Free CPA FAR (Financial Accounting & Reporting) Financial Reporting Practice Questions
Financial reporting concepts on the CPA FAR exam cover the FASB conceptual framework, financial statement presentation requirements, revenue recognition (ASC 606), and government-wide reporting under GASB standards. FAR is widely considered the most difficult Core section (AICPA).
Sample Questions
Question 1
Easy
Under U.S. GAAP, which of the following best describes the accrual basis of accounting?
Solution
C is correct.
The accrual basis recognizes revenues when they are earned (performance obligations are met) and expenses when they are incurred (resources are consumed or obligations are created), without regard to the timing of cash flows. This is the foundation of GAAP and provides the most complete picture of financial position and performance over a period.
The accrual basis recognizes revenues when they are earned (performance obligations are met) and expenses when they are incurred (resources are consumed or obligations are created), without regard to the timing of cash flows. This is the foundation of GAAP and provides the most complete picture of financial position and performance over a period.
Question 2
Medium
Bristol Manufacturing entered into derivative contracts during the year. Which of the following amounts is reported in OCI?
Solution
C is correct.
Under ASC 815, only the EFFECTIVE portion of a cash flow hedge gain or loss is reported in OCI; it is parked there until the hedged forecasted transaction affects earnings. The ineffective portion of a cash flow hedge flows through net income immediately. Fair value hedges run entirely through net income (the hedge gain/loss offsets the hedged item's fair value change in earnings). Speculative (non-designated) derivatives are also marked to market through net income.
Under ASC 815, only the EFFECTIVE portion of a cash flow hedge gain or loss is reported in OCI; it is parked there until the hedged forecasted transaction affects earnings. The ineffective portion of a cash flow hedge flows through net income immediately. Fair value hedges run entirely through net income (the hedge gain/loss offsets the hedged item's fair value change in earnings). Speculative (non-designated) derivatives are also marked to market through net income.
Question 3
Hard
Under ASC 820, which of the following disclosures is required for recurring fair value measurements categorized within Level 3 of the fair value hierarchy but is NOT required for Level 1 or Level 2 measurements?
Solution
A is correct.
ASC 820-10-50 requires a Level 3 rollforward for recurring fair value measurements: a reconciliation showing beginning balance, total gains or losses (realized and unrealized), purchases, sales, issuances, settlements, and transfers in or out of Level 3. This rollforward is unique to Level 3 because Level 3 inputs are unobservable and warrant the most extensive disclosure.
The other items — asset class, measurement date, and recurring vs nonrecurring designation — are required for all three levels of the hierarchy and therefore do not distinguish Level 3.
ASC 820-10-50 requires a Level 3 rollforward for recurring fair value measurements: a reconciliation showing beginning balance, total gains or losses (realized and unrealized), purchases, sales, issuances, settlements, and transfers in or out of Level 3. This rollforward is unique to Level 3 because Level 3 inputs are unobservable and warrant the most extensive disclosure.
The other items — asset class, measurement date, and recurring vs nonrecurring designation — are required for all three levels of the hierarchy and therefore do not distinguish Level 3.