operations adds interest income of $6,000 and the foreign currency transaction gain of $9,000, and subtracts interest expense of $12,000, for net other income of $3,000. Therefore, income from continuing operations before income taxes is $143,000. The discontinued operation loss is presented separately after continuing operations, and the available-for-sale debt security gain is reported in other comprehensive income.
Income from continuing operations before taxes is $820,000 net sales less $480,000 COGS and $200,000 operating expenses, plus net other income of $3,000.
Topic: Financial Reporting
Atlas Corp. is an SEC registrant. On May 20, after filing its first-quarter Form 10-Q and before its year-end Form 10-K, Atlas entered into a material definitive agreement that management says required prompt disclosure under the Securities Exchange Act of 1934. A staff accountant is assembling evidence for the filing memo. Which source document best supports the conclusion that Atlas used the Exchange Act form intended to report significant events occurring between periodic reports?
Best answer: C
What this tests: Financial Reporting
Explanation: The best support is the Form 8-K because it is the SEC current report for specified significant events. Forms 10-Q and 10-K are periodic quarterly and annual reports, respectively, and board minutes alone do not show use of the required Exchange Act filing form.
Public companies subject to the Securities Exchange Act of 1934 use different forms for different reporting purposes. Form 10-K is the annual report, generally including audited annual financial statements and related disclosures. Form 10-Q is the quarterly interim report. Form 8-K is a current report used to disclose specified material events, such as entry into certain material agreements, that occur between periodic reporting dates. Because the May 20 agreement occurred after the quarterly filing and before the annual filing, the filed Form 8-K is the source document that directly supports the conclusion.
Form 8-K is the Exchange Act current report used to disclose specified material events between periodic Form 10-Q and Form 10-K filings.
Topic: Financial Reporting
Green Co. is preparing its statement of cash flows for the year ended December 31, 20X4, under U.S. GAAP. The draft line “Purchases of equipment” must be traced to the fixed-asset rollforward and related source extracts.
| Source extract | Amount |
|---|---|
| 20X4 equipment additions recorded in the fixed-asset subledger | $1,450,000 |
| Portion acquired by issuing a note payable to the seller and included in additions | 400,000 |
| Unpaid equipment invoices included in accounts payable at January 1, 20X4, and paid during 20X4 | 90,000 |
| Unpaid equipment invoices included in accounts payable at December 31, 20X4 | 220,000 |
There were no other noncash equipment transactions, and all listed amounts are material. How should the equipment activity be presented in Green’s 20X4 statement of cash flows?
Best answer: B
What this tests: Financial Reporting
Explanation: The statement of cash flows reports cash paid, not total accrual-basis additions from the fixed-asset subledger. Tracing to the payable and seller-note extracts gives a $920,000 investing outflow, while the $400,000 seller note and $220,000 unpaid current-year invoices are noncash acquisitions.
Purchases of property and equipment are investing activities when cash is paid. The fixed-asset rollforward shows total additions of $1,450,000, but that total includes noncash activity and excludes cash paid for prior-year equipment invoices. Green should subtract the $400,000 equipment acquired by issuing a note and the $220,000 current-year equipment invoices still unpaid at year-end. Green should add the $90,000 beginning unpaid equipment invoices that were paid during 20X4 because those payments used current-year cash to acquire equipment. The investing cash outflow is therefore $920,000. Significant noncash equipment acquisitions, including the seller note and current-year unpaid invoices, should be disclosed separately rather than included in the cash flow sections.
Cash paid for equipment is $1,450,000 minus the $400,000 seller note minus the $220,000 ending unpaid invoices plus the $90,000 beginning unpaid invoices paid during the year.
Topic: Financial Reporting
Riverton County issued general obligation bonds to finance construction of a new courthouse. The bond proceeds may be used only for courthouse construction. The county also levied a separate property tax that is legally restricted for future principal and interest payments on the bonds. The courthouse will be used by county departments and will not charge user fees. Which fund or funds should the county use to record these activities in its governmental fund financial statements?
Best answer: B
What this tests: Financial Reporting
Explanation: The courthouse construction and the bond repayment are two different governmental fund purposes. Restricted bond proceeds for constructing a major capital facility belong in a capital projects fund, while legally restricted tax resources for principal and interest belong in a debt service fund.
Governmental funds are selected based on the purpose of the resources and activity. A capital projects fund is used to account for financial resources restricted, committed, or assigned to acquire or construct major capital facilities, such as a courthouse, unless the activity belongs in a proprietary or fiduciary fund. Separately, a debt service fund is used to account for resources restricted, committed, or assigned for principal and interest payments on governmental long-term debt. The courthouse will serve county departments and will not charge user fees, so it is not an enterprise fund activity.
Capital projects funds account for resources restricted for major capital facilities, while debt service funds account for resources restricted for governmental debt principal and interest.
Topic: Financial Reporting
The controller of River Clinic, a nongovernmental not-for-profit, is reviewing a draft prepared from a for-profit financial statement template. On December 20, 20X6, River received an unconditional $600,000 cash contribution under a donor letter requiring the cash to be used only to construct a new clinic wing. No construction costs were incurred before year-end. Which correction should the controller make for River’s 20X6 financial statements?
Best answer: C
What this tests: Financial Reporting
Explanation: River received an unconditional contribution, so revenue is recognized when received or promised. Because the donor restricted the cash for constructing a long-lived asset and River has not satisfied the restriction, the revenue is presented with donor restrictions and the cash receipt is a financing inflow.
A nongovernmental not-for-profit does not use a for-profit income statement or equity presentation. It reports revenues, expenses, gains, and losses in a statement of activities using net asset classes: with donor restrictions and without donor restrictions. An unconditional donor-restricted contribution is recognized as contribution revenue when received, not deferred as a liability merely because the purpose has not yet been fulfilled. Cash receipts from contributions restricted by donors for acquiring, constructing, or improving long-lived assets are classified as financing activities in the statement of cash flows. Since no construction costs were incurred by year-end, the restriction remains and should also be reflected in donor-restricted net asset disclosures.
An unconditional contribution restricted for long-term construction is revenue with donor restrictions and a financing cash inflow for a nongovernmental not-for-profit.
Topic: Financial Reporting
A staff accountant is drafting a classified balance sheet for Lark Co., a for-profit entity, at December 31, Year 1. Selected adjusted trial balance accounts and supporting documentation are as follows:
| Account | Debit (credit) |
|---|---|
| Cash | $40,000 |
| Accounts receivable | 150,000 |
| Allowance for credit losses | (8,000) |
| Inventory | 210,000 |
| Prepaid insurance | 24,000 |
| Equipment, net | 500,000 |
| Accounts payable | (95,000) |
| Note payable | (180,000) |
| Customer advances | (36,000) |
Supporting documentation indicates that the prepaid insurance covers January 1 through December 31, Year 2; $60,000 of the note payable is due in Year 2 and the remainder is due in Year 5; and $30,000 of customer advances will be earned in Year 2, with the remainder earned in Year 3. What should Lark report as total current assets and total current liabilities?
Best answer: B
What this tests: Financial Reporting
Explanation: Lark should classify assets expected to be used or realized within one year as current and liabilities due or earned within one year as current. Accounts receivable are reported net of the allowance, and only the current portions of the note payable and customer advances are current liabilities.
A classified balance sheet separates current and noncurrent items based on expected realization, use, settlement, or earning within one year or the operating cycle. Current assets are cash of $40,000, accounts receivable net of the $8,000 allowance ($142,000), inventory of $210,000, and prepaid insurance of $24,000 because it benefits Year 2. Total current assets are $416,000. Current liabilities are accounts payable of $95,000, the $60,000 note principal due in Year 2, and $30,000 of customer advances to be earned in Year 2. Total current liabilities are $185,000.
Current assets include cash, net receivables, inventory, and the Year 2 prepaid insurance, while current liabilities include accounts payable, the current portion of the note, and the Year 2 customer advances.
Topic: Financial Reporting
A nongovernmental not-for-profit entity receives a $150,000 cash gift on December 20, Year 1. The signed donor letter states that the gift must be used only to purchase medical equipment for a community clinic. The gift is unconditional, no amounts are refundable to the donor, and no equipment has been purchased by December 31, Year 1. How should this gift affect the entity’s December 31, Year 1 statement of financial position?
Best answer: D
What this tests: Financial Reporting
Explanation: The gift is unconditional, so the not-for-profit recognizes the cash received as an asset. Because the donor limited its use to purchasing medical equipment and that purpose has not yet been met, the related net assets are classified as with donor restrictions at year-end.
For a nongovernmental not-for-profit, an unconditional contribution is recognized when received or promised. A donor-imposed restriction affects the classification of net assets, not whether the cash is an asset. Here, the donor imposed a purpose restriction: the gift must be used only to purchase medical equipment. Since no equipment was purchased by December 31, the restriction has not been satisfied. Therefore, the statement of financial position should include the $150,000 cash in assets and the same amount in net assets with donor restrictions. A liability would be appropriate only if the transfer were conditional or refundable, which the facts specifically rule out.
The donor-imposed purpose restriction remains unmet at year-end, so the unconditional contribution increases assets and net assets with donor restrictions.
Topic: Financial Reporting
A CPA is drafting year-end financial statements for a small private company that uses the cash basis of accounting as a special purpose framework. The statement being titled will present only cash collected from customers and cash paid for operating costs during the year. Which title is most appropriate for this statement?
Best answer: C
What this tests: Financial Reporting
Explanation: Special purpose framework financial statements should use titles that clearly describe the basis of accounting used. Because the statement presents only cash collected and cash paid, “Statement of Cash Receipts and Disbursements” is the most appropriate title.
When financial statements are prepared under a special purpose framework, the statement titles should be suitably descriptive and should not imply that the statements are prepared under accrual-basis U.S. GAAP. For a cash-basis presentation of activity, the financial statement commonly focuses on cash receipts and cash disbursements rather than revenues earned and expenses incurred. The title should therefore communicate the cash-basis nature of the information presented.
This title describes the cash-basis activity presented and avoids implying accrual-basis U.S. GAAP reporting.
Topic: Financial Reporting
A public company preparing its annual income statement reports net income of $1,125,000. Preferred dividends declared and paid for the year were $75,000, and weighted-average common shares outstanding were 300,000. The company has no potentially dilutive securities. How should the company present basic earnings per share for the year?
Best answer: B
What this tests: Financial Reporting
Explanation: Basic EPS is computed using income available to common shareholders. The numerator is net income less preferred dividends, or $1,050,000, divided by 300,000 weighted-average common shares, resulting in $3.50 per common share.
For a public company, basic earnings per share is presented as a per-common-share amount. The basic EPS numerator is income available to common shareholders, which is net income reduced by preferred dividends for the period. Here, $1,125,000 of net income less $75,000 of preferred dividends equals $1,050,000. Dividing $1,050,000 by 300,000 weighted-average common shares gives basic EPS of $3.50. Because the company has no potentially dilutive securities, the facts do not support presenting a separate diluted EPS amount based on conversion or exercise assumptions.
Basic EPS equals net income reduced by preferred dividends, divided by weighted-average common shares outstanding.
Use the CPA FAR Practice Test page for the full practice route, mixed-topic practice, timed mock exams, and explanations.
Read the CPA FAR guide on CPAExamsMastery.com, then return to Mastery Exam Prep for timed practice.