CPA Financial Accounting and Reporting (FAR) : CPA Financial Accounting and Reporting (FAR)
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Current Assets
Of the following, which is a method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement?
Expense Method
Allowance method based on A/R aging
Gross sales
Income Method
Allowance method based on A/R aging
Aging receivables focuses on the balance sheet and emphasizes assets. It results in a good matching of revenue and expenses.
Example Question #2 : Current Assets
Turblad Company has several items in its safe at December 31, Year 1. Which of these items would not be included in Turblad's cash & cash equivalents in its Year 1 balance sheet?
A treasury bill for $5,000 that matures in January of Year 2
A note receivable signed by a loyal customer which matures in March of Year 3
A certificate of stock with a market value $100 per share, which is classified as an investment security
A check written to Turnblad for $1,200 from a customer, that has not yet been deposited
A treasury bill for $5,000 that matures in January of Year 2
A treasury bill would be considered an investment, not cash or a cash equivalent.
Example Question #3 : Current Assets
Globe Company began April of Year 3 with a cash balance of $68,000 in its operating account. During the month of April, Globe issued new checks totaling $14,000 to vendors. Of these newly issued checks, $9,000 cleared the bank in April. Globe also transferred $8,000 to its payroll account to pay employees during the month. Globe received $22,000 in checks from its customers in April and deposited $18,000 of those checks during the month. Also during April $6,000 of checks issued during March of Year 3 cleared the bank. What is Globe's cash balance in its operating account at the end of April, Year 3?
$68,000
$55,000
$59,000
$64,000
$64,000
Globe's adjusted cash balance is calculated by taking the beginning balance of $68K - $14K for newly issued checks - $8K transferred to payroll + $18K deposited checks. It is irrelevant when Globe's issued checks actually cleared the bank.
Example Question #1 : Bank Reconciliations
ABC Company is reconciling its cash balance at December 31, Year 1. Which of the following items would require an adjusting entry to the cash account by ABC Company?
ABC paid for merchandise from one of its suppliers via check before the supplier notified ABC that the goods were out of stock. ABC cancelled its order and contacted its bank to void the check.
At December 31, several thousand dollars in checks were still sitting on the controller's desk, signed and waiting to be mailed
ABC transferred funds to its payroll impress account on December 29 via a same-day wire. ABC recorded the transfer in the general ledger on the day it was made. The funds were used to issue checks from the payroll account and the majority of these checks were still outstanding at December 31.
ABC received multiple checks and direct deposits from customers during the year, and several of these cash receipts were applied to the wrong customer's account
ABC paid for merchandise from one of its suppliers via check before the supplier notified ABC that the goods were out of stock. ABC cancelled its order and contacted its bank to void the check.
ABC has cancelled its check with the bank, but this adjustment is not yet reflected in its ledger. Therefore, ABC would need to make an adjustment to its ledger to increase its cash balance.
Example Question #2 : Bank Reconciliations
Of the following, which would not be included in the cash and cash equivalent account?
Bank draft
Stock investments
Petty cash
Savings account
Stock investments
Stock investments classify as their own asset class and are not a cash account.
Example Question #1 : Prepaid Expenses
Barkley Inc prepaid for an insurance policy on July 31, Year 2, in the amount of $6,000. The entry to adjust the prepaid expense account on December 31, Year 2, would include which of the following?
A debit of $3,500
A credit of $2,500
A debit of $2,500
A credit of $3,500
A credit of $2,500
Barkley needs to recognize insurance expense for 5 months (August-December). Insurance expense should be recorded at $500 per month ($6K/12 months). $500 x 5 months = $2,500, and this should be a credit to prepaid insurance to reduce that asset account.
Example Question #2 : Prepaid Expenses
Beaumont Inc is finalizing its prepaid insurance account at December 31, Year 3. The account includes $15,000 for a general insurance policy beginning and paid for on December 1, Year 3; $4,000 for an auto policy beginning January 1, Year 4; and $12,000 paid key man life insurance policy running from July 1, Year 2, through June 30, Year 3. What amount should be reported as an expense in Beaumont's Year 3 income statement?
$13,250
$17,750
$15,000
$17,250
$13,250
The company should expense what has been incurred as of the end of Year 3. This includes $1,250 for the general insurance policy ($15K/12 months x 1 month) and all $12K of the key man policy.
Example Question #3 : Prepaid Expenses
Which of the following transactions would be initially recorded in the prepaid expense account?
A company pre-pays a year-long subscription to a local newspaper, the cost of which it considers small
A retail company makes significant sales of gift certificates shortly before the holiday season, the majority of which it doesn't expect will be spent until after the new year
A company orders office supplies which it expects to use within the current month
A company pre-pays annual real estate taxes at the beginning of the fiscal year
A company pre-pays annual real estate taxes at the beginning of the fiscal year
Annual real estate taxes paid at the beginning of the year would be entered into prepaid taxes and then amortized to expenses throughout the year. Unearned revenue, immaterial prepaid subscriptions, and office supplies for the current period would not go to prepaid expenses.
Example Question #4 : Prepaid Expenses
Of the following, which would be an intangible asset?
Investments in stock
Goodwill
Leasehold improvements
Research and development
Goodwill
Of the following, goodwill is an intangible asset, R&D is an expense, investments are their own asset class, and leasehold improvements are capitalized.
Example Question #1 : Income Taxes
In Year 1, a company has revenues of $600,000 and expenses of $400,000. Of the expenses, $70,000 represents a warranty on a company product. However, the company only paid $30,000 as a result of this warranty. The remainder is expected to be paid in a future year in which company officials believe there is a 60% chance that the company will have taxable income to be reduced by this warranty cost. The relevant tax rate is 30% for Year 1 and 32% for periods after that. What is the total amount of income tax expense to be recognized in Year 1?
$49,000
$62,000
$59,200
$70,000
$59,200
Reported net income of $200K ($600K revenue - $400K expenses) must be adjusted to $240K to exclude the portion of the warranty expenses that weren't paid in Year 1. This means the the current portion of income expense is $72K ($240K x 30%). The remaining $40K deduction is deferred to a future year, so the company recognizes a deferred benefit of $12,800 ($40K x 32%). Total Year 1 tax expense is equal to $72K - $12,800.
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