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A practice exam for the CPA Level I Financial Accounting & Reporting (FAR) exam. It includes questions and answers related to various accounting concepts such as process costing, perpetual inventory system, financial reporting, intangible assets, revenue recognition, treasury stock transactions, foreign currency transactions, current ratio, statement of cash flows, stock dividends, double-entry bookkeeping system, financial statements, accounting concepts, and IFRS. rationales for each answer, which can be useful for students to understand the concepts better.
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is $1.6 million / $8 million = 0.2 or 20%. Therefore, PQR should recognize 20% of the total contract price as revenue in year one, which is $10 million x 0.2 = $2.5 million. Which of the following best describes the accrual basis of accounting? a) Recognizing revenues and expenses when cash is received or paid b) Recognizing revenues and expenses when they are incurred, regardless of when cash is received or paid c) Recognizing revenues and expenses only when cash is received or paid d) Recognizing revenues and expenses when they are incurred, but only if cash is received or paid within the same accounting period Answer: b) Recognizing revenues and expenses when they are incurred, regardless of when cash is received or paid Rationale: The accrual basis of accounting recognizes revenues and expenses when they are incurred, regardless of when cash is received or paid, providing a more accurate representation of a company's financial position. What is the main objective of financial reporting for external users?
a) To provide information for management decision- making b) To provide information about the economic resources, obligations, and equity of an entity c) To facilitate tax reporting d) To comply with regulatory requirements Answer: b) To provide information about the economic resources, obligations, and equity of an entity Rationale: The main objective of financial reporting for external users is to provide information about the economic resources, obligations, and equity of an entity, enabling users to make informed economic decisions. How are intangible assets, such as patents and trademarks, generally recorded on the balance sheet? a) At their original cost b) At their fair market value c) At their original cost less accumulated depreciation d) Only if they have a determinable useful life Answer: a) At their original cost Rationale: Intangible assets are generally recorded on the balance sheet at their original cost, which includes all costs necessary to make the intangible asset ready for its intended use. Which of the following financial statements reports a company's financial position at a specific point in time? a) Income statement b) Statement of cash flows c) Balance sheet
returned to shareholders. Which of the following is not a characteristic of a capital lease? a) Ownership of the leased asset is transferred to the lessee at the end of the lease term b) The lease term is for a major part of the economic life of the asset c) The present value of lease payments exceeds a significant portion of the fair value of the asset d) The lease contains a bargain purchase option Answer: a) Ownership of the leased asset is transferred to the lessee at the end of the lease term Rationale: Ownership of the leased asset is not transferred to the lessee at the end of the lease term in a capital lease, which is a key characteristic distinguishing it from an operating lease. How are gains or losses from foreign currency transactions usually reported in the income statement? a) Included in operating income b) Reported as an adjustment to retained earnings c) Separately reported as other income or expense d) Included in cost of goods sold Answer: c) Separately reported as other income or expense Rationale: Gains or losses from foreign currency transactions are usually reported in the income statement as other income or expense, reflecting their non-operating nature.
Which of the following is a primary objective of segment reporting under IFRS 8? a) To provide information about different types of revenue and expenses b) To provide information about different geographical locations of a company's operations c) To provide information about different operating segments of a company d) To provide information about the company's industry as a whole Answer: c) To provide information about different operating segments of a company Rationale: The primary objective of segment reporting under IFRS 8 is to provide information about the different operating segments of a company, enabling users to assess the company's business activities and the economic environment in which it operates. How is the carrying amount of a bond payable generally calculated on the balance sheet? a) At its face value b) At its amortized cost c) At its fair value d) At its present value Answer: b) At its amortized cost Rationale: The carrying amount of a bond payable is generally calculated on the balance sheet at its amortized cost, which reflects the cumulative amount of interest expense recognized and the difference between the face
c) Return on assets d) Earnings per share Answer: a) Current ratio Rationale: The current ratio measures a company's ability to meet its short-term obligations using its most liquid assets, providing insight into its short-term liquidity position. What is the purpose of the statement of cash flows? a) To report a company's financial position at a specific point in time b) To provide information about a company's sources and uses of cash during a specific period c) To report a company's revenues and expenses for a specific period d) To disclose a company's significant accounting policies Answer: b) To provide information about a company's sources and uses of cash during a specific period Rationale: The purpose of the statement of cash flows is to provide information about a company's sources and uses of cash during a specific period, categorizing cash flows into operating, investing, and financing activities. How are stock dividends typically recorded on the balance sheet? a) As a reduction of retained earnings and an increase in common stock b) As an expense in the income statement c) As an increase in an asset account
d) As a liability on the balance sheet Answer: a) As a reduction of retained earnings and an increase in common stock Rationale: Stock dividends are typically recorded on the balance sheet as a reduction of retained earnings and an increase in common stock, reflecting the distribution of additional shares to existing shareholders without involving the receipt of cash.
Rationale: Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are properly recognized and that the financial statements reflect the economic activities of the business during that period.
within 10 days. Rationale: "2/10, net 30" indicates that customers receive a 2% discount if they pay within 10 days; otherwise, the full amount is due within 30 days.