CPA FAR Exam Flashcards

Q: What is the pass rate on the CPA FAR exam?

FAR has the lowest cumulative pass rate of the three CPA core sections — approximately 42% (AICPA 2024-2025 data), compared to roughly 48% for AUD and 63% for REG. AICPA attributes this to FAR being the most content-heavy section, spanning US GAAP for for-profit, governmental, and not-for-profit entities.

Q: How is the FAR exam scored and structured?

FAR runs 4 hours and contains 50 multiple-choice questions (two testlets, with multistage adaptive difficulty) and 7 task-based simulations (three testlets). MCQs and TBS are each weighted 50% toward your final scaled score, which ranges 0-99 with 75 required to pass.

Q: How long do I have to wait to retake a failed FAR section?

There is no fixed calendar waiting period. Since NASBA's continuous testing model took effect in 2020, candidates may reapply and schedule a retake as soon as they receive their score and submit a new section application and payment — there is no FINRA-style escalating 30/30/180-day wait for repeated failures.

Q: Which FAR topic areas carry the most weight?

Financial Reporting and Select Balance Sheet Accounts each carry 30-40% of the exam, with Select Transactions at 25-35%. Within Select Transactions, revenue recognition (ASC 606), leases (ASC 842), and deferred taxes (ASC 740) are consistently the most heavily tested individual topics on both MCQ and TBS.

Q: What's new on the FAR blueprint that candidates often miss?

ASU 2023-07 expanded segment reporting disclosures (significant segment expenses, CODM identification), and ASU 2023-09 expanded income tax rate reconciliation and cash-tax-paid disclosures. CECL (ASC 326) is now fully phased in for all entity types, and ASU 2017-07 changed where pension cost components are presented on the income statement — only service cost stays in operating income.

Q: How long does section credit last if I pass FAR but not the other sections yet?

NASBA extended the rolling credit window from 18 months to 30 months, effective January 2024. You must pass all three core sections (AUD, FAR, REG) plus one discipline section (BAR, ISC, or TCP) within that 30-month window measured from your first passing section, or you lose credit for sections that fall outside the window.

Question 1

What are the five required financial statements for a nongovernmental for-profit entity under US GAAP?

Accepted Answer

Balance sheet, income statement, statement of comprehensive income, statement of cash flows, and statement of changes in equity. Comprehensive income can be shown as one continuous statement or as two separate but consecutive statements.

Question 2

A company discontinues a component that represents a major strategic shift with a major effect on operations. How is it reported?

Accepted Answer

Reported separately as discontinued operations, net of tax, below income from continuing operations (ASC 205-20). A minor product-line disposal without a major strategic shift stays in continuing operations instead.

Question 3

Classify each of the following as an operating, investing, or financing cash flow activity: interest paid, dividends paid, and purchase of equipment.

Accepted Answer

Interest paid is operating under US GAAP (unlike IFRS, which allows financing); dividends paid is financing; purchase of equipment is investing. Interest received and dividends received are also operating under GAAP.

Question 4

How is an error discovered in a prior-period financial statement corrected?

Accepted Answer

Restate the prior period(s) affected and adjust beginning retained earnings of the earliest period presented; disclose the nature of the error and its effect (ASC 250). This differs from a change in accounting estimate, which is handled prospectively.

Question 5

What distinguishes a recognized (Type I) subsequent event from a nonrecognized (Type II) subsequent event?

Accepted Answer

A Type I event provides evidence about conditions that existed at the balance sheet date, so the financials are adjusted. A Type II event arises from conditions after the balance sheet date and is disclosed only, never recorded.

Question 6

What measurement focus and basis of accounting do governmental funds use, versus government-wide statements?

Accepted Answer

Governmental funds use current financial resources measurement focus with modified accrual accounting. Government-wide statements use economic resources measurement focus with full accrual accounting (GASB 34).

Question 7

List GASB 54's five fund balance classifications from least to most spendable-restricted.

Accepted Answer

Nonspendable, Restricted, Committed, Assigned, Unassigned. Nonspendable can't be spent (e.g., inventory); restricted is externally imposed; committed is self-imposed by the government's highest authority; assigned reflects intended use; unassigned is the residual.

Question 8

Which governmental fund is the only one that can report a positive Unassigned fund balance?

Accepted Answer

The General Fund. Other governmental funds can report a negative unassigned balance (a deficit) but never a positive one — any positive residual in another fund is classified as assigned or restricted instead.

Question 9

What is an encumbrance in governmental fund accounting?

Accepted Answer

A budgetary commitment recording a purchase order or contract before the related expenditure is actually incurred. It reserves (commits or assigns) fund balance but is not itself a GAAP expenditure or liability.

Question 10

What did GASB 34 fundamentally add to governmental financial reporting?

Accepted Answer

It required accrual-based, entity-wide government-wide financial statements in addition to the traditional fund-based statements, plus Management's Discussion & Analysis (MD&A) as required supplementary information.

Question 11

Under ASC 958, how many net asset classes does a not-for-profit report, and what are they?

Accepted Answer

Two: net assets with donor restrictions and net assets without donor restrictions. ASU 2016-14 eliminated the older three-tier unrestricted / temporarily restricted / permanently restricted model.

Question 12

An NFP receives a conditional pledge with a measurable performance barrier and a right of return. When is contribution revenue recognized?

Accepted Answer

Not until the condition is substantially met. A conditional promise to give is not recognized as revenue until the barrier is overcome, unlike an unconditional promise, which is recognized immediately.

Question 13

What two expense classifications must a not-for-profit disclose, and how do they differ?

Accepted Answer

Functional (program services vs. management & general vs. fundraising) and natural (salaries, rent, supplies, depreciation). ASC 958 requires an analysis showing both, typically in a statement of functional expenses.

Question 14

A donor gives an NFP $500,000 stipulating the principal must be invested permanently and only investment income may be spent. How is this classified?

Accepted Answer

As a donor-restricted endowment within net assets with donor restrictions. The corpus stays restricted indefinitely, while spendable earnings may be restricted or unrestricted depending on the donor's stipulation.

Question 15

What's the difference between SEC Form 10-K and Form 10-Q?

Accepted Answer

Form 10-K is the annual report filed with the SEC and includes audited financial statements. Form 10-Q is the quarterly report filed for each of the first three fiscal quarters and includes unaudited, reviewed financials.

Question 16

Under the integral view of interim reporting, how is a cost that benefits the entire fiscal year (like an annual repair) handled in Q1?

Accepted Answer

It's estimated and allocated proportionately across the interim periods it benefits rather than expensed entirely in the quarter incurred, because interim periods are treated as integral parts of the full annual period.

Question 17

What is the 10% test used for in segment reporting?

Accepted Answer

It identifies reportable operating segments under ASC 280 — a segment is separately reportable if its revenue, profit or loss, or assets equal at least 10% of the combined totals for all operating segments.

Question 18

Prices are rising. Compare the balance sheet and income statement effects of FIFO vs. LIFO inventory costing.

Accepted Answer

FIFO: ending inventory approximates current replacement cost (higher), and lower COGS yields higher net income. LIFO: ending inventory reflects older, lower costs, and higher COGS yields lower net income and lower income taxes.

Question 19

A company uses LIFO for inventory costing. Which lower-of-cost test applies, and what are its bounds?

Accepted Answer

Lower of Cost or Market (LCM) — market is replacement cost, bounded by a ceiling (net realizable value) and a floor (NRV minus normal profit margin). Companies using FIFO or weighted-average instead apply the simpler LCNRV test.

Question 20

A company uses LIFO for tax reporting. What does the LIFO conformity rule require for its books?

Accepted Answer

If LIFO is used for federal income tax reporting, it must also be used for external financial (book) reporting — a company cannot report FIFO on its books while claiming LIFO tax benefits.

Question 21

Compare straight-line, double-declining-balance, and units-of-production depreciation in year one for a new asset.

Accepted Answer

Straight-line spreads cost evenly by time. Double-declining-balance is accelerated, applying a constant rate to declining book value and ignoring salvage value until the final year. Units-of-production expenses cost based on actual usage or output, not time.

Question 22

How is an impairment loss measured for a long-lived asset held for use under ASC 360?

Accepted Answer

First test recoverability: if carrying value exceeds undiscounted future cash flows, the asset is impaired. Then measure the loss as carrying value minus fair value and write the asset down — the write-down cannot be reversed later under US GAAP.

Question 23

A company classifies a building as held for sale. What happens to depreciation and measurement?

Accepted Answer

Depreciation stops immediately, and the asset is measured at the lower of carrying value or fair value less costs to sell, reported separately from other assets on the balance sheet.

Question 24

Contrast the subsequent accounting for goodwill versus a finite-life intangible asset like a patent.

Accepted Answer

Goodwill is never amortized — it's tested at least annually for impairment (an optional qualitative screen, then a quantitative fair-value-vs-carrying-value test). A finite-life intangible is amortized over its useful life and tested for impairment only when indicators exist.

Question 25

A company incurs research costs and separate development costs for a new product. How does US GAAP treat each?

Accepted Answer

Research costs are expensed as incurred. Development costs are also generally expensed as incurred under US GAAP — unlike IFRS, which capitalizes development costs meeting specific criteria — except for narrow exceptions like certain internal-use software costs.

Question 26

A bond is issued at a premium. What does that imply about the stated rate vs. the market rate, and how is the premium amortized?

Accepted Answer

The stated (coupon) rate exceeds the market rate, so investors pay more than face value. The premium is amortized using the effective interest method, which reduces interest expense below the cash interest paid each period.

Question 27

How are debt issuance costs presented on the balance sheet?

Accepted Answer

As a direct reduction of (contra to) the related debt liability, not as a separate asset. They're amortized to interest expense over the life of the debt using the effective interest method, the same as a bond discount.

Question 28

How does ASU 2020-06 change the accounting for convertible debt?

Accepted Answer

It eliminates the separate bifurcation previously required for cash conversion and beneficial conversion features on most convertible instruments. Convertible debt is now recorded as a single liability at its full face amount, with no separate equity component.

Question 29

Under CECL (ASC 326), when does a company recognize a credit loss allowance on an amortized-cost receivable?

Accepted Answer

Immediately at origination or purchase — CECL requires estimating lifetime expected credit losses upfront, replacing the older incurred-loss model that waited until a loss was probable.

Question 30

How are unrealized gains and losses on AFS debt securities reported, versus trading debt or most equity securities?

Accepted Answer

AFS debt securities: unrealized gains/losses go through Other Comprehensive Income (OCI), not net income. Trading debt securities and most equity securities (post-ASU 2016-01) flow unrealized gains/losses through net income instead.

Question 31

An investor holds 30% of a company's voting stock with no other overriding factors. Which accounting method applies?

Accepted Answer

The equity method (ASC 323). Ownership between 20-50% is presumed to give significant influence (not control), so the investor recognizes its proportionate share of the investee's net income or loss, adjusting the investment's carrying value.

Question 32

Under the cost method, what happens when a company reacquires its own shares as treasury stock and later reissues them above cost?

Accepted Answer

Treasury stock is a contra-equity account recorded at reacquisition cost — no gain or loss ever hits the income statement. On reissuance, any difference from cost adjusts additional paid-in capital (or retained earnings if APIC is insufficient).

Question 33

Walk through the basic EPS formula.

Accepted Answer

Basic EPS = (Net income minus preferred dividends) divided by weighted-average common shares outstanding during the period. Preferred dividends are subtracted because that income isn't available to common shareholders.

Question 34

A company has outstanding stock options. Which method converts them into incremental diluted shares, and what's the key mechanic?

Accepted Answer

The treasury stock method — assume the options are exercised, then assume the hypothetical proceeds are used to repurchase shares at the average market price. Only the net incremental shares increase the diluted share count, and only if the effect is dilutive.

Question 35

List the five steps of the ASC 606 revenue recognition model in order.

Accepted Answer

(1) Identify the contract with a customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations, (5) recognize revenue when or as each performance obligation is satisfied.

Question 36

How do you decide whether a company recognizes revenue as principal (gross) or agent (net)?

Accepted Answer

It depends on whether the company controls the good or service before transferring it to the customer. If it controls it, recognize revenue gross as principal; if it merely arranges for another party to provide it, recognize only the net fee as agent.

Question 37

What determines whether a performance obligation is satisfied over time versus at a point in time?

Accepted Answer

Over time applies if the customer simultaneously receives and consumes benefits as the entity performs, performance creates or enhances an asset the customer controls, or the asset has no alternative use and the entity has an enforceable right to payment for progress. Otherwise, revenue is recognized at the point in time control transfers.

Question 38

A contract includes variable consideration, such as a bonus for early delivery. How is the transaction price estimated?

Accepted Answer

Estimate it using either the expected value method (probability-weighted) or the most likely amount method, whichever better predicts the outcome, then constrain the estimate to the amount that's probable not to result in a significant revenue reversal later.

Question 39

Under ASC 842, does a lessee record a right-of-use asset and lease liability for an operating lease?

Accepted Answer

Yes. Unlike the old ASC 840 rules, both finance and operating leases require lessees to recognize a right-of-use (ROU) asset and lease liability. The difference is expense pattern: finance leases split interest and amortization; operating leases recognize one straight-line lease expense.

Question 40

Name the five criteria that classify a lease as a finance lease from the lessee's perspective.

Accepted Answer

Ownership transfers by the end of the lease; a written bargain purchase option exists; the lease term is a major part (about 75%) of remaining economic life; the present value of payments is substantially all (about 90%) of fair value; or the asset is so specialized it has no alternative use to the lessor. Meeting any one triggers finance lease treatment.

Question 41

What lease-term election lets a lessee avoid recording an ROU asset and lease liability entirely?

Accepted Answer

The short-term lease exemption — leases with a term of 12 months or less, and no purchase option the lessee is reasonably certain to exercise, can be expensed straight-line without balance sheet recognition.

Question 42

What is the only method allowed for business combinations under ASC 805, and how is goodwill calculated?

Accepted Answer

The acquisition method. Goodwill equals consideration transferred plus the fair value of any noncontrolling interest, minus the fair value of identifiable net assets acquired. If the result is negative, it's a bargain purchase and the gain is recognized immediately in income.

Question 43

Compare the voting interest model and the VIE model for deciding whether to consolidate an investee.

Accepted Answer

The voting model consolidates based on owning more than 50% of voting rights. The VIE model applies when voting rights don't align with economics — consolidation goes to whichever party has the power to direct the VIE's significant activities and absorbs its losses or benefits (the primary beneficiary), regardless of ownership percentage.

Question 44

How is noncontrolling interest (NCI) measured and presented after a business combination?

Accepted Answer

NCI is measured at fair value at the acquisition date (the full-goodwill method) and presented as a separate component within total equity on the consolidated balance sheet, never as a liability or mezzanine item.

Question 45

Distinguish a temporary difference from a permanent difference for income tax purposes.

Accepted Answer

A temporary difference reverses in a future period and creates a deferred tax asset or liability, such as depreciation timing. A permanent difference never reverses and affects only the effective tax rate, not deferred taxes, such as tax-exempt municipal bond interest.

Question 46

A company books an expense for book purposes this year but can't deduct it for tax until a future year. Does this create a DTA or a DTL?

Accepted Answer

A deferred tax asset (DTA). The company will get a tax deduction later that it already recognized for book purposes, meaning it will pay less tax in the future relative to book income — common examples are warranty expense accruals and NOL carryforwards.

Question 47

When must a company record a valuation allowance against a deferred tax asset?

Accepted Answer

When it is more likely than not (over 50% probability) that some or all of the DTA will not be realized. The valuation allowance reduces the DTA's carrying amount to the amount expected to actually be realized.

Question 48

Under ASU 2017-07, how is net periodic pension/OPEB cost presented on the income statement?

Accepted Answer

Only the service cost component is included within operating income (typically in compensation expense). All other components — interest cost, expected return on plan assets, amortization of gains/losses — are reported outside operating income, often in other income/expense.

Question 49

How is the funded status of a defined benefit pension plan calculated, and where is it reported?

Accepted Answer

Funded status equals the fair value of plan assets minus the projected benefit obligation (PBO). It's reported on the balance sheet as a net pension asset if overfunded, or a net pension liability if underfunded.

Question 50

What is the grant-date fair value method for employee stock options under ASC 718?

Accepted Answer

Compensation expense is measured once at the grant date using an option-pricing model (such as Black-Scholes) and recognized over the requisite service (vesting) period — it is not remeasured for later changes in the stock price.

Free CPA FAR Exam Flashcards

Filter by Topic

Jump to Card

About These CPA FAR Flashcards

Topics Covered

Frequently Asked Questions

CPA FAR Financial Accounting & Reporting

Explore More CPA Exam

CPA Certified Public Accountant

CPA ISC Information Systems & Controls (Discipline)

CPA REG Regulation

CPA AUD Auditing & Attestation

CPA BAR Business Analysis & Reporting (Discipline)

CPA TCP Tax Compliance & Planning (Discipline)

More From This Family