CPA — Financial Accounting & Reporting (FAR) [Core] practice questions and exam guide

SEC Regulation S-X primarily governs:

1. The content of MD&A and other narrative disclosures accompanying the statements
2. The form and content of financial statements filed with the SEC, and the schedules
3. Reconciliation of non-GAAP measures to the most comparable GAAP measure
4. State blue-sky registration and qualification requirements for securities offerings

Answer: B — The form and content of financial statements filed with the SEC, and the schedules

B) correct - Regulation S-X prescribes what financial statements and schedules a filing must contain and the form they take. A) Narrative items such as MD&A are the province of Regulation S-K. C) Non-GAAP reconciliation is governed by Regulation G. D) Blue-sky rules are state law, outside the SEC's own filing regulations.

The primary purpose of the Management's Discussion and Analysis (MD&A) section in an SEC filing is to:

1. The audited financial statements and the accompanying auditor's report themselves
2. A substitute for the GAAP footnote disclosures otherwise required in the filing
3. Management's narrative view of financial condition, results, and known trends
4. Related party transactions and other disclosures required by ASC 850, in narrative form

Answer: C — Management's narrative view of financial condition, results, and known trends

C) correct - MD&A shows the company through management's eyes, covering operations, liquidity, capital resources, and known trends and uncertainties. A) The statements and audit report appear in their own section of the filing. B) MD&A supplements the footnotes; it does not displace them. D) Related party disclosure is one footnote topic, far narrower than MD&A's scope.

The AICPA CPA FAR exam blueprint allocates the largest weighting to:

1. Conceptual framework and standard-setting environment topics primarily
2. Not-for-profit accounting standards and reporting matters primarily
3. State and local government accounting standards and reporting only
4. Select balance sheet accounts and select transactions collectively

Answer: D — Select balance sheet accounts and select transactions collectively

A) Conceptual framework is a smaller weighting. B) NFP is embedded within other areas. C) SLG is 5-15%. D) Correct - transactions and balance sheet accounts collectively dominate.

The FASB standard-setting process typically includes:

1. Discussion paper, exposure draft, public comment, and final ASU
2. Direct issuance of standards with no public comment period given
3. Regulatory approval by the SEC before any exposure draft is issued
4. Congressional approval of all new accounting standards before use

Answer: A — Discussion paper, exposure draft, public comment, and final ASU

A) Correct - FASB due process moves from agenda decision through public deliberation and comment to a final Accounting Standards Update. B) Public comment is a defining feature of due process. C) The SEC recognizes FASB as the standard setter but does not clear drafts. D) Congress does not vote on accounting standards.

For interim periods under ASC 740, income tax expense on ordinary income is computed using:

1. The estimated annual effective tax rate applied to year-to-date income
2. The prior year's actual effective tax rate applied to current YTD income
3. The statutory tax rate applied to interim book income only for period
4. The stand-alone quarterly rate with no annual estimation performed

Answer: A — The estimated annual effective tax rate applied to year-to-date income

A) Correct - AETR times YTD income. B) Prior-year rates ignore current forecasts. C) Statutory rate ignores differences. D) Interim tax uses a YTD estimate.

Under ASC 220, comprehensive income may be presented in:

1. The notes to the financial statements only, not on the face of statements
2. A single continuous statement or two consecutive statements
3. The statement of stockholders' equity as its sole presentation location
4. A separately issued supplementary schedule outside the annual report

Answer: B — A single continuous statement or two consecutive statements

A) A formal statement is required. B) Correct - both formats are permitted. C) Stockholders' equity is not the required presentation. D) A supplementary schedule alone is insufficient.

Which of the following is an example of a non-GAAP financial measure commonly reconciled under SEC Regulation G?

1. Adjusted EBITDA excluding stock compensation and restructuring charges
2. Net income as presented on the face of the audited income statement
3. Total assets as presented on the audited consolidated balance sheet
4. Basic earnings per share computed under the GAAP EPS requirements

Answer: A — Adjusted EBITDA excluding stock compensation and restructuring charges

A) correct - it starts from a GAAP result and removes items management considers non-representative, which is what makes it a non-GAAP measure needing reconciliation. B) Reported net income is itself the GAAP benchmark. C) Total assets as reported is a GAAP balance sheet figure. D) Basic EPS computed under GAAP is a required GAAP disclosure.

Basic EPS excludes the effect of which of the following?

1. Preferred dividends declared to preferred shareholders during year
2. Weighted-average common shares outstanding during the year
3. Convertible bonds and options not yet exercised at year-end
4. Net income available to common shareholders during the year

Answer: C — Convertible bonds and options not yet exercised at year-end

A) Preferred dividends are subtracted from the numerator. B) Weighted-average is the denominator. C) Correct - potential dilutive securities enter diluted EPS. D) That is the numerator of basic EPS.

Under U.S. GAAP, goodwill acquired in a business combination by a public company is:

1. Tested for impairment at least annually and not amortized
2. Amortized straight-line over a maximum 40-year useful life
3. Amortized straight-line over a maximum 10-year useful life
4. Written off entirely at the acquisition date as an expense

Answer: A — Tested for impairment at least annually and not amortized

A) Correct - public companies test annually and on triggering events. B) The 40-year rule was replaced by ASC 350. C) That is the private-company alternative, not the public rule. D) Immediate write-off would misrepresent acquired synergies.

An entity reports income from continuing operations, a loss from discontinued operations, and other comprehensive income items, all within the same reporting period. The purpose of intraperiod tax allocation under ASC 740 is to:

1. Allocate the period's total tax expense among continuing operations, discontinued operations, and OCI
2. Allocate the current tax provision between the federal jurisdiction and the various state jurisdictions
3. Allocate deferred tax assets and liabilities between current and noncurrent balance sheet captions
4. Allocate the consolidated group's tax liability among members for intercompany transactions

Answer: A — Allocate the period's total tax expense among continuing operations, discontinued operations, and OCI

A) correct - intraperiod allocation spreads the period's total tax provision across continuing operations, discontinued operations, OCI, and other components so each bears its associated tax effect, rather than dumping all tax expense into continuing operations. B) allocating tax between federal and state jurisdictions is a separate concept from intraperiod allocation, which is about financial statement components, not taxing jurisdictions. C) balance sheet current/noncurrent classification of deferred taxes is a different topic (and under current guidance, deferred taxes are classified entirely as noncurrent) unrelated to intraperiod allocation. D) allocating tax liability among group members for intercompany transactions is a tax-sharing/consolidated-return topic, not what intraperiod allocation addresses.

Under U.S. GAAP, most inventory (excluding LIFO/retail) is measured at:

1. Cost only, with no reduction for market conditions permitted
2. Lower of cost or net realizable value under ASU 2015-11
3. Fair market value with revaluation upward if appropriate reflected
4. Replacement cost minus the normal profit margin at all times

Answer: B — Lower of cost or net realizable value under ASU 2015-11

A) Write-downs are required, not prohibited. B) Correct - LCNRV for non-LIFO/retail inventory. C) Upward revaluation is not permitted. D) Old LCM formulas do not apply.

Which of the following costs is explicitly excluded from the scope of ASC 420 and instead accounted for as incurred under other applicable GAAP?

1. One-time employee termination benefits associated with a restructuring not covered by an ongoing benefit arrangement
2. Costs to terminate a contract that is not a capital lease, before the end of its term
3. Costs associated with a business combination, which are addressed under ASC 805 rather than ASC 420
4. Other associated exit or disposal costs, such as costs to consolidate facilities or relocate employees

Answer: C — Costs associated with a business combination, which are addressed under ASC 805 rather than ASC 420

A) one-time termination benefits meeting ASC 420's specific criteria fall squarely within its scope. B) contract termination costs (for non-capital-lease contracts) are one of the cost types ASC 420 explicitly addresses. C) correct - exit/disposal costs incurred in connection with a business combination are scoped out of ASC 420 and instead accounted for under the acquisition accounting guidance in ASC 805. D) facility consolidation and employee relocation costs are examples of "other associated costs" explicitly within ASC 420's scope.

A cash flow hedge's effective portion is initially recognized in:

1. Current-period earnings as an ordinary gain or loss on the derivative
2. Retained earnings directly, bypassing the income statement entirely
3. Other comprehensive income, reclassified when earnings are affected
4. The carrying amount of the hedged item as a basis adjustment made

Answer: C — Other comprehensive income, reclassified when earnings are affected

C) Correct - the effective portion sits in OCI until the hedged forecasted transaction affects earnings, then is recycled. A) Immediate earnings recognition describes a fair value hedge. B) Nothing may be posted straight to retained earnings. D) Adjusting the hedged item's basis is the fair value hedge mechanic.

When an investor pays the final installment on a stock subscription receivable and shares are issued, the entity should:

1. Eliminate the contra-equity receivable and record the shares as issued and outstanding
2. Recognize a gain equal to the final installment collected on settling the receivable
3. Record the installment proceeds as revenue in the period the final payment is made
4. Keep the shares classified as subscribed but unissued until the certificates are retired

Answer: A — Eliminate the contra-equity receivable and record the shares as issued and outstanding

A) correct - full payment removes the contra-equity balance and completes the share issuance, so the shares join issued and outstanding counts. B) Collecting from a shareholder on a capital transaction produces no income statement gain. C) Share proceeds are contributed capital, not revenue from operations. D) Continuing subscribed-but-unissued treatment after full payment misstates shares outstanding.

In a bargain purchase where the acquiree is not wholly owned, the resulting gain recognized at the acquisition date is:

1. Allocated between the acquirer and the noncontrolling interest in proportion to their respective ownership percentages
2. Allocated entirely to the noncontrolling interest, since NCI is measured based on identifiable net assets
3. Deferred until the noncontrolling interest is subsequently acquired in a step acquisition
4. Attributed entirely to the acquirer (the parent), not shared with or allocated to the noncontrolling interest

Answer: D — Attributed entirely to the acquirer (the parent), not shared with or allocated to the noncontrolling interest

A) the bargain purchase gain is not split pro rata with NCI; it is specifically attributed to the acquirer. B) allocating the entire gain to NCI would be backwards - the gain, when it exists, belongs to the acquirer under the guidance. C) there is no requirement to defer this gain until a future step acquisition of the remaining NCI; it is recognized at the current acquisition date. D) correct - a bargain purchase gain is recognized by, and attributed entirely to, the acquirer, even when the acquiree is not wholly owned and a noncontrolling interest exists.

Parent sells a piece of equipment to Subsidiary at a gain, and Subsidiary depreciates the equipment over its remaining useful life. In consolidation, the elimination of this intercompany gain and its effect on depreciation expense is:

1. A one-time elimination in the year of sale, with no adjustment required in any later year
2. Elimination of the gain in the year of sale, then annual removal of the excess depreciation
3. Permanent exclusion from the consolidated statements, with no catch-up in any future year
4. Recognition of the entire eliminated gain when the asset is eventually retired or disposed of

Answer: B — Elimination of the gain in the year of sale, then annual removal of the excess depreciation

A) intercompany equipment sales with a gain require ongoing adjustments in subsequent years too, because Subsidiary's higher (marked-up) basis produces excess depreciation each year the asset remains in use - a one-time, sale-year-only elimination is incomplete. B) correct - after eliminating the unrealized gain in the sale year, each subsequent year's consolidated depreciation must be adjusted downward to reflect Parent's original cost basis, since Subsidiary's book depreciation (based on the inflated transfer price) overstates depreciation expense from the consolidated entity's perspective. C) the adjustment is not simply excluded once and forgotten; it recurs annually until the asset is fully depreciated or disposed of outside the group. D) the elimination is spread over the asset's remaining useful life through the annual depreciation adjustment, not concentrated entirely at final retirement.

Under GASB 87, short-term leases (maximum possible term, including options, of 12 months or less at commencement) are:

1. Recognized like other leases, with a lease asset and lease liability
2. Prohibited, since governments must contract for at least twelve months
3. Measured at the present value of payments, but over a shorter term
4. Reported as outflows of resources per the contract's payment provisions

Answer: D — Reported as outflows of resources per the contract's payment provisions

D) correct - the short-term exception replaces capitalization with recognition of outflows as the contract requires payment. A) The exception exists precisely to avoid that treatment. B) Nothing prohibits short-term leasing. C) The present-value model is skipped entirely, not compressed.

A government receives a grant with purpose restrictions but no time requirements. Under GASB 33/34, resources received before all other eligibility requirements are met should be reported by the recipient as:

1. Revenue on receipt of the cash, regardless of the eligibility requirements
2. A reduction of the expenditures of the period in which the cash arrives
3. An extraordinary item presented in the government-wide activities statement
4. A liability, or deferred inflow if applicable, until eligibility is met

Answer: D — A liability, or deferred inflow if applicable, until eligibility is met

D) correct - resources received before eligibility requirements are satisfied are not yet earned, so they are carried as an obligation to the provider until they are. A) Recognizing revenue on receipt anticipates requirements not yet met. B) Netting against expenditures hides both the resource and the obligation. C) Extraordinary item treatment does not apply to grant timing.

Under ASU 2016-14, a not-for-profit reports net assets in how many classifications?

1. Four: general, restricted, endowment, and board-designated
2. Three: unrestricted, temporarily restricted, and permanently restricted
3. Two: with donor restrictions and without donor restrictions
4. One combined net asset amount without further breakdown

Answer: C — Two: with donor restrictions and without donor restrictions

A) Those mix restrictions with designations. B) Three classes was the pre-2016-14 model. C) Correct - ASU 2016-14 simplified NFP net assets to two classes. D) A single classification would eliminate donor restriction disclosure.

Which of the following would NOT typically be reported in a capital projects fund?

1. Bond proceeds designated for constructing a new library building
2. A federal grant restricted to funding a bridge replacement project
3. A transfer from the general fund earmarked for a park construction project
4. Annual appropriations for ongoing road resurfacing and pothole repair

Answer: D — Annual appropriations for ongoing road resurfacing and pothole repair

A) Bond proceeds for constructing a building are a classic capital projects fund resource. B) A grant restricted to a discrete capital project also fits capital projects fund accounting. C) A transfer earmarked for a specific construction project is properly reported there. D) correct - ongoing, routine maintenance like resurfacing/pothole repair is an operating expenditure, generally reported in the general fund or a special revenue fund, not major capital facility construction.

Under ASU 2016-14, an NFP's net assets are classified as:

1. Restricted, temporarily restricted, and permanently restricted assets
2. With donor restrictions and without donor restrictions collectively
3. Board-designated, endowment, and general operating assets
4. Current, noncurrent, and permanent equity components collectively

Answer: B — With donor restrictions and without donor restrictions collectively

A) That is the pre-2016-14 three-class model. B) Correct - the current two-class model. C) Board designations sit within without-donor-restrictions. D) Those are commercial categories.

In a split-interest agreement where a not-for-profit is the trustee, changes in the value of trust assets and revised actuarial assumptions about the life-income beneficiary's payments are recognized as:

1. An adjustment to contribution revenue in the year the trust agreement terminates
2. Change in the value of split-interest agreements in the statement of activities
3. A direct adjustment of net assets without donor restrictions, bypassing activities
4. A note disclosure only, deferred until the trust is settled with the beneficiary

Answer: B — Change in the value of split-interest agreements in the statement of activities

B) correct - both the trust assets and the beneficiary liability are remeasured each period, and the net effect is reported in the statement of activities. A) Deferring the true-up to termination leaves every interim period stale. C) Adjusting net assets directly would bypass the statement that reports the change. D) Disclosure without recognition understates the reported obligation and interest.

An NFP's spending policy allows appropriation from an endowment fund based on a percentage of a trailing multi-year average fair value (a 'total return' spending approach). This spending policy is:

1. A permissible application of UPMIFA's prudence standard, subject to donor restrictions
2. Prohibited by UPMIFA, which limits spending to current-year realized investment income
3. Without effect on net asset classification or on the required endowment disclosures
4. A change in accounting principle to be reported whenever the averaging period changes

Answer: A — A permissible application of UPMIFA's prudence standard, subject to donor restrictions

A) correct - a total-return rate applied to a smoothed multi-year value is a common way to exercise the prudence judgment the statute calls for. B) Confining spending to current realized income describes the older regime UPMIFA replaced. C) The spending policy must be disclosed and interacts with appropriation of restricted amounts. D) Applying an established formula is not a change in accounting principle.

Under ASU 2020-07, contributed nonfinancial assets are measured for recognition purposes at:

1. Fair value, the measurement basis for contributions that the standard left unchanged
2. The donor's adjusted tax basis in the asset immediately before the contribution
3. The lower of the donor's original cost and the recipient's estimated resale value
4. Net realizable value, based on the proceeds the organization expects on disposal

Answer: A — Fair value, the measurement basis for contributions that the standard left unchanged

A) correct - the standard changed presentation and disclosure only; contributed nonfinancial assets are still recognized at fair value. B) The donor's tax basis is not a GAAP measurement for the recipient. C) A lower-of-cost-or-resale rule does not exist for contributions. D) Expected disposal proceeds do not set the initial recognition amount.

Sale-leaseback under ASC 842 — first step in the analysis?

Apply ASC 606's control-transfer criteria to determine whether a qualifying sale occurred, before separately evaluating the leaseback's classification.

Acquisition method?

Required for business combinations. Recognize assets and liabilities at fair value. Goodwill = excess over net assets.

Conditions for equity classification of a stock warrant (ASC 815-40)?

Indexed to the issuer's own stock (fixed-for-fixed) and no requirement for net cash settlement.

Modified accrual basis?

Used by govt funds. Revenue when measurable + available. Expenditures when incurred.

What is the discount on a noninterest-bearing note, and how is it treated?

The difference between face amount and present value at issuance; it's amortized to interest income/expense over the note's term using the effective interest method.

Presentation of unusual/infrequent items today?

Included within income from continuing operations on a pretax basis, with separate disclosure of nature and amount (no extraordinary treatment).