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FAR-000001FAR-IRevenue recognition
During the year-end close for a manufacturer, an entity receives an advance payment for goods it has not yet shipped. What should be recorded initially?
- A.A contract liability should be recorded until the promised goods are transferred.
- B.Revenue should be recognized immediately for the full cash receipt
- C.A receivable should be recorded even though cash was received
- D.The cash receipt should be ignored until shipment
Answer: A. A contract liability should be recorded until the promised goods are transferred.A contract liability should be recorded until the promised goods are transferred.
Why the other answers are wrong
- B. The choice "Revenue should be recognized immediately for the full cash receipt" misses the issue because cash collection alone does not satisfy the performance obligation.
- C. The choice "A receivable should be recorded even though cash was received" misses the issue because a receivable is not needed when the customer already paid.
- D. The choice "The cash receipt should be ignored until shipment" misses the issue because cash received must still be recorded with an offsetting liability.
FAR-000002FAR-IILong-lived assets
During the year-end close for a manufacturer, equipment has a carrying amount greater than the undiscounted cash flows expected from use and disposal. What should management do next under U.S. GAAP?
- A.Write the asset down to zero immediately
- B.Measure impairment as the excess of carrying amount over fair value.
- C.Recognize no impairment because depreciation is already recorded
- D.Use discounted cash flows only to decide whether recoverability failed
Answer: B. Measure impairment as the excess of carrying amount over fair value.Measure impairment as the excess of carrying amount over fair value.
Why the other answers are wrong
- A. The choice "Write the asset down to zero immediately" misses the issue because impairment is measured against fair value, not automatically zero.
- C. The choice "Recognize no impairment because depreciation is already recorded" misses the issue because depreciation does not replace impairment testing.
- D. The choice "Use discounted cash flows only to decide whether recoverability failed" misses the issue because undiscounted cash flows are used for the recoverability screen.
FAR-000003FAR-IILeases
During the year-end close for a manufacturer, a lessee obtains the right to use equipment for most of the asset's useful life. What is the likely financial statement effect at commencement?
- A.The lessee records rent expense only as cash is paid
- B.The lessor records the lessee's right-of-use asset
- C.The lessee recognizes a right-of-use asset and lease liability if the contract is a lease.
- D.No accounting occurs until the lease ends
Answer: C. The lessee recognizes a right-of-use asset and lease liability if the contract is a lease.The lessee recognizes a right-of-use asset and lease liability if the contract is a lease.
Why the other answers are wrong
- A. The choice "The lessee records rent expense only as cash is paid" misses the issue because most leases create recognized assets and liabilities for the lessee.
- B. The choice "The lessor records the lessee's right-of-use asset" misses the issue because the right-of-use asset belongs to the lessee.
- D. The choice "No accounting occurs until the lease ends" misses the issue because recognition generally occurs at commencement.
FAR-000004FAR-IIBonds payable
During the year-end close for a manufacturer, a bond is issued at a premium because the stated interest rate exceeds the market rate. How does the premium affect interest expense over time?
- A.The premium increases interest expense above cash interest each period
- B.The premium is recognized as revenue on the issue date
- C.The premium is never amortized
- D.Amortizing the premium reduces interest expense below the cash interest paid.
Answer: D. Amortizing the premium reduces interest expense below the cash interest paid.Amortizing the premium reduces interest expense below the cash interest paid.
Why the other answers are wrong
- A. The choice "The premium increases interest expense above cash interest each period" misses the issue because that describes discount amortization, not premium amortization.
- B. The choice "The premium is recognized as revenue on the issue date" misses the issue because a bond premium is not revenue to the issuer.
- C. The choice "The premium is never amortized" misses the issue because bond premiums are amortized over the bond term.
FAR-000005FAR-IIIConsolidations
During the year-end close for a manufacturer, a parent sells inventory to a subsidiary and the inventory remains unsold at period-end. What consolidation adjustment is needed?
- A.Eliminate the intercompany profit still included in ending inventory.
- B.Recognize the profit again on consolidation
- C.Eliminate only the cash collected from the subsidiary
- D.Record goodwill for the intercompany sale
Answer: A. Eliminate the intercompany profit still included in ending inventory.Eliminate the intercompany profit still included in ending inventory.
Why the other answers are wrong
- B. The choice "Recognize the profit again on consolidation" misses the issue because the profit is not earned outside the consolidated group.
- C. The choice "Eliminate only the cash collected from the subsidiary" misses the issue because cash collection is not the consolidation issue.
- D. The choice "Record goodwill for the intercompany sale" misses the issue because goodwill is not created by internal inventory sales.
FAR-000006FAR-IVNot-for-profit accounting
During the year-end close for a manufacturer, a donor contribution is restricted for construction of a future building. How should the contribution generally be classified before the restriction is met?
- A.It is always reported as net assets without donor restrictions
- B.It is reported as net assets with donor restrictions.
- C.It is reported as a liability to the donor
- D.It is excluded from the financial statements until construction begins
Answer: B. It is reported as net assets with donor restrictions.It is reported as net assets with donor restrictions. The tested issue is Not-for-profit accounting, so the best answer must match that rule and respond directly to the facts in the stem.
Why the other answers are wrong
- A. The choice "It is always reported as net assets without donor restrictions" misses the issue because the donor-imposed purpose restriction affects classification.
- C. The choice "It is reported as a liability to the donor" misses the issue because a contribution restriction is not normally a repayment obligation.
- D. The choice "It is excluded from the financial statements until construction begins" misses the issue because the contribution is recognized when received or promised if criteria are met.
FAR-000007FAR-IVGovernmental accounting
During the year-end close for a manufacturer, a city reports activity in its general fund. Which measurement focus and basis of accounting are generally used?
- A.Economic resources focus and full accrual are used for the general fund
- B.Cash basis accounting is required for all governmental funds
- C.Current financial resources measurement focus and modified accrual accounting are used.
- D.Fair value accounting is used for all general fund liabilities
Answer: C. Current financial resources measurement focus and modified accrual accounting are used.Current financial resources measurement focus and modified accrual accounting are used.
Why the other answers are wrong
- A. The choice "Economic resources focus and full accrual are used for the general fund" misses the issue because that describes government-wide statements, not governmental funds.
- B. The choice "Cash basis accounting is required for all governmental funds" misses the issue because governmental funds use modified accrual, not pure cash basis.
- D. The choice "Fair value accounting is used for all general fund liabilities" misses the issue because fund reporting has specific recognition rules, not universal fair value.
FAR-000008FAR-IAccounting changes
During the year-end close for a manufacturer, management revises the estimated useful life of equipment based on new operating information. How should the change be accounted for?
- A.Restate all prior financial statements
- B.Report the change as an extraordinary item
- C.Ignore the change until the asset is sold
- D.Account for the revision prospectively as a change in accounting estimate.
Answer: D. Account for the revision prospectively as a change in accounting estimate.Account for the revision prospectively as a change in accounting estimate.
Why the other answers are wrong
- A. The choice "Restate all prior financial statements" misses the issue because changes in estimate are generally prospective.
- B. The choice "Report the change as an extraordinary item" misses the issue because extraordinary item presentation is not the treatment.
- C. The choice "Ignore the change until the asset is sold" misses the issue because the new estimate affects future depreciation.
High-value FAR topics
Revenue, leases, bonds, equity, cash flows, consolidations, statement classification, contingencies, subsequent events, and governmental and nonprofit reporting.
Best study rhythm
Use short focused sets. After each set, identify whether each miss came from rule memory, calculation setup, reading, or answer-choice elimination.
FAR topic guides
Build FAR strength with focused topic guides.
FARLeases explained for FAR CPA candidatesRight-of-use assets, lease liabilities, classification, and common FAR traps.
FARRevenue recognition for FAR CPA candidatesPerformance obligations, transaction price, allocation, timing, and cash-vs-revenue mistakes.
FARBonds payable for FAR CPA candidatesDiscounts, premiums, carrying amount, effective interest, and extinguishment basics.
FARHow many FAR questions should you do before exam day?A practical way to think about FAR question volume, review quality, and readiness.
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