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How to Prepare For Financial Accounting and Reporting (FAR) Exam
Preparation Guide for Financial Accounting and Reporting (FAR) Exam
Introduction
The Financial Accounting and Reporting FAR exam test is part of the uniform CPA examination and is administered by the American Institute of Certified Public Accountants (AICPA). The American Institute of Certified Public Accountants (AICPA) is the United States national professional association of Certified Public Accountants (CPAs), with more than 418,000 members in business and industry, public practice, government, education, student affiliates, and foreign associates in 143 countries. Established in 1887, the association sets ethical guidelines for audits of private businesses, non-profit organizations, federal, state, and local governments for the profession and U.S. auditing standards. It also establishes the Standardized CPA Test and rates it. The AICPA has offices in New York City; Durham, NC; Washington DC; and Ewing, NJ.
For practitioners aspiring to become CPAs, the Standardized Certified Public Accountant test is a credentialing exam. It is graded and governed by the American Institute of Certified Public Accountants (AICPA) and by the National Association of State Accountancy Boards (NASBA).
This exam guide is intended to get you to know about the exam details and help you to prepare for the Financial Accounting and Reporting FAR exam test successfully. This guide includes information on the certification test target audience, recommended preparation FAR exam dumps and documentation, and a full list of exam targets, all to help you obtain a passing grade. To increase your chances of passing the test, AICPA strongly recommends a mix of on-the-job experience, course attendance, and self-study.
NEW QUESTION 66
According to the FASB conceptual framework, comprehensive income includes which of the following?
- A. Option B
- B. Option D
- C. Option C
- D. Option A
Answer: A
Explanation:
Choice "b" is correct. Comprehensive income is the change in equity of a business during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes in
equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.
NEW QUESTION 67
Chester Corp. was a development stage enterprise from its inception on September 1, 1987 to December
3 1, 1988. The following information was taken from Chester's accounting records for the above period:
For the period September 1, 1987 to December 31, 1988, what amount should Chester report as net
loss?
- A. $150,000
- B. $ 50,000
- C. $450,000
- D. $350,000
Answer: C
Explanation:
Choice "d" is correct. $450,000 net loss for the period Sept. 1, 1987 to DeC. 31, 1988.
Rule: "Development stage enterprises" present their FS in accordance with GAAP and make additional
disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
NEW QUESTION 68
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 69
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 70
What information should a public company present about revenues from its reporting segments?
- A. Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany
sales. - B. No disclosure of revenues from foreign operations need be reported.
- C. Disclose as a combined amount sales to unaffiliated customers and intracompany sales between
geographic areas. - D. Disclose separately the amount of sales to unaffiliated customers but not the amount of intracompany
sales between geographic areas.
Answer: A
Explanation:
Choice "a" is correct. Unaffiliated customers sales and intracompany sales must be disclosed separately.
NEW QUESTION 71
What is the purpose of information presented in notes to the financial statements?
- A. To provide recognition of amounts not included in the totals of the financial statements.
- B. To provide disclosures required by generally accepted accounting principles.
- C. To present management's responses to auditor comments.
- D. To correct improper presentation in the financial statements.
Answer: B
NEW QUESTION 72
Which of the following types of entities are required to report on business segments?
- A. Publicly-traded enterprises.
- B. Not-for-profit enterprises.
- C. Joint ventures.
- D. Nonpublic business enterprises.
Answer: D
Explanation:
Choice "b" is correct. Only publicly-traded enterprises are required to report on business segments.
Choices "a", "c", and "d" are incorrect, per the Explanation: above.
NEW QUESTION 73
Tack, Inc. reported a retained earnings balance of $150,000 at December 31,1990. In June 1991, Tack
discovered that merchandise costing $40,000 had not been included in inventory in its 1990 financial
statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained
earnings in its statement of retained earnings at December 31, 1991?
- A. $190,000
- B. $178,000
- C. $150,000
- D. $122,000
Answer: B
Explanation:
Choice "b" is correct. $178,000.
NEW QUESTION 74
In the hierarchy of generally accepted accounting principles, APB Opinions have the same authority as
AICPA:
- A. Issues Papers.
- B. Statements of Position.
- C. Accounting Research Bulletins.
- D. Industry Audit and Accounting Guides.
Answer: C
Explanation:
Choice "d" is correct. AICPA Accounting Research Bulletins, FASB Standards, FASB Interpretations,
FASB Staff Positions, FASB Statement 133 Implementation Issues, and APB Opinions and
Interpretations are the most authoritative sources of generally accepted accounting principles. Choice "a"
is incorrect. AICPA Statements of Position, AICPA Accounting and Auditing Guides, and FASB Technical
Bulletins are secondary sources of generally accepted accounting principles. Choice "b" is incorrect.
AICPA Statements of Position, AICPA Accounting and Auditing Guides, and FASB Technical Bulletins
are secondary sources of generally accepted accounting principles. Choice "c" is incorrect. AICPA Issues
Papers and Practice Bulletins, FASB Concepts Statements, and other authoritative pronouncements are
tertiary sources for generally accepted accounting principles.
NEW QUESTION 75
Which of the following factors determines whether an identified segment of an enterprise should be
reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information?
I. The segment's assets constitute more than 10% of the combined assets of all operating segments.
II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.
- A. II only.
- B. I only.
- C. Neither I nor II.
- D. Both I and II.
Answer: B
Explanation:
Choice "a" is correct. For segment reporting, if an identified segment's assets constitute more than 10% of
the combined assets of all operating segments, the segment should be reported. The same rule does not
apply for the segment's liabilities. The candidate does have to remember the 10% and also the 10% of
"what." Choice "b" is incorrect. For segment reporting, if an identified segment's assets constitute more
than 10% of the combined assets of all operating segments, the segment should be reported. The same
rule does not apply for the segment's liabilities. Choice "c" is incorrect. For segment reporting, if an
identified segment's assets constitute more than 10% of the combined assets of all operating segments,
the segment should be reported. The same rule does not apply for the segment's liabilities, so the correct
answer cannot be "Both." Choice "d" is incorrect. For segment reporting, if an identified segment's assets
constitute more than 10% of the combined assets of all operating segments, the segment should be
reported. The correct answer cannot be "Neither."
NEW QUESTION 76
Which of the following is true regarding the comparison of managerial to financial accounting?
- A. Managerial accounting need not follow generally accepted accounting principles (GAAP) while
financial accounting must follow them. - B. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is
timeliness. - C. Managerial accounting is generally more precise.
- D. Managerial accounting has a past focus and financial accounting has a future focus.
Answer: A
Explanation:
Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes.
GAAP need not be followed for (internal) managerial accounting purposes.
Choice "a" is incorrect. Financial accounting is generally more precise.
Choice "b" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on
reporting past results.
Choice "c" is incorrect. The emphasis of financial accounting is providing useful information to financial
statement users (including the characteristic of relevance), while the emphasis of managerial accounting
is providing timely information to management decision makers.
NEW QUESTION 77
Which of the following statements best describes an operating procedure for issuing a new Financial
Accounting Standards Board (FASB) statement?
- A. A new statement is issued only after a majority vote by the members of the FASB.
- B. The emerging issues task force must approve a discussion memorandum before it is disseminated to
the public. - C. A new FASB statement can be rescinded by a majority vote of the AICPA membership.
- D. The exposure draft is modified per public opinion before issuing the discussion memorandum.
Answer: A
Explanation:
Choice "c" is correct. A new statement from the FASB is issued only after a majority vote of the members
of the FASB.
Choice "a" is incorrect. There is no necessity for the EITF to approve a discussion memorandum
(presumably the question means a discussion memorandum of the FASB statement itself and not an EITF
statement) before it is disseminated to the public.
Choice "b" is incorrect. There is no necessity for an exposure draft to be modified per public option before
issuing the discussion memorandum (a question can be raised here as to "what" discussion
memorandum"). Exposure drafts are quite/most often modified before they are issued as FASB
statements, but they do not have to be. Whether they are or are not modified is a function of whether the
FASB thinks they should be modified, partly due to the public comments that have been received.
Choice "d" is incorrect. There is no way to rescind a new FASB statement, although, in reality, a FASB
statement can be rescinded by the issuance of a new statement on the same subject. However, even if
there was a way to rescind a new FASB statement, it would not be by a majority vote of the AICPA
membership, but by a majority vote of the members of the FASB. Reporting Net Income
NEW QUESTION 78
Deficits accumulated during the development stage of a company should be:
- A. Capitalized and written off in the first year of principal operations.
- B. Reported as organization costs.
- C. Reported as a part of stockholders' equity.
- D. Capitalized and amortized over a five year period beginning when principal operations commence.
Answer: C
Explanation:
Choice "b" is correct. Deficits accumulated during the development stage of a company should be
reported as a part of stockholders' equity.
Rule: Development stage enterprises should present FS in accordance with GAAP and make additional
disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales &
expenses (part of I/S), cumulative statement of cash flows and supplementary "shareholders equity."
Choices "a", "c", and "d" are incorrect, per the rule above.
NEW QUESTION 79
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
Quo sells extended service contracts on its products. Because related services are performed over
several years, in 1993 Quo changed from the cash method to the accrual method of recognizing income
from these service contracts.
List B (Select one)
- A. Retroactive or retrospective restatement approach.
- B. Cumulative effect approach.
- C. Prospective approach.
Answer: A
Explanation:
Choice "B" is correct. If comparative FS are issued, restate prior year's FS. If comparative FS are not
issued, restate prior year-end's retained earnings account by "adjusting" (net of tax) the opening balance
of the current retained earnings statement. Note that when an error is corrected, retroactive restatement is
used, and when there is a change in accounting principle, retrospective restatement is done. However,
this is only a difference in terminology.
NEW QUESTION 80
On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the
weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of
the change is determined:
- A. During 1992 by a weighted average of the purchases.
- B. During the eight months ending August 31, 1992, by a weighted average of the purchases.
- C. As of August 31, 1992.
- D. As of January 1, 1992.
Answer: D
Explanation:
Rule: The cumulative effect of a change in accounting principle equals the difference between retained
earnings at the beginning of period of the change and what retained earnings would have been if the
change was applied to all affected prior periods. Choice "a" is correct. As of January 1, 1992, the
beginning of the year. This assumes that the company is not presenting comparative financial statements.
If comparative financial statements are presented, then the adjustment is made to the beginning retained
earnings of the earliest year presented. Choice "b" is incorrect. The cumulative effect of the change is not
determined as of the date the decision is made. Choices "c" and "d" are incorrect. The cumulative effect of
the change is not determined by a weighted average. (A far out distractor.)
NEW QUESTION 81
How should the effect of a change in accounting estimate be accounted for?
- A. By reporting pro forma amounts for prior periods.
- B. As a prior period adjustment to beginning retained earnings.
- C. By restating amounts reported in financial statements of prior periods.
- D. In the period of change and future periods if the change affects both.
Answer: D
Explanation:
Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future)
periods, if the change affects both. It does not affect "prior periods," nor "retained earnings." Choice "a" is
incorrect. Restating prior years' financial statements is required when comparative financial statements
are shown for prior period adjustments of "corrections of errors," "changes in entities," and changes in
accounting principle. Choices "b" and "c" are incorrect. A "change in accounting estimate" does not affect
prior periods.
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
Which of the following is correct concerning financial statement disclosure of accounting policies?
- A. Disclosures should duplicate details disclosed elsewhere in the financial statements.
- B. The format and location of accounting policy disclosures are fixed by generally accepted accounting
principles. - C. Disclosure of accounting policies is an integral part of the financial statements.
- D. Disclosures should be limited to principles and methods peculiar to the industry in which the company
operates.
Answer: C
Explanation:
Choice "b" is correct. Disclosure of accounting policies (and all other disclosure also) is an integral part of
the financial statements. Choice "a" is incorrect. For disclosure of accounting policies, disclosure should
not be limited to principles and methods peculiar to the industry in which the company operates. All
material accounting policies should be disclosed. Choice "c" is incorrect. For disclosure of accounting
policies, the format and location of accounting policies are not fixed by GAAP. Accounting policy
disclosures are normally Note 1, but that is a (reasonable and very general) practice and not a "rule." It
does make sense to disclose the "why" before the "what." Choice "d" is incorrect. Disclosure of
accounting policies should not duplicate details disclosed elsewhere in the financial statements.
Interim Financial Reporting
NEW QUESTION 84
Belle Co. determined after four years that the estimated useful life of its labeling machine should be 10
years rather than 12 years. The machine originally cost $46,000 and had an estimated salvage value of
$ 1,000. Belle uses straight-line depreciation. What amount should Belle report as depreciation expense
for the current year?
- A. $3,200
- B. $4,500
- C. $3,750
- D. $5,000
Answer: D
Explanation:
Choice "d" is correct. A change in estimated useful life is a change in accounting estimate, and is
therefore accounted for prospectively. The revised useful life should be used as of the beginning of the
year of the change and should be applied to the current book value of the fixed asset. The first step in
determining the depreciation expense in the year of the change in estimate is to determine the book value
of the labeling machine at the time of the change:
Original cost $46,000
-Accumulated depreciation 15,000 = [(46,000 - 1,000) / 12] *4 Current book value $31,000 This book
value is then depreciated over the remaining life of the fixed asset based on the new estimated life. In this
problem, the new estimated life is 10 years, four of which have already passed, so the asset must be
depreciated over the remaining 6 years: ($31,000 - 1,000) / 6 = $5,000 Choice "a" is incorrect. This
answer is incorrectly calculated by adding the salvage value to the current book value, and by using the
entire 10 year revised estimated life. Salvage value should always be subtracted and the asset should
only be depreciated over the remaining life of the asset. Choice "b" is incorrect. This is the annual
depreciation before the change in estimated life ($46,000 -$1,000) / 12 = $3,750]. The depreciation after
the change in estimate should be calculated as described above. Choice "c" is incorrect. This would have
been the annual straight-line depreciation if the original useful life of the asset had been 10 years rather
than 12 years. The change in estimated life is applied prospectively, as described above, not
retrospectively.
NEW QUESTION 85
In which of the following situations should a company report a prior-period adjustment?
- A. The scrapping of an asset prior to the end of its expected useful life.
- B. The correction of a mathematical error in the calculation of prior years' depreciation.
- C. A switch from the straight-line to double-declining balance method of depreciation.
- D. A change in the estimated useful lives of fixed assets purchased in prior years.
Answer: B
Explanation:
Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements
of prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a
non-GAAP method of accounting to a GAAP method of accounting (which are corrections of errors).
Choice "a" is incorrect. This change is a change in accounting estimate. Choice "c" is incorrect. This
change is a change for one GAAP method of depreciation to another GAAP method of depreciation.
Under SFAS No. 154, it is treated as a change in accounting estimate effected by a change in accounting
principle and is handled prospectively, and not as a prior-period adjustment. Choice "d" is incorrect. This
is a business activity ordinary in nature.
NEW QUESTION 86
Arpco, Inc., a for-profit provider of healthcare services, recently purchased two smaller companies and is
researching accounting issues arising from the two business combinations. Which of the following
accounting pronouncements are the most authoritative?
- A. FASB Statements of Financial Accounting Concepts.
- B. FASB Statements of Financial Accounting Standards.
- C. AICPA Industry and Audit Guides.
- D. AICA Statements of Position.
Answer: B
Explanation:
Choice "d" is correct. Since Arpco is a for-profit provider of healthcare services, it is covered under normal
GAAP. Thus, the most authoritative pronouncements are the FASB Statements of Financial Accounting
Standards (SFAS). Choice "a" is incorrect. AICPA Statements of Position are not the most authoritative
pronouncement for almost anything (other than for some issues that only they cover). They are normally
"merely" the opinion of the AICPA.
Choice "b" is incorrect. AICPA Industry and Audit Guides are not the most authoritative pronouncement
for almost anything (other than for some issues that only they cover). Choice "c" is incorrect. FASB
Statements of Financial Accounting Concepts are not authoritative pronouncements except where they
have been incorporated by reference into an SFAS. They are the basis on which SFAS can be
constructed.
NEW QUESTION 87
Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause
earnings to differ from comprehensive income for an enterprise in an industry not having specialized
accounting principles?
- A. Unrealized loss on investments in current marketable equity securities held for trading.
- B. Loss on exchange of nonmonetary assets with commercial substance.
- C. Loss on exchange of nonmonetary assets without commercial substance.
- D. Unrealized loss on investments in noncurrent marketable equity securities available for sale.
Answer: D
Explanation:
Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale
would cause earnings to differ from comprehensive income for an enterprise in an industry not having
specialized accounting principles. Rule: FAC 5 defines "earnings" for a period to exclude certain
cumulative accounting adjustments and other non-owner changes in equity (such as changes in market
value of marketable securities available for sale) that are included in comprehensive income for a period.
NEW QUESTION 88
On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to
discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would
be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.
Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its
carrying amount in 20X3. Maxy's effective tax rate is 30%.
In its 20X2 income statement, what amount should Maxy report as loss from discontinued operations?
- A. $1,190,000
- B. $980,000
- C. $1,400,000
- D. $1,700,000
Answer: A
Explanation:
Choice "b" is correct. Since the fair value of Alpha's facilities was $300,000 less than its carrying value,
there has been an impairment loss, and that loss should be recognized in 20X2. That $300,000
impairment loss plus the $1,400,000 20X2 operating loss would be recognized in 20X2 net of tax. The
total loss would be $1,700,000 * 70% (100% - 30%) or $1,190,000. Choice "a" is incorrect. It includes the
2 0X2 operating loss of $1,400,000 but not the $300,000 impairment loss but does report the 20X2
operating loss net of tax. Choice "c" is incorrect. It includes the 20X2 operating loss of $1,400,000, but not
the $300,000 impairment loss, and reports the 20X2 operating loss gross of tax and not net of tax. Choice
"d" is incorrect. It reports the 20X2 loss from discontinued operations gross of tax and not net of tax.
NEW QUESTION 89
......
Introduction to Financial Accounting and Reporting (FAR) Exam
The Standardized CPA Evaluation is the exam portion of the Financial Accounting and Reporting (FAR) which measures the expertise and skills that a newly qualified CPA must demonstrate in the financial accounting and reporting systems used by enterprise (public and non-public), non-profit, and state and local government agencies.
In the FAR portion of the test, the examination contains the requirements and regulations provided by:
- International Accounting Standards Board (IASB)
- U.S. Securities and Exchange Commission (U.S. SEC)
- Governmental Accounting Standards Board (GASB)
- American Institute of Certified Public Accountants (AICPA)
- Financial Accounting Standards Board (FASB)
The FAR section consists of questions that emphasize the conceptual structure and financial reporting, the selection of accounts of financial statements, the selection of transactions, and the application of state and local governments to accounting work. These sections can be overviewed from the FAR practice test. References at the end of this introduction provide a list of guidelines and regulations provided by these bodies and other reference materials that are available for evaluation in the FAR portion of the review.
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