FAR Actual Questions Answers PDF 100% Cover Real Exam Questions
FAR Exam questions and answers
Topics of Financial Accounting and Reporting (FAR) Exam
The syllabus for the Financial Accounting and Reporting (FAR) part of the Certified Public Accountant (CPA) Exam can be found in the FAR exam dumps and is also listed below with detail of each area of concern and their topics:
Area 1 - Conceptual Framework, Standard-Setting and Financial Reporting (25-35%)
Objectives covered by this section:
- Financial statements of employee benefit plans
- Income statement/ statement of profit or loss
- Going concerned
- Conceptual framework and standard-setting for business and non-business entities
- Statement of activities
- Statement of financial position
- Statement of cash flows
- Statement of changes in equity
- Discontinued operations
- Statement of comprehensive income
- Consolidated financial statements (including wholly-owned subsidiaries and noncontrolling interests)
- Public company reporting topics (U.S. SEC reporting requirements, earnings per share, and segment reporting)
- Balance sheet/ statement of financial position
- Special purpose frameworks
- Notes to financial statements
Area 2 - Select Financial Statement Accounts (30-40%)
Objectives covered by this section:
- Financial assets at amortized cost
- Revenue recognition
- Trade receivables
- Income taxes
- Long-term debt (financial liabilities)
- Notes and bonds payable
- Stock compensation (share-based payments)
- Debt covenant compliance
- Equity method investments
- Property, plant, and equipment
- Financial assets at fair value
- Intangible assets - goodwill and other
- Equity
- Cash and cash equivalents
- Inventory
- Retirement benefits
Area 3 - Select Transactions (20-30%)
Objectives covered by this section:
- Derivatives and hedge accounting (e.g. swaps, options, forwards)
- Research and development costs
- Accounting changes and error corrections
- Business combinations
- Foreign currency transactions and translation
- Leases
Area IV - State and Local Governments (5-15%)
Objectives covered by this section:
- Budgetary accounting and encumbrances
- Interfund activity, including transfers
- Notes to financial statements
- Other financing sources and uses
- Nonexchange revenue transactions
- Expenditures and expenses
- Net position and components thereof
- State and local government concepts
- Deriving government-wide financial statements and reconciliation requirements
- General and proprietary long-term liabilities
- Budgetary comparison reporting
- Fiduciary funds financial statements
- Governmental funds financial statements
NEW QUESTION 75
Which of the following statements regarding fair value is/are correct?
I. The fair value of an asset or liability is specific to the entity making the fair value measurement.
II. Fair value is the price to acquire an asset or assume a liability.
III. Fair value includes transportation costs, but not transaction costs.
IV. The price in the principal market for an asset or liability will be the fair value measurement.
- A. I & IV
- B. II & III
- C. III & IV
- D. I & II
Answer: C
Explanation:
Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a
market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an
exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "a", "b" and "c"
are incorrect, per the above Explanation: .
NEW QUESTION 76
In 1990, Brighton Co. changed from the individual item approach to the aggregate approach in applying
the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in
Brighton's financial statements as a:
- A. Component of income from continuing operations, without separate disclosure.
- B. Retrospective adjustment on the retained earnings statement, with separate disclosure.
- C. Component of income after continuing operations, with separate disclosure.
- D. Component of income from continuing operations, with separate disclosure.
Answer: B
Explanation:
Choice "a" is correct. A change in the composition of the elements of cost such as changing from the
individual item approach to the aggregate approach in applying the lower of FIFO cost or market to
inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative
effect of the change in accounting principle should now be shown on the retained earnings statement as
an adjustment to the beginning balance of retained earnings, in what is called retrospective application.
Choices "b", "c", and "d" are incorrect. The cumulative effect of a change in accounting principle is now
reported on the retained earnings statement, not the income statement. Most of these types of changes
(changes in accounting principle) used to be reported on the income statement. SFAS No. 154 changed
that.
NEW QUESTION 77
Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its
income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000,
operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll
costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31,
1 991, were $40,000,000.
Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of
Cott's total revenues and total assets as follows:
Which of these business segments are deemed to be reportable segments?
- A. Ebon, Fair, Gel, and Hak.
- B. Ebon, Fair, and Gel only.
- C. Ebon only.
- D. Ebon and Fair only.
Answer: A
Explanation:
Rule: A segment must be at least 10% of:
1 . Combined revenues (whether intersegment or unaffiliated customers), or
2 . Operating income (of all segments not having an operating loss), or
3 . Identifiable assets.
Choice "d" is correct. Ebon, Fair, Gel, and Hak, since all four companies meet at least one of the criteria.
NEW QUESTION 78
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
. Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain.
Fuqua has frequently retired bonds early when interest rates declined significantly.
. A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth
similar loss sustained in a 5-year period at that location.
. A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments.
Before income taxes, what amount of gain (loss) should be reported separately as a component of
income from continuing operations in 1990?
- A. $5,000
- B. $(255,000)
- C. $260,000
- D. $(350,000)
Answer: A
Explanation:
Choice "b" is correct. $5,000.
The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature"
and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported
separately as a component of "income from continuing operations."
The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not
qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).
NEW QUESTION 79
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds
and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions.
Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Assume the
transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently.
Gold should report the:
- A. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond
transaction as an extraordinary loss. - B. Net effect of the two transactions in income before extraordinary items.
- C. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in
income before extraordinary items. - D. Net effect of the two transactions as an extraordinary gain.
Answer: C
Explanation:
Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds
(an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not
a "refinancing" (where one would sell new bond debt to buy back old bond debt outstanding).
The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in
nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp.
transaction is a loss in "income before extraordinary items."
Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted.
Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before
extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the
provisions of APB Opinion No. 30.
NEW QUESTION 80
Which of the following facts concerning fixed assets should be included in the summary of significant
accounting policies?
- A. Option C
- B. Option D
- C. Option B
- D. Option A
Answer: A
Explanation:
Choice "c" is correct. Yes - No.
Yes - "Depreciation methods" should be disclosed in the "summary of significant accounting policies."
No - Composition of fixed assets (or any other account) should not be disclosed in the "summary of
significant accounting policies."
NEW QUESTION 81
On January 2, 20X5, to better reflect the variable use of its only machine, Holly, Inc. elected to change its
method of depreciation from the straight-line method to the units of production method. The original cost
of the machine on January 2, 20X3, was $50,000, and its estimated life was 10 years. Holly estimates that
the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during 20X4 and 3,500
during 20X3.
Holly's income tax rate is 30%. Holly should report the accounting change in its 20X5 financial statements
as a(n):
- A. Cumulative effect of a change in accounting principle of $2,000 in its income statement.
- B. Adjustment to beginning retained earnings of $2,000.
- C. Cumulative effect of a change in accounting principle of $1,400 in its income statement.
- D. None of the above.
Answer: D
Explanation:
Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in
method and a change in estimate. These changes should be accounted for as changes in estimate and
handled prospectively. The new depreciation method should be used as of the beginning of the year of
change and should start with the current book value of the underlying asset. No retroactive or
retrospective calculations should be made, and no adjustment should be made to retained earnings. The
cumulative effect treatment on the income statement was the treatment of most changes in accounting
principle prior to SFAS No. 154. The adjustment to beginning retained earnings is the treatment now
given to changes in accounting principle by SFAS No. 154. However a change in depreciation method is
no longer accounted for as a change in accounting principle. Choices "a", "b", and "c" are incorrect, per
the above Explanation: .
NEW QUESTION 82
A transaction that is unusual, but not infrequent, should be reported separately as a(an):
- A. Extraordinary item, net of applicable income taxes.
- B. Extraordinary item, but not net of applicable income taxes.
- C. Component of income from continuing operations, but not net of applicable income taxes.
- D. Component of income from continuing operations, net of applicable income taxes.
Answer: C
Explanation:
Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a
component of continuing operations, (gross) but not net of applicable income taxes.
Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent."
Choice "c" is incorrect, per "d" above.
NEW QUESTION 83
The following information pertains to Aria Corp. and its divisions for the year ended December 31, 1988:
Aria and all of its divisions are engaged solely in manufacturing operations. Aria has a reportable segment
if that segment's revenue exceeds:
- A. $260,000
- B. $200,000
- C. $264,000
- D. $204,000
Answer: A
Explanation:
Choice "b" is correct. $260,000 represents a reportable segment (10% of total sales):
Rule: To be significant enough to report on, a segment must be at least 10% of:
1 . Combined revenues (whether intersegment or unaffiliated customers), or
2 . Operating income, or
3 . Identifiable assets.
NEW QUESTION 84
In single period statements, which of the following should not be reflected as an adjustment to the
opening balance of retained earnings?
- A. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.
- B. Effect of a failure to provide for uncollectible accounts in the previous period.
- C. Cumulative effect of a change from the percentage of completion to the completed contract method of
accounting for long-term construction projects. - D. Effect of a decrease in the estimated useful life of depreciable equipment.
Answer: D
Explanation:
Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate
handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The
correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The
opening balance of retained earnings would be adjusted to correct the error. Choice "c" is incorrect. This
change is a change in accounting principle and is handled retrospectively. With retrospective application,
the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively.
With retrospective application, the opening balance of retained earnings would be adjusted to reflect the
cumulative effect of the changes.
NEW QUESTION 85
In April 30, 20X4, Deer Corp. approved a plan to dispose of a component of its business. For the period
January 1 through April 30, 20X4, the component had revenues of $500,000 and expenses of $800,000.
The assets of the component were sold on October 15, 20X4 at a loss. In its income statement for the
year ended December 31, 20X4, how should Deer report the component's operations from January 1 to
April 30, 20X4?
- A. $300,000 should be reported as an extraordinary loss.
- B. $300,000 should be reported as a loss from operations of a component and included in loss from
discontinued operations. - C. $300,000 should be reported as part of the loss on disposal of a component and included as part of
continuing operations. - D. $500,000 and $800,000 should be included with revenues and expenses, respectively, as part of
continuing operations.
Answer: B
Explanation:
Choice "d" is correct. Once the decision has been made to dispose of a component of a business and that
component meets the criteria to be classified as held for sale, the operating results of the component for
the period reported on, and any gain or loss from the disposal, should be reported separately from
continuing operations, net of tax. In this question, the component was classified as held for sale and was
sold in the same year.
Thus, in 20X4, the results of operations, the $300,000 ($500,000-$800,000) loss, are reported as a loss
from discontinued operations. The loss on disposal would be reported as part of that loss from
discontinued operations also.
Choice "a" is incorrect. The results of operations prior to the decision date, and also after the decision
date, are reported separately from the results of continuing operations as a part of discontinued
operations. Choice "b" is incorrect. The results of operations prior to the decision date, and also after the
decision date, are reported separately from the results of continuing operations as a loss from operations
of a component and included in loss from discontinued operations.
Choice "c" is incorrect. The results of discontinued operations are not reported as an extraordinary item.
NEW QUESTION 86
Which of the following should be reported as a prior period adjustment?
- A. Option B
- B. Option D
- C. Option C
- D. Option A
Answer: A
Explanation:
Choice "b" is correct. No - Yes Change in estimated lives of depreciable assets is a "change in estimate."
They affect only current and future periods (not "prior periods," not retained earnings). Change from
unaccepted principle to accepted principle is an example of an error of a prior period that should be
reported as a "prior period adjustment."
NEW QUESTION 87
Kell Corp.'s $95,000 net income for the quarter ended September 30, 1990, included the following aftertax
items:
. A $60,000 extraordinary gain, realized on April 30, 1990, was allocated equally to the second, third, and
fourth quarters of 1990.
. A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized
on August 2, 1990.
In addition, Kell paid $48,000 on February 1, 1990, for 1990 calendar-year property taxes. Of this amount,
$ 12,000 was allocated to the third quarter of 1990.
For the quarter ended September 30, 1990, Kell should report net income of:
- A. $103,000
- B. $91,000
- C. $111,000
- D. $115,000
Answer: B
Explanation:
Choice "a" is correct. $91,000 net income for the third quarter ended 9-30-90.
Rules: The entire amount of an "extraordinary" item should be reported during the period incurred.
A "cumulative effect" type accounting change is not included in the net income of the period of change;
instead, the beginning of the year retained earnings is restated.
Expenses, which benefit more than one interim period, such as property taxes, are allocated among the
periods benefited.
NEW QUESTION 88
According to the FASB conceptual framework, what does the concept of reliability in financial reporting
include?
- A. Effectiveness.
- B. Neutrality.
- C. Certainty.
- D. Precision.
Answer: B
Explanation:
Choice "d" is correct. The concept of reliability in financial reporting includes; neutrality, representational
faithfulness and verifiability.
Choices "a", "b", and "c" are incorrect, per the above.
NEW QUESTION 89
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
. Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain.
Fuqua has frequently retired bonds early when interest rates declined significantly.
. A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth
similar loss sustained in a 5-year period at that location.
. A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments.
Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in
1 990?
- A. $5,000
- B. $0
- C. $(90,000)
- D. $(350,000)
Answer: B
Explanation:
Choice "a" is correct. $0. Note: The sale of the steel transportation component resulted in a loss from
discontinued operations and is reported after "income from continuing operations." The steel forming
segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur
infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a
component of "income from continuing operations." The retirement of debt, although unusual, is not
infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item
per APBO No. 30 (and SFAS No. 145).
NEW QUESTION 90
Which of the following qualifies as an operating segment?
- A. Corporate headquarters, which oversees $1 billion in sales for the entire company.
- B. Eastern Europe segment, which reports its results directly to the manager of the European division,
and has 20% of the company's assets, 12% of revenues, and 11% of profits. - C. North American segment, whose assets are 12% of the company's assets of all segments, and
management reports to the chief operating officer. - D. South American segment, whose results of operations are reported directly to the chief operating
officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits.
Answer: C
Explanation:
Choice "b" is correct. Assets of the North American segment exceed 10% combined assets of all
operating segments.
Choice "a" is incorrect. Corporate headquarters in not considered a segment.
Choice "c" is incorrect. The South American segment does not meet any of the 10% minimums (Revenue,
P&L or Assets).
Choice "d" is incorrect. Eastern Europe segment does not report to the chief operating officer.
NEW QUESTION 91
Dean Co. acquired 100% of Morey Corp. prior to 1989. During 1989, the individual companies included in
their financial statements the following:
What amount should be reported as related party disclosures in the notes to Dean's 1989 consolidated
financial statements?
- A. $175,000
- B. $150,000
- C. $155,000
- D. $330,000
Answer: A
Explanation:
Choice "c" is correct. The only related party transaction that would require disclosure (assuming that all
amounts are material to the financial statements) would be the loans to officers since they are outside of
the ordinary course of business. Choices "a", "b", and "d" are incorrect. Officers' salaries, officers'
expenses and intercompany sales (between entities included in a consolidated set of financial statements)
are all transactions in the ordinary course of business and generally would not require disclosure.
NEW QUESTION 92
In Baer Food Co.'s 1990 single-step income statement, the section titled "Revenues" consisted of the
following:
In the revenues section of its 1990 income statement, Baer Food should have reported total revenues of:
- A. $201,900
- B. $215,400
- C. $203,700
- D. $216,300
Answer: A
Explanation:
Choice "d" is correct. $201,900.
The various amounts from discontinued operations should be included in discontinued operations, not in
revenues.
NEW QUESTION 93
Which of the following information should be included in Melay, Inc.'s 1992 summary of significant
accounting policies?
- A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the
straight-line method. - B. During 1992, the Delay component was sold.
- C. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.
- D. Future common share dividends are expected to approximate 60% of earnings.
Answer: A
Explanation:
Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of
depreciation that should be described in the "summary of significant accounting policies." Choice "b" is
incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on
"discontinued operations" in the F1 class) but is not a "significant accounting policy."
Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting
policy."
Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for
the financial statements. They might be appropriate for the "presidents letter to shareholders."
NEW QUESTION 94
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