CPA Exam — Financial Accounting and Reporting (FAR) — All Questions

On December 31, Year 1, Kestrel Co. owes a $500,000 note payable due March 1, Year 2. On January 20, Year 2, before its Year 1 financial statements are issued, Kestrel issues $500,000 of five-year bonds and uses the proceeds to repay the note when due. How should the note be reported in Kestrel's December 31, Year 1 balance sheet?

• a.As a noncurrent liability, with the refinancing disclosed✓
• b.As a current liability, with the refinancing disclosed only
• c.As a current liability, because it matures within one year
• d.Split equally between current and noncurrent liabilities

ASC 470-10-45-14 lets a short-term obligation be excluded from current liabilities when, after the balance sheet date but before the statements are issued, the entity actually issues a long-term obligation to refinance it; ASC 470-10-50-4 then requires disclosure of the refinancing. Keeping the note in current liabilities ignores that exception, whether or not the refinancing is disclosed. Nothing in the guidance splits the note into equal halves; the amount excluded is the amount actually refinanced, here all $500,000.

Bramble Co.'s December 31 trial balance includes: cash $40,000; accounts receivable, net $65,000; inventory $90,000; prepaid insurance covering the next 12 months $6,000; cash restricted for a plant expansion scheduled in three years $25,000; and an investment in bonds maturing in four years $30,000. What amount should Bramble report as total current assets?

• a.$226,000
• b.$231,000
• c.$201,000✓
• d.$195,000

Current assets are cash and other resources reasonably expected to be realized or consumed within one year or the operating cycle (ASC 210-10-45-1): $40,000 + $65,000 + $90,000 + $6,000 = $201,000. Including the cash restricted for a plant expansion gives $226,000, but ASC 210-10-45-4 excludes cash segregated for the acquisition of noncurrent assets. Omitting the prepaid insurance gives $195,000, yet prepaid expenses consumed within a year are current. Adding the four-year bond investment gives $231,000, but it will not be realized within a year.

During Year 1, Lark Corp. committed to and completed the sale of its entire restaurant segment, a disposal that represents a strategic shift with a major effect on its operations. The segment's Year 1 operating loss was $300,000 and the loss on disposal was $100,000. Lark's income tax rate is 25%. What should Lark report as loss from discontinued operations, net of tax?

• a.$225,000
• b.$300,000✓
• c.$75,000
• d.$400,000

A component disposal that represents a strategic shift is reported in discontinued operations (ASC 205-20-45-1B), and both the component's operating results and the loss on disposal are reported there net of tax (ASC 205-20-45-3): ($300,000 + $100,000) x (1 - 0.25) = $300,000. $400,000 is the pretax amount. $225,000 nets tax on the operating loss but leaves out the disposal loss, and $75,000 is the after-tax disposal loss alone.

On November 15, Year 1, Pell Co., whose functional currency is the U.S. dollar, bought inventory from a German supplier for EUR 100,000, payable January 15, Year 2. Spot rates were $1.10 per euro on November 15, $1.14 on December 31, and $1.12 on January 15. What foreign currency transaction gain or loss should Pell recognize in Year 1 net income?

• a.$2,000 loss
• b.No gain or loss until settlement
• c.$4,000 loss✓
• d.$4,000 gain

Under ASC 830-20-35-1, a payable denominated in a foreign currency is remeasured at each balance sheet date and the change is a transaction gain or loss in net income. The payable grows from $110,000 (100,000 x $1.10) to $114,000 (100,000 x $1.14), a $4,000 loss because Pell now owes more dollars; it would be a gain only for a euro receivable. The $2,000 figure is the Year 2 movement from $1.14 to $1.12 (a gain in Year 2), and deferring everything to settlement is not permitted.

Which of the following items is reported in other comprehensive income rather than in net income?

• a.Unrealized holding gain on a trading debt security
• b.Unrealized holding gain on an available-for-sale debt security✓
• c.Unrealized holding gain on an investment in listed common stock
• d.Foreign currency transaction gain on a euro-denominated payable

ASC 320-10-35-1 reports unrealized holding gains and losses on available-for-sale debt securities in other comprehensive income. Equity securities with readily determinable fair values are measured at fair value through net income (ASC 321-10-35-1), trading debt securities' unrealized gains go to earnings (ASC 320-10-35-1), and foreign currency transaction gains are included in net income (ASC 830-20-35-1).

For Year 1, Nimbus Co. reports net income of $250,000, an unrealized holding loss on available-for-sale debt securities of $30,000 (net of tax), and a foreign currency translation gain of $12,000 (net of tax). What is Nimbus's comprehensive income for Year 1?

• a.$292,000
• b.$232,000✓
• c.$250,000
• d.$268,000

Comprehensive income is net income plus other comprehensive income (ASC 220-10-45-1): $250,000 - $30,000 + $12,000 = $232,000. $268,000 reverses the signs of both OCI items, $250,000 is net income alone, and $292,000 treats the holding loss as a gain.

Heron Co.'s retained earnings were $800,000 on January 1, Year 1, as previously reported. During Year 1, Heron found that Year 0 depreciation had been understated by $20,000 (pretax); its tax rate is 25%. Year 1 net income, correctly stated, was $150,000, and cash dividends of $40,000 were declared. Heron presents only Year 1 statements. What is Heron's December 31, Year 1 retained earnings balance?

• a.$895,000✓
• b.$890,000
• c.$910,000
• d.$950,000

An error in prior-period statements is a prior-period adjustment to opening retained earnings, net of tax (ASC 250-10-45-23): $800,000 - $15,000 ($20,000 x 0.75) = $785,000 restated; plus $150,000 net income less $40,000 dividends = $895,000. $910,000 ignores the correction, $890,000 uses the pretax $20,000, and $950,000 ignores both the correction and the dividends.

Quill Co. reports Year 1 net income of $120,000. Depreciation expense was $30,000, a gain on the sale of equipment was $8,000, accounts receivable increased by $15,000, inventory decreased by $10,000, and accounts payable decreased by $6,000. Using the indirect method, what is net cash provided by operating activities?

• a.$139,000
• b.$153,000
• c.$131,000✓
• d.$147,000

Under the indirect method (ASC 230-10-45-28), start with net income, add back noncash depreciation, subtract the gain (the proceeds are investing cash), subtract the receivable increase, add the inventory decrease, and subtract the payable decrease: $120,000 + $30,000 - $8,000 - $15,000 + $10,000 - $6,000 = $131,000. $147,000 adds the gain instead of subtracting it, $153,000 reverses all three working-capital signs, and $139,000 leaves the gain in.

Under U.S. GAAP, how should a for-profit entity classify cash paid for interest on its bonds and cash dividends paid to its own shareholders in the statement of cash flows?

• a.Interest paid: operating; dividends paid: financing✓
• b.Interest paid: financing; dividends paid: operating
• c.Interest paid: financing; dividends paid: financing
• d.Interest paid: operating; dividends paid: operating

ASC 230-10-45-17 lists cash payments to lenders for interest as operating cash outflows, and ASC 230-10-45-15 lists payments of dividends to owners as financing cash outflows. Classifying interest as financing, or dividends paid as operating, follows IFRS-style choices that U.S. GAAP does not allow here.

During Year 1, Ridge Co. sold equipment with a carrying amount of $40,000 for $52,000 cash, bought new equipment for $90,000 cash, paid $60,000 cash for a 30% equity interest in another company, and paid a $15,000 cash dividend. What is Ridge's net cash used in investing activities?

• a.$113,000
• b.$98,000✓
• c.$110,000
• d.$38,000

Investing cash flows include proceeds from selling productive assets and payments to acquire them and to acquire equity interests in other entities (ASC 230-10-45-12 and 45-13): $52,000 - $90,000 - $60,000 = -$98,000. $113,000 wrongly includes the dividend, which is financing. $110,000 uses the equipment's carrying amount rather than the cash received, and $38,000 omits the equity investment.

A for-profit entity chooses the direct method to report operating cash flows. What must it also provide?

• a.A separate schedule of cash receipts from each major customer
• b.A reconciliation of net income to net cash flow from operating activities✓
• c.Nothing further, because the direct method replaces the reconciliation
• d.A reconciliation of cash and cash equivalents to working capital

ASC 230-10-45-30 requires an entity that uses the direct method to also provide a reconciliation of net income to net cash flow from operating activities, which is the same computation the indirect method presents. Customer-by-customer receipts schedules and working-capital reconciliations are not required, and the direct method does not remove the reconciliation requirement.

On January 1, Year 1, Pine Corp. acquired 80% of Shore Co.'s voting stock for $640,000 cash. The fair value of the 20% noncontrolling interest was $160,000. Shore's identifiable net assets had a book value of $600,000 and a fair value of $700,000. What goodwill should appear in Pine's consolidated balance sheet?

• a.$100,000✓
• b.$200,000
• c.$80,000
• d.$40,000

ASC 805-30-30-1 measures goodwill as consideration transferred plus the fair value of the noncontrolling interest, less the fair value of identifiable net assets: $640,000 + $160,000 - $700,000 = $100,000. $80,000 is the parent's share only ($640,000 - 80% x $700,000), which ignores the full-goodwill model. $200,000 compares with book value rather than fair value, and $40,000 compares the parent's price with total book value.

Pine Corp. acquired 80% of Shore Co. on January 1, Year 1, when the noncontrolling interest's fair value was $160,000. For Year 1, Shore reported net income of $150,000 (no acquisition-date fair value adjustments require amortization) and paid dividends of $50,000. What noncontrolling interest should be reported in consolidated equity at December 31, Year 1?

• a.$190,000
• b.$140,000
• c.$160,000
• d.$180,000✓

The noncontrolling interest starts at its acquisition-date fair value and is then attributed its share of the subsidiary's income and dividends (ASC 810-10-45-16 and ASC 810-10-45-19 to 45-21): $160,000 + 20% x $150,000 - 20% x $50,000 = $180,000. $190,000 omits the dividends to noncontrolling holders, $140,000 starts from 20% of Shore's book value ($120,000) instead of fair value, and $160,000 ignores the year's activity.

During Year 1, Pax Co. sold inventory costing $75,000 to its wholly-owned subsidiary for $100,000. At year-end, the subsidiary still held 40% of those goods. What unrealized profit must be eliminated from consolidated inventory?

• a.$40,000
• b.$25,000
• c.$10,000✓
• d.$15,000

Intra-entity profit on assets still held within the consolidated group is eliminated (ASC 810-10-45-1). Total intra-entity profit is $25,000 ($100,000 - $75,000); 40% of the goods remain, so $10,000 is unrealized. $25,000 eliminates profit on goods already resold to outsiders, $40,000 is 40% of the selling price rather than of the profit, and $15,000 is the profit on the 60% that was resold.

Which item belongs in an entity's summary of significant accounting policies rather than elsewhere in the notes?

• a.The method used to price inventories✓
• b.The dollar amount of depreciation expense for the year
• c.The composition of inventories by raw materials, work in process, and finished goods
• d.The five-year maturity schedule of long-term debt

ASC 235-10-50-4 gives inventory pricing methods as an example of a policy disclosure, alongside depreciation and consolidation bases. ASC 235-10-50-5 says the policy note should not duplicate details presented elsewhere, citing the composition of inventories and the maturity dates of long-term debt as examples. Depreciation expense for the year is an amount, not a policy.

A U.S. registrant enters into a material definitive agreement outside the ordinary course of business. Which Exchange Act report is used to disclose this event, generally within four business days?

• a.Form 10-K
• b.Form 20-F
• c.Form 10-Q
• d.Form 8-K✓

Form 8-K is the current report for specified material events, including Item 1.01 entry into a material definitive agreement, and General Instruction B.1 generally requires filing within four business days. Form 10-Q is the quarterly report, Form 10-K the annual report, and Form 20-F is the annual report for foreign private issuers.

Items 1 through 3 of Part I of Form 10-Q are:

• a.MD&A; controls and procedures; exhibits
• b.Financial statements; MD&A; market risk disclosures✓
• c.Audited financial statements; MD&A; executive compensation
• d.Financial statements; risk factors; legal proceedings

Form 10-Q Part I consists of Item 1 Financial Statements, Item 2 Management's Discussion and Analysis, Item 3 Quantitative and Qualitative Disclosures About Market Risk, and Item 4 Controls and Procedures. Risk factors and legal proceedings are Part II items, the quarterly financial statements are not required to be audited, executive compensation belongs in the annual report or proxy statement, and exhibits are a Part II item.

In Form 10-K, what does Part II, Item 7A require?

• a.Management's discussion and analysis of financial condition
• b.Financial statements and supplementary data
• c.Changes in and disagreements with accountants
• d.Quantitative and qualitative disclosures about market risk✓

Form 10-K Part II, Item 7A calls for quantitative and qualitative disclosures about market risk under Regulation S-K Item 305. Management's discussion and analysis is Item 7 (S-K Item 303), financial statements and supplementary data are Item 8, and changes in and disagreements with accountants are Item 9.

Under the Form 10-K General Instructions, within how many days after its fiscal year-end must a large accelerated filer file its annual report on Form 10-K?

• a.75 days
• b.45 days
• c.60 days✓
• d.90 days

General Instruction A.(2) of Form 10-K sets the deadline at 60 days after fiscal year-end for large accelerated filers, 75 days for accelerated filers, and 90 days for all other registrants. Forty-five days is the Form 10-Q deadline for filers that are not large accelerated or accelerated filers.

Cobalt Corp. reports Year 1 net income of $500,000. It has 10,000 shares of 6%, $100 par cumulative preferred stock outstanding all year; no preferred dividends were declared in Year 1. Common shares outstanding were 100,000 on January 1, and 20,000 more were issued for cash on July 1. What is basic earnings per share for Year 1?

• a.$5.00
• b.$3.67
• c.$4.00✓
• d.$4.55

Income available to common deducts the current-year dividend on cumulative preferred stock whether or not declared (ASC 260-10-45-11): $500,000 - $60,000 = $440,000. Weighted shares are 100,000 + 20,000 x 6/12 = 110,000, so basic EPS is $4.00. $4.55 omits the preferred dividend, $3.67 uses year-end shares (120,000), and $5.00 uses both net income and beginning shares.

Drake Co. had 100,000 common shares outstanding on January 1, Year 1, issued 20,000 shares for cash on April 1, and distributed a 10% stock dividend on December 1. What weighted-average number of shares should Drake use for Year 1 basic EPS?

• a.126,500✓
• b.116,000
• c.115,000
• d.132,000

Shares issued for cash are weighted from their issue date, while a stock dividend is applied retroactively to all shares outstanding before it (ASC 260-10-55-12): (100,000 + 20,000 x 9/12) x 1.10 = 115,000 x 1.10 = 126,500. 115,000 ignores the stock dividend, 132,000 treats all 120,000 shares as outstanding all year, and 116,000 weights the dividend shares only from December 1.

Elm Corp. has 10,000 stock options outstanding all year, each exercisable for one common share at $20. The average market price of Elm's common stock for the year was $25. Using the treasury stock method, how many incremental shares are added to the denominator of diluted EPS?

• a.2,000✓
• b.10,000
• c.8,000
• d.0

Under the treasury stock method (ASC 260-10-45-23), assumed proceeds of $200,000 (10,000 x $20) are used to repurchase shares at the average price: $200,000 / $25 = 8,000. The incremental shares are 10,000 - 8,000 = 2,000. Adding all 10,000 ignores the assumed repurchase, 8,000 is the repurchased amount, and zero would apply only if the options were out of the money (antidilutive).

Fenn Co. reports net income of $400,000 and 100,000 weighted-average common shares. It has $1,000,000 of 6% convertible bonds, issued at par and outstanding all year, convertible into 20,000 common shares. The tax rate is 25%. What is diluted EPS?

• a.$3.71✓
• b.$4.00
• c.$3.33
• d.$3.83

The if-converted method (ASC 260-10-45-40) adds back after-tax interest and adds the conversion shares: interest $60,000 x (1 - 0.25) = $45,000; ($400,000 + $45,000) / (100,000 + 20,000) = $3.71. The bonds are dilutive because $45,000 / 20,000 = $2.25 per incremental share is below basic EPS of $4.00. $3.83 adds back pretax interest, $3.33 adds the shares without the interest, and $4.00 is basic EPS.

Gale Corp. reports net income of $300,000 and declares $30,000 of dividends on its convertible preferred stock. Weighted-average common shares are 90,000, and the preferred stock is convertible into 15,000 common shares. What is diluted EPS?

• a.$2.57
• b.$3.00
• c.$3.33
• d.$2.86✓

Basic EPS is ($300,000 - $30,000) / 90,000 = $3.00. Under the if-converted method (ASC 260-10-45-40), the preferred dividends are not deducted and the conversion shares are added: $300,000 / 105,000 = $2.86; this is dilutive because $30,000 / 15,000 = $2.00 per incremental share is below $3.00. $2.57 adds the shares but still deducts the dividends, $3.00 is basic EPS, and $3.33 adds back the dividends without adding the shares.

A partnership prepares its financial statements on the cash basis of accounting. Which title for its operating statement matches the titles used in the illustrative auditor's reports of AU-C Section 800?

• a.Statement of revenue collected and expenses paid✓
• b.Statement of activities
• c.Statement of revenue and expenses, income tax basis
• d.Statement of comprehensive income

AU-C 800 requires special purpose financial statements to be suitably titled, and its illustrative cash-basis report refers to a statement of assets and liabilities arising from cash transactions and a statement of revenue collected and expenses paid. The income tax basis title belongs to tax-basis statements. Statement of comprehensive income is a GAAP statement, and statement of activities is the GAAP title used by not-for-profit entities.

Opal Co. keeps its records on the cash basis. During Year 1 it collected $500,000 from customers. Accounts receivable were $60,000 at the beginning of the year and $80,000 at the end; unearned revenue was $10,000 at the beginning and $4,000 at the end. There were no write-offs. What is Opal's accrual-basis revenue for Year 1?

• a.$474,000
• b.$520,000
• c.$514,000
• d.$526,000✓

Accrual revenue equals cash collected plus the increase in receivables plus the decrease in unearned revenue: $500,000 + $20,000 + $6,000 = $526,000. The receivable increase is revenue earned but not yet collected; the unearned revenue decrease is revenue earned from cash collected earlier. $474,000 reverses both adjustments, $514,000 treats the unearned revenue decrease as a deduction, and $520,000 omits the unearned revenue change.

Jade Co. has cash $30,000, marketable securities $20,000, accounts receivable $50,000, inventory $80,000, prepaid expenses $10,000, and current liabilities $100,000. What is Jade's quick (acid-test) ratio?

• a.1.90
• b.1.80
• c.1.10
• d.1.00✓

The quick ratio divides cash, marketable securities and receivables by current liabilities: ($30,000 + $20,000 + $50,000) / $100,000 = 1.00. 1.90 is the current ratio (all $190,000 of current assets), 1.80 excludes only the prepaid expenses, and 1.10 wrongly includes prepaid expenses among quick assets.

Kite Co. reports net income of $120,000, income tax expense of $40,000, and interest expense of $20,000. What is Kite's times-interest-earned ratio?

• a.8.0 times
• b.6.0 times
• c.9.0 times✓
• d.7.0 times

Times interest earned is earnings before interest and taxes divided by interest expense: ($120,000 + $40,000 + $20,000) / $20,000 = 9.0. 6.0 uses net income, 8.0 adds back taxes but not interest, and 7.0 adds back interest but not taxes.

Lumen Co. reports net income of $200,000, interest expense of $30,000, income tax expense of $50,000, depreciation of $40,000, and amortization of $10,000. What is Lumen's EBITDA?

• a.$320,000
• b.$250,000
• c.$330,000✓
• d.$280,000

EBITDA adds interest, taxes, depreciation and amortization back to net income: $200,000 + $30,000 + $50,000 + $40,000 + $10,000 = $330,000. $280,000 is EBIT, $320,000 omits amortization, and $250,000 adds back only depreciation and amortization.

Mesa Corp.'s common stock trades at $60 per share. Earnings per share are $4.00 and dividends per share are $1.50. What are Mesa's price-to-earnings ratio and dividend payout ratio?

• a.15.0 and 37.5%✓
• b.40.0 and 37.5%
• c.15.0 and 266.7%
• d.15.0 and 2.5%

Price-to-earnings is $60 / $4.00 = 15.0, and the dividend payout ratio is dividends per share divided by EPS, $1.50 / $4.00 = 37.5%. 2.5% is the dividend yield ($1.50 / $60), 40.0 divides price by dividends per share, and 266.7% inverts the payout ratio ($4.00 / $1.50).

Nova Co. budgeted revenue of $500,000 and expenses of $400,000 for Year 1. Actual revenue was $470,000 and actual expenses were $380,000. What is the net income variance?

• a.$10,000 favorable
• b.$50,000 unfavorable
• c.$10,000 unfavorable✓
• d.$30,000 unfavorable

Budgeted net income is $100,000 and actual net income is $90,000, so the variance is $10,000 unfavorable: a $30,000 unfavorable revenue variance partly offset by a $20,000 favorable expense variance. $30,000 unfavorable is the revenue variance alone, and $50,000 adds the two variances as if both were unfavorable.