CPA Exam Flashcards

Q: What is the CPA exam pass rate?

The CPA exam has an approximate 50% pass rate per section. FAR (Financial Accounting & Reporting) historically has the lowest pass rate (~45%), while BEC/discipline sections tend to be slightly higher (~55%). You must score 75 or higher (on a scaled 0-99 score) to pass each section. Most candidates take 12-18 months to pass all sections.

Q: How many sections does the CPA exam have?

The CPA exam has 4 sections: FAR (Financial Accounting & Reporting), AUD (Auditing & Attestation), REG (Regulation—taxation & business law), and one discipline section chosen from: BAR (Business Analysis & Reporting), TCP (Tax Compliance & Planning), or ISC (Information Systems & Controls). Each section is 4 hours. All must be passed within an 18-month rolling window.

Q: What are the CPA exam requirements?

Requirements vary by state but generally include: 150 credit hours of college education (bachelor's degree + additional coursework), concentration in accounting courses, U.S. citizenship is NOT required. Some states allow you to sit at 120 credits but require 150 for licensure. No firm sponsorship needed to take the exam. Total exam fees are approximately $1,000-1,500.

Q: How long does CPA exam validity last?

You must pass all 4 CPA exam sections within an 18-month rolling window. The window starts when you pass your first section. If you don't pass all sections within 18 months, your earliest passed section expires and you must retake it. Once fully licensed, you maintain your CPA through Continuing Professional Education (CPE)—typically 40 hours per year.

Q: What happens if I fail a CPA exam section?

If you fail a CPA section, you can retake it in the next testing window. The CPA exam uses continuous testing with quarterly score release dates. There is no limit on retake attempts, but you must stay within the 18-month window. Each retake costs approximately $200-350 per section depending on your state. Review your Score Report to identify weak areas.

Q: Is the CPA exam hard?

The CPA exam is considered one of the most challenging professional certifications. The ~50% pass rate reflects its difficulty. FAR is often considered the hardest section due to the breadth of material. Most successful candidates use a structured review course (Becker, Roger, Surgent) and study 300-400 total hours. The key is consistent daily study and practice with MCQs and task-based simulations.

Question 1

GAAP (Generally Accepted Accounting Principles)

Accepted Answer

The standard framework of guidelines for financial accounting in the U.S. Established by FASB. Includes principles like revenue recognition, matching, full disclosure, and consistency. Required for publicly traded companies.

Question 2

Accrual Basis vs. Cash Basis Accounting

Accepted Answer

Accrual basis: recognizes revenue when earned and expenses when incurred, regardless of cash flow. Cash basis: records transactions only when cash changes hands. GAAP requires accrual basis for financial statements.

Question 3

Balance Sheet (Statement of Financial Position)

Accepted Answer

Reports assets, liabilities, and equity at a specific point in time. Fundamental equation: Assets = Liabilities + Stockholders' Equity. Assets listed in order of liquidity; liabilities in order of maturity.

Question 4

Income Statement (Statement of Operations)

Accepted Answer

Reports revenues, expenses, gains, and losses over a period of time. Net Income = Revenue − Expenses + Gains − Losses. Presented in single-step or multi-step format.

Question 5

Statement of Cash Flows

Accepted Answer

Reports cash inflows and outflows in three categories: Operating (day-to-day business), Investing (long-term assets), and Financing (debt and equity). Can use direct or indirect method for operating section.

Question 6

Depreciation Methods

Accepted Answer

Straight-line: (Cost − Salvage) ÷ Useful Life. Double-declining balance: 2 × (1 ÷ Useful Life) × Book Value. Sum-of-years' digits: Remaining Life ÷ Sum of Years × Depreciable Base. Units of production: based on actual usage.

Question 7

Revenue Recognition (ASC 606)

Accepted Answer

Five-step model: (1) Identify the contract, (2) Identify performance obligations, (3) Determine transaction price, (4) Allocate price to obligations, (5) Recognize revenue when obligations are satisfied—either over time or at a point in time.

Question 8

Inventory Valuation Methods

Accepted Answer

FIFO (First-In, First-Out): oldest costs to COGS. LIFO (Last-In, First-Out): newest costs to COGS (not allowed under IFRS). Weighted average: average cost per unit. Lower of cost or net realizable value applies.

Question 9

Accounts Receivable & Allowance for Doubtful Accounts

Accepted Answer

AR recorded at net realizable value. Bad debt estimated using: percentage of sales method (income statement approach) or aging of receivables method (balance sheet approach). Write-offs debit Allowance, credit AR.

Question 10

Lease Accounting (ASC 842)

Accepted Answer

Lessees recognize a right-of-use (ROU) asset and lease liability for all leases >12 months. Finance leases: amortize ROU asset and record interest. Operating leases: single lease expense on a straight-line basis.

Question 11

Audit Opinion Types

Accepted Answer

Unmodified (clean): financial statements are fairly presented. Qualified: except for a specific issue. Adverse: statements are NOT fairly presented. Disclaimer: auditor cannot form an opinion due to scope limitation.

Question 12

Materiality

Accepted Answer

A misstatement is material if it could influence the economic decisions of users. Auditors set materiality levels during planning. Performance materiality is set lower than overall materiality to reduce aggregation risk.

Question 13

Audit Risk Model

Accepted Answer

Audit Risk = Inherent Risk × Control Risk × Detection Risk. Inherent risk: susceptibility to misstatement. Control risk: risk controls fail to prevent/detect. Detection risk: risk audit procedures fail to detect. Only detection risk is controlled by auditor.

Question 14

Internal Controls (COSO Framework)

Accepted Answer

Five components: (1) Control Environment, (2) Risk Assessment, (3) Control Activities, (4) Information & Communication, (5) Monitoring Activities. Framework used to evaluate internal control effectiveness.

Question 15

Substantive Procedures vs. Tests of Controls

Accepted Answer

Tests of controls: evaluate operating effectiveness of internal controls (walkthroughs, reperformance). Substantive procedures: detect material misstatements directly (analytical procedures, tests of details).

Question 16

Audit Evidence (Sufficient & Appropriate)

Accepted Answer

Sufficiency: quantity of evidence (more needed for higher risk). Appropriateness: quality—relevance and reliability. External evidence > internal. Auditor-generated > client-generated. Original > copies.

Question 17

Going Concern

Accepted Answer

Auditor evaluates whether substantial doubt exists about the entity's ability to continue as a going concern within one year. If doubt exists and is not alleviated, an emphasis-of-matter paragraph is added to the audit report.

Question 18

Confirmation Procedures

Accepted Answer

Positive confirmation: recipient responds whether they agree or disagree. Negative confirmation: recipient responds only if they disagree. Blank confirmation: recipient fills in the amount (most reliable). Used for AR, bank balances, legal matters.

Question 19

Individual Tax Filing Status

Accepted Answer

Five statuses: Single, Married Filing Jointly (MFJ), Married Filing Separately (MFS), Head of Household (HoH), Qualifying Surviving Spouse. Status determines tax brackets, standard deduction, and eligibility for credits.

Question 20

Standard Deduction (2025)

Accepted Answer

Single: $15,000. MFJ: $30,000. HoH: $22,500. Additional deduction for age 65+ or blind: $1,950 (single) or $1,550 (married). Taxpayers choose the greater of standard or itemized deductions.

Question 21

Capital Gains Tax Rates

Accepted Answer

Short-term (held ≤1 year): taxed as ordinary income. Long-term (held >1 year): taxed at 0%, 15%, or 20% depending on income. Net Investment Income Tax (NIIT): additional 3.8% on investment income above thresholds.

Question 22

Section 1031 Like-Kind Exchange

Accepted Answer

Allows deferral of gain on exchange of real property held for business or investment. Must identify replacement property within 45 days and close within 180 days. Personal property no longer qualifies after TCJA.

Question 23

S Corporation Requirements

Accepted Answer

Maximum 100 shareholders (all must be U.S. citizens/residents or certain trusts). Only one class of stock. Must be domestic corporation. Pass-through taxation: income/losses flow to shareholders' personal returns.

Question 24

Partnership Taxation Basics

Accepted Answer

Partnerships file Form 1065 (informational return). No entity-level tax. Income, deductions, and credits pass through to partners via Schedule K-1. Partners pay self-employment tax on their distributive share.

Question 25

Statute of Limitations for Tax Returns

Accepted Answer

General rule: 3 years from filing date (or due date if later). Substantial omission (>25% of gross income): 6 years. Fraud or failure to file: no statute of limitations. Amended returns: file within 3 years of original filing.

Question 26

Circular 230 (Tax Practice Standards)

Accepted Answer

Treasury regulations governing practice before the IRS. Applies to CPAs, attorneys, enrolled agents. Requires: due diligence, no unreasonable positions, prompt return of client records, written disclosure of conflicts.

Question 27

Entity Selection: C Corp vs. S Corp vs. LLC

Accepted Answer

C Corp: double taxation, unlimited shareholders, multiple stock classes. S Corp: pass-through, ≤100 shareholders, one stock class. LLC: pass-through, flexible management, self-employment tax on active members.

Question 28

Qualified Business Income (QBI) Deduction (Section 199A)

Accepted Answer

Allows up to 20% deduction on qualified business income from pass-through entities. Subject to W-2 wage and property limitations above income thresholds. Specified service trades (law, accounting, consulting) have additional limitations.

Question 29

WACC (Weighted Average Cost of Capital)

Accepted Answer

Formula: WACC = (E/V × Re) + (D/V × Rd × (1−T)). Where E = equity, D = debt, V = total value, Re = cost of equity, Rd = cost of debt, T = tax rate. Used as discount rate for capital budgeting decisions.

Question 30

Net Present Value (NPV)

Accepted Answer

Sum of present values of future cash flows minus initial investment. NPV > 0: accept the project (adds value). NPV < 0: reject. NPV = 0: indifferent. Preferred over IRR for mutually exclusive projects.

Question 31

Internal Rate of Return (IRR)

Accepted Answer

The discount rate that makes NPV equal to zero. Decision rule: accept if IRR > required rate of return (hurdle rate). Assumes reinvestment at IRR (a potential limitation vs. NPV method).

Question 32

Variance Analysis

Accepted Answer

Compares actual results to budgeted/standard costs. Price variance: (Actual Price − Standard Price) × Actual Quantity. Quantity variance: (Actual Quantity − Standard Quantity) × Standard Price. Favorable = under budget; Unfavorable = over budget.

Question 33

Sarbanes-Oxley Act (SOX) Key Provisions

Accepted Answer

Section 302: CEO/CFO certify financial statements. Section 404: Management assesses internal controls; auditor attests. Section 906: Criminal penalties for fraudulent certification. Created PCAOB to oversee auditors of public companies.

Question 34

Fund Accounting (Government)

Accepted Answer

Governmental funds: General, Special Revenue, Capital Projects, Debt Service, Permanent. Proprietary funds: Enterprise, Internal Service. Fiduciary funds: Pension Trust, Investment Trust, Private-Purpose Trust, Custodial.

Question 35

Modified Accrual Basis (Governmental Funds)

Accepted Answer

Revenues recognized when measurable and available (collected within 60 days of period end). Expenditures recognized when the liability is incurred. Used by governmental funds. Full accrual used by proprietary and fiduciary funds.

Question 36

GASB vs. FASB

Accepted Answer

GASB sets accounting standards for state and local governments. FASB sets standards for private-sector entities and non-profits. Key difference: GASB focuses on accountability and budgetary compliance; FASB focuses on profitability and cash flows.

Question 37

Non-Profit Accounting (ASC 958)

Accepted Answer

Net assets classified as: with donor restrictions or without donor restrictions. Must present Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and Statement of Functional Expenses.

Question 38

Goodwill & Impairment

Accepted Answer

Goodwill = Purchase Price − Fair Value of Net Assets Acquired. Not amortized. Tested annually for impairment. Impairment: if carrying amount of reporting unit exceeds fair value, write down goodwill (cannot exceed carrying amount).

Question 39

Deferred Tax Assets & Liabilities

Accepted Answer

DTL: taxable income will be HIGHER in future (e.g., accelerated depreciation). DTA: taxable income will be LOWER in future (e.g., warranty expense). Recorded at enacted tax rates. DTA may need valuation allowance if realization is uncertain.

Question 40

Bond Issuance: Premium vs. Discount

Accepted Answer

Premium: market rate < stated rate (investors pay more). Discount: market rate > stated rate (investors pay less). Premium amortized reduces interest expense; discount amortized increases interest expense over bond life.

Question 41

Stock-Based Compensation (ASC 718)

Accepted Answer

Options measured at fair value on grant date using Black-Scholes or binomial model. Expense recognized over the vesting period. No adjustment for subsequent fair value changes. Forfeitures can be estimated or recognized as they occur.

Question 42

Business Combinations (ASC 805)

Accepted Answer

Acquisition method required: (1) Identify the acquirer, (2) Determine acquisition date, (3) Recognize and measure identifiable assets/liabilities at fair value, (4) Recognize goodwill or gain on bargain purchase.

Question 43

Earnings Per Share (Basic vs. Diluted)

Accepted Answer

Basic EPS: (Net Income − Preferred Dividends) ÷ Weighted Average Common Shares. Diluted EPS: includes effect of stock options, convertible bonds, convertible preferred using treasury stock or if-converted methods.

Question 44

Tax Credits vs. Tax Deductions

Accepted Answer

Deduction: reduces taxable income (value = deduction × marginal tax rate). Credit: reduces tax liability dollar-for-dollar (more valuable). Refundable credits can create a refund; nonrefundable credits reduce tax to zero only.

Question 45

Estimated Tax Payments

Accepted Answer

Required if expected tax liability ≥ $1,000. Due quarterly: Apr 15, Jun 15, Sep 15, Jan 15. Safe harbor: pay 100% of prior year tax (110% if AGI > $150,000) or 90% of current year tax to avoid penalty.

Question 46

Subsequent Events

Accepted Answer

Type I (recognized): conditions existed at balance sheet date—adjust financial statements. Type II (non-recognized): conditions arose after balance sheet date—disclose only. Evaluation period extends through date financial statements are issued/available.

Question 47

Related Party Transactions

Accepted Answer

Must disclose: nature of relationship, description of transactions, dollar amounts, amounts due to/from. Common related parties: parent/subsidiary, affiliates, principal owners, management, immediate family of officers.

Question 48

Cost Behavior: Fixed, Variable, Mixed

Accepted Answer

Fixed costs: total stays constant regardless of volume (per-unit decreases). Variable costs: total changes proportionally with volume (per-unit stays constant). Mixed: contains both elements. High-low method separates components.

Question 49

Break-Even Analysis

Accepted Answer

Break-even point (units) = Fixed Costs ÷ Contribution Margin per Unit. Break-even point (dollars) = Fixed Costs ÷ Contribution Margin Ratio. CM Ratio = (Sales − Variable Costs) ÷ Sales.

Question 50

AICPA Code of Professional Conduct

Accepted Answer

Key principles: Responsibilities, Public Interest, Integrity, Objectivity & Independence, Due Care, Scope & Nature of Services. Independence required in fact AND appearance for attest engagements. Violations can lead to license revocation.

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