CPA Level I Financial Accounting & Reporting (FAR) Practice Exam Q&A 2024, Exams of Financial Accounting

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CPA LEVEL I

Financial Accounting &

Reporting (FAR)

PRACTICE EXAM Q & A

1. ABC Inc. is a manufacturing company that uses the weighted-average method of process costing. In January, the company started production of 10,000 units and completed 8,000 units by the end of the month. The ending work in process inventory was 40% complete with respect to direct materials and 20% complete with respect to conversion costs. The total costs incurred during January were $120,000 for direct materials and $80,000 for conversion costs. What is the cost per equivalent unit for direct materials and conversion costs, respectively? A) $12 and $ B) $12 and $ C) $15 and $10* D) $15 and $ Rationale: The equivalent units for direct materials are 9,200 (8,000 + 0.4 x 2,000) and the equivalent units for conversion costs are 8,400 (8,000 + 0.2 x 2,000). The cost per equivalent unit for direct materials is $120,000 / 9, = $15 and the cost per equivalent unit for conversion costs is $80,000 / 8,400 = $10.
2. XYZ Ltd. is a retailer that uses the perpetual inventory system and the gross method of recording purchases. On January 1, XYZ purchased 100 units of inventory from a supplier for $50 per unit, with terms of 2/10, n/30. On January 5, XYZ returned 10 units to the supplier due to defects. On January 9, XYZ paid the supplier in full. What is the amount of purchase discounts that XYZ should

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.

1. Which of the following is True about the double-entry bookkeeping system? a) It is used to record transactions only in terms of debits. b) It ensures that each transaction is recorded once in the books. c) It involves recording transactions in a single account only. d) It is irrelevant for financial statement preparation. Answer: b) It ensures that each transaction is recorded once in the books. Rationale: The double-entry bookkeeping system requires each transaction to have equal debits and credits, ensuring that all transactions are recorded accurately and completely.
2. Financial statements are prepared to provide information about the financial position, performance, and cash flows

4. Under accrual accounting, which of the following events would require recognition as an expense? a) Cash payment to suppliers for goods received. b) Receipt of cash from customers for services provided. c) Accrual of salaries payable for work performed by employees. d) Purchase of inventory on credit from a supplier. Answer: c) Accrual of salaries payable for work performed by employees. Rationale: Accrual accounting recognizes expenses when incurred, regardless of the timing of cash payments. The accrual of salaries payable represents an expense for employee work performed but not yet paid.
5. When preparing the statement of cash flows using the indirect method, which of the following adjustments should be made to net income? a) Subtract non-cash expenses and add non-cash revenues. b) Exclude cash flows from financing activities. c) Add back any losses and subtract any gains. d) Subtract cash flows from investing activities. Answer: a) Subtract non-cash expenses and add non-cash revenues. Rationale: The indirect method adjusts net income by adding back non-cash expenses (such as depreciation) and subtracting non-cash revenues (such as gain on the sale of an asset) to determine cash flows from operating activities.

6. Under the International Financial Reporting Standards (IFRS), which of the following is not considered a primary financial statement? a) Statement of Comprehensive Income b) Statement of Financial Position c) Statement of Cash Flows d) Statement of Changes in Equity Answer: a) Statement of Comprehensive Income Rationale: Although the Statement of Comprehensive Income is a significant financial statement, it is not one of the primary financial statements under IFRS. The primary financial statements include the Statement of Financial Position, Statement of Cash Flows, and Statement of Changes in Equity.
7. What is the objective of the applied financial accounting framework? a) To provide information to internal management for decision-making purposes. b) To allocate costs to different departments within an entity. c) To establish uniform accounting practice across industries. d) To provide relevant, reliable, and comparable financial information to external users. Answer: d) To provide relevant, reliable, and comparable financial information to external users. Rationale: The objective of the applied financial

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.

10. Which of the following financial ratios measures a company's ability to meet its short-term obligations? a) Return on Equity (ROE) b) Debt-to-Equity Ratio c) Current Ratio d) Gross Profit Margin Answer: c) Current Ratio Rationale: The current ratio is computed by dividing current assets by current liabilities. It demonstrates a company's ability to meet its short-term obligations using its current assets.
11. A company sells merchandise to customers with terms of 2/10, net 30. What does this mean? a) Customers have a 2-day grace period to pay the full amount due. b) Customers receive a 10% discount if they pay within 30 days. c) Customers receive a 2% discount if they pay within 10 days. d) Customers must pay the full amount within 30 days. Answer: c) Customers receive a 2% discount if they pay

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.

12. Which of the following inventory costing methods assumes that the most recently purchased inventory items are sold first? a) FIFO (First-In, First-Out) b) LIFO (Last-In, First-Out) c) Average Cost Method d) Specific Identification Method Answer: b) LIFO (Last-In, First-Out) Rationale: The LIFO method assumes that the most recently acquired inventory items are sold first, leaving the older inventory items in stock.
13. How does an increase in the allowance for doubtful accounts impact the financial statements? a) Decreases net income and total assets. b) Increases net income and total assets. c) Decreases net income and total liabilities. d) Increases net income and total liabilities. Answer: a) Decreases net income and total assets. Rationale: Increasing the allowance for doubtful accounts reduces the accounts receivable balance and, consequently, the net income and total assets on the financial statements.