Last Updated: April 18, 2018

Here are some Financial and Reporting Questions along with some detailed answers.

You can find more FAR practice questions in our FAR study guide.


The town of Albany applies the provisions of GASB 34, Basic
Financial Statements–and Management’s Discussion and Analysis-
for State and Local Governments, for its financial statements.
As of December 31, 2017, Silverton compiled the information
below for its capital assets, exclusive of infrastructure

Cost of capital assets financed with general obligation debt and
tax revenues $7,000,000

Accumulated depreciation on the capital assets 3,000,000

Outstanding debt related to the capital assets 1,000,000

1. On the government-wide statement of net assets at December
31, 2017, under the governmental activities column, what amount
should be reported for capital assets?

a. $3,000,000
b. $4,000,000
c. $5,000,000
d. $6,000,000

2. On the Government wide statement of net assets at December
31, 2017, under the governmental activities column, the
information related to capital assets should be reported in the
net assets section at which of the following amounts?

a. $1,000,000
b. $2,000,000
c. $3,000,000
d. $4,000,000

3. Auburn City reported a $2,000 net increase in fund balance
for governmental funds. During the year, Auburn purchased
general capital assets of $10,000 and recorded depreciation
expense of $4,000. What amount should Auburn report as the
change in net assets for governmental activities?

a. $ 8,000
b. $ 3,500
c. $ (2,500)
d. $12,500

4. A not-for-profit voluntary health and welfare organization
received a $500,000 permanent endowment. The donor stipulated
that the income must be used for a mental health program. The
endowment fund reported $60,000 net de- crease in market value
and $30,000 investment income. The organization spent $45,000 on
the mental health program during the year. What amount of change
in temporarily restricted net assets should the organization

a. $425,000 increase.
b. $15,000 decrease.
c. $75,000 decrease
d. $0

5. Cares, a nongovernmental not-for-profit organization,
received $80,000 from Bane Company to sponsor a play given by
Cares at the local theater. Cares gave Bane 30 tickets, which
generally cost $150 each. Bane received no other benefits. What
amount of ticket sales revenue should Cares record?

a. $0
b. $80,000
c. $57,500
d. $4,500

6. Under Statement of Financial Accounting Concepts 2, the
ability through consensus among measurers to ensure that
information represents what it purports to represent is an
example of the concept of

a. Relevance.
b. Comparability.
c. Verifiability.
d. Feedback value.

7. When a company changes the expected service life of an asset
because additional information has been obtained, which of the
following should be reported?

“Pro forma effects
of retroactive
application”                       “Retrospective application”

a.                      Yes                                                Yes
b.                      No                                                 No
c.                      Yes                                                No
d.                      No                                                 Yes

8. Albert Corporation issued a 40% stock split-up of its common
stock that had a par value of $10 before and after the split-up.
At what amount should retained earnings be capitalized for the
additional shares issued?

a. There should be no capitalization of retained earnings.
b. Market value on the payment date.
c. Market value on the declaration date.
d. Par value.

9. A nonmonetary asset was received by Company A in a
nonreciprocal transfer from Company B that has commercial
substance. The asset should be recorded by A at

a. B’s recorded amount.
b. The fair value of the asset received.
c. B’s recorded amount or the fair value of the asset received,
whichever is lower.
d. B’s recorded amount or the fair value of the asset received,
whichever is higher.

10. A development stage enterprise

a. Issues an income statement that is the same as an established
operating enterprise, and shows cumulative amounts from the
enterprise’s inception as additional information.
b. Issues an income statement that only shows cumulative amounts
from the enterprise’s inception.
c. Issues an income statement that is the same as an established
operating enterprise, but does not show cumulative amounts from
the enterprise’s inception as additional information.
d. Does not issue an income statement.

11. During a period of inflation, an account balance remains
constant. With respect to this account, a purchasing power gain
will be recognized if the account is a

a. Monetary asset.
b. Monetary liability.
c. Nonmonetary liability.
d. Nonmonetary asset.

12. The summary of significant accounting policies should
disclose the

a. Pro forma effect of retroactive application of an accounting
b. Adequacy of pension plan assets in relation to vested
c. Basis of profit recognition on long-term construction
d. Future minimum lease payments in the aggregate and for each
of the five succeeding fiscal years.

13. The following items relate to the preparation of a statement
of cash flows:
2017                            2013                    2017

Cash                                $150,000                  $100000          Net sales $3,200,000
AR–net                            420,000                      290,000        CGS (2,500,000)


inventory                        330,000                       210,000        Expenses (500.000)
AP                                      265,000                       220,000        Net income $ 200.000

All accounts payable relate to trade merchandise. Accounts
payable are recorded net and always are paid to take all of the
discount allowed. The direct approach is used for operating
activities. Under operating activities, cash payments during
2017 to suppliers amounted to

a. $2,500,000
b. $2,575,000
c. $2,455,000
d. $2,335,000

14. Grain Constructors, Inc. had an operating loss carry forward
of $200,000 that arose from ordinary operations in2017. There is
no evidence that indicates the need for a valuation allowance.
The income tax rate is 50%. For the year ended December 31,2017,
the tax benefit should be reported in the income statement as

a. An extraordinary item of $200,000
b. An extraordinary item of $100,000.
c. An operating gain of $100,000.
d. A $100,000 reduction in income tax expense from continuing

Items 15 through 17 are based on the following information:

The December 31,2017 balance sheet of Patent, Inc. is presented
below. These are the only accounts in Patent’s balance sheet.
Amounts indicated by a question mark (?) can be calculated from
the additional information given.


Cash                                                                                $ 25,000

Accounts receivable (trade)                                          ?

Inventory                                                                              ?

Property, plant and equipment (net)                   294,000

Liabilities and stockholders ‘ equity

Accounts payable (trade)                                               ?

Income taxes payable (current)                            25,000

Long-term debt                                                             100,000

Common stock                                                              300,000

Retained earnings                                                              ?

Additional information

Current ratio (at year-end)                                          1.5 to 1

Total liabilities divided by total stockholders’ equity         .8

Inventory turnover based on sales and
ending inventory                                                             15 times

Inventory turnover based on cost of goods sold and
ending inventory                                                             10.5 times

Gross margin for 2017                                                  $3 15,000

15. What was Patent’s December 31,2017 balance in the inventory

a. $ 21,000
b. $ 70,000
c. $ 30,000
d. $135,000

16. What was Patent’s December 31,2017 balance in trade accounts

a. $182,000
b. $92,000
c. $67,000
d. $207,000

17. What was Patent’s December 31,2013 balance in retained

a. $ 60,000
b. $ 60,000 deficit.
c. $132,000 deficit.
d. $132,000

18. Companies X and Y have been operating separately for five
years. Each company has a minimal amount of liabilities and a
simple capital structure consisting solely of voting common
stock. Company X, in exchange for 40% of its voting stock,
acquires 80% of the common stock of Company Y. This was a “tax
free” stock for stock (type B) exchange for tax purposes.
Company Y identifiable assets have a total net fair market value
of $800,000 and a total net book value of $580,000. The fair
market value of the X stock used in the exchange was $700,000.
The fair value of the shares of stock of Y owned by the non-
controlling interest was $100,000 at the date of acquisition.
The goodwill on this acquisition would be

a. $ 60,000
b. $120,000
c. $236,000
c. Zero.

19. Crown Corporation owns an office building and leases the
offices under a variety of rental agreements involving rent paid
monthly in advance and rent paid annually in advance. Not all
tenants make timely payments of their rent. Crown’s balance
sheets contained the following information:
2017                                            2016

Rentals receivable                               $3,100                                      $2,400

Unearned rentals                                    6,000                                         8,000

During 2017, Crown received $20,000 cash from tenants. How much
rental revenue should Crown record for 2017?

a. $17,300
b. $22,700
c. $21,300
d. $18,700

20. Wagner Company carries product X in inventory on December 3,
2017, at its unit cost of $7.50. Because of a sharp decline in
demand for the product, the selling price was reduced to $8.00
per unit. Wagner’s normal profit margin on product X is $1.60,
disposal costs are $1.00 per unit, and the replacement cost is
$5.30. Under the rule of cost or market, whichever is lower,
Wagner’s December 3 1,2013, inventory of product X should be
valued at a unit cost of

a. $5.30
b. $7.50
c. $7.00
d. $5.40

21. On January 1, 2017, Ohana, Inc. signed a fixed-price
contract to have Builder Associates construct a major plant
facility at a cost of $4,000,000. It was estimated that it would
take three years to complete the project. Also on January 1,
2017, to finance the construction cost, Ohana borrowed
$4,000,000 payable in 10 annual installments of $400,000 plus
interest at the rate of 11%. During 2017 Ohana made deposit and
progress payments totaling $1,500,000 under the contract; the
average amount of accumulated expenditures was $650,000 for the
year. The excess borrowed funds were invested in short-term
securities, from which Ohana realized investment income of
$250,000. What amount should Ohana report as capitalized
interest at December 31, 2017?

a. $440,00
b. $190,000
c. $165,000
d. $ 71,500

22. On May 1, 2017, Gale Corp. bought a parcel of land for
$100,000. Seven months later, Gale sold this land to a triple- A
rated company for $150,000, under the following terms: 25% at
closing, and a first mortgage note (at the market rate of
interest) for the balance. The first payment on the note, plus
accrued interest, is due December 1, 2017 1. Gale reported this
sale on the installment basis in its 2017 tax return. In its
2017 income statement, how much gain should Gale report from the
sale of this land?

a. $0
b. $50,000
c. $37,500
d. $12,500

23. On January 1,2017, Hardison Company lent $20,000 cash to
Nate Company. The promissory note made by Nate did not bear
interest and was due on December 3 1,2017 1. No other rights or
privileges were exchanged. The prevailing interest for a loan of
this type was 12%. The present value of $1 for two periods at
12% is 0.797. Hardison should recognize interest income in 2017

a. $0
b. $1,913
c. $2,030
d. $2,400

24. Devra Co. has been forced into bankruptcy and liquidated.
Unsecured claims will be paid at the rate of $.50 on the dollar.
Parker Co. holds a noninterest-bearing note receivable from
Devra in the amount of $50,000, collateralized by machinery with
a liquidation value of $10,000. The total amount to be realized
by Parker on this note receivable is

a. $30,000
b. $25,000
c. $20,000
d. $10,000

25. Included in N. Ford’s assets at December 3 1,2017, are the
2,000 shares of Leverage Corporation common stock purchased in
2008 for $100,000. The market value of the stock was $80 per
share at December 31, 2017. A $500,000 whole life insurance
policy having a cash value of $72,000 at December 31, 2017,
subject to a $30,000 loan payable to the insurance company.

In Ford’s December 31, 2017 personal statement of financial
condition, the above assets should be reported at

a. $202,000
b. $232,000
c. $172,000
d. $142,000

26. Footnotes to the financial statements are beneficial in
meeting the disclosure requirements of financial reporting. The
footnotes should not be used to

a. Correct ah improper presentation in the financial statements.
b. Describe depreciation methods employed by the company. c.
Describe the principles and methods peculiar to the industry in
which the company operates, when these principles and methods
are predominantly followed in that industry.
d. Describe significant accounting policies.

27. The statement of cash flows classifies cash receipts and
cash payments as arising from operating, investing, and
financing activities. All of the following should be classified
as investing activities except

a. Cash outflows to purchase manufacturing equipment
b. Cash outflows to lenders for interest
c. Cash inflows from the sale of bonds of other entities.
d. Cash inflows from the sale of a manufacturing plant

28. Initial direct costs incurred by the lessor under a sales-
type lease should be

a. Deferred and allocated over the economic life of the leased
b. Added to the gross investment in the lease and amortized over
the term of the lease as a yield adjustment.
c. Deferred and allocated over the term of the lease in
proportion to the recognition of rental income.
d. Expensed in the period incurred.

29. Under IFRS which of the following is the definition of a

a. An asset that is certain as to value.
b. A liability that has definitely been incurred.
c. An asset that is uncertain as to its fair value.
d. A liability that is uncertain in timing or amount.

30. Park prepares its financial statements in accordance with
IFRS. Park has several cash advances and loans from bank
overdrafts. How should these items be reported on the statement
of cash flows?

a. Financing activities.
b. Investing activities.
c. Operating activities.
d. Other significant noncash activities.

Answers and Explanation


1. C
2. A
3. A
4. D
5. D
6. C
7. B
8. D
9. B
10. A
11. B
12. C
13. B
14. D
15. B
16. c
17. B
18. D
19. B
20. D
21. D
22. B
23. A
24. A
25. B
26. A
27. B
28. D
29. D
30. A

Hints for Multiple-Choice Questions

1. Capital assets are presented net of accumulated depreciation
2. In the net assets section capita1 assets are presented net of
related debt.
3. Net assets is increased by increase in fund balance and
increase in capital assets.
4. Endowment is a permanently restricted amount.
5. Ticket revenue is at fair value.
6. A characteristic of reliability.
7. This is a change in an accounting estimate.
8. This constitutes a large stock dividend. It is not a stock
split because par value has not changed.
9. No tricks here.
10. Must follow GAAP.
11. Monetary items are fixed in amount.
12. Entity should disclose the accounting principles follow and
methods of applying those principles.
13. Cash payments to suppliers is determined by adjusting CGS
for changes in inventory and AP.
14. The operating loss reduces income from operations.
15. Calculate inventory algebraically-Sales = (10.5) (INV) +
$315,000 = (15)(INV).
16. First calculate total current assets, then use current
17. LiabilitiesISE = 0.8/1.0.
18. Measurement of GW.
19. Review Cash to accrual, Module 7, Section A.4.
20. Floor is NRV less normal profit.
21. Capitalized interest is avoidable interest.
22. Installment method can only be used under GAAP where
collection is not reasonably assured.
23. $20,000 is both the PV and FV of this note.
24. Only $40,000 of the note is unsecured.
25. Present estimated current values of assets and current
amounts of liabilities.
26. Footnotes provide additional information.
27. Investing activities relate to investments in property,
plant, and equipment and securities.
28. Initial direct costs are part of cost of sales.
29. Provisions are liabilities.
30. These are not classified as financing activities.

1. (C) The assets under the governmental activities column would
include the capital assets of $7,000,000 less the accumulated
depreciation of $3,000,000.

2. (A) The amount of net assets is equal to assets minus
liabilities. Therefore, the amount would be equal to $1,000,000
($7,000,000 total assets – $3,000,000 accumulated depreciation –
$2,000,000 liabilities).

3. (A) The changes in net assets is equal to $8,000 ($10,000
expenditures for capital assets- $2,000 increase in fund
balances). The depreciation expense would not be included in the
fund statement.

4. (D) The endowment would be a permanently restricted asset.
The income would be initially recorded as temporarily restricted
funds and the expenditures would be recorded as decreases in
unrestricted assets. At the end of the period, the temporarily
restricted income would be reclassified as unrestricted,
resulting in $0 change in temporarily restricted assets. Note
that if the entity had not spent all of the endowment income in
this year there would have been a change in temporarily
restricted assets.

5. (D) The ticket sales revenue should be equal to the
construction contracts. fair market value of the tickets.

6. (C) Verifiability relates to the reliability of the
measurement. The others related to relevance.

7. (B) A change in the expected service life of an asset because
of new information is reported prospectively. Prior periods are
not restated.

8. (b) In a large stock dividend, retained earnings should be
charged for the par value of the additional shares issued.

9. (b) If the nonmonetary exchange has commercial substance, the
asset received is recorded at its fair value.

10. (a) A development stage enterprise issues an income
statement that is the same as an established operating
enterprise and shows cumulative amounts from the enterprise’s
inception and additional information

11. (b) In a period of inflation, a gain will be recognized on a
monetary liability. The liability will be paid with dollars with
less purchasing power.

12. (c) The summary of significant accounting policies should
disclose the basis of profit recognition on long-term
construction contracts.

13. (b) The cash payments to suppliers is equal to $2,575,000
($2,500,000 CGS + $220,000 beg. AP – $265,000 end. AP – $210,000
beg. Inv. + $330,000 end. Inv.).

14. (d) The tax benefit is $40,000 ($100,000 x 40%).

15. (b) Inventory is equal to $70,000. To calculate this amount,
inventory turnover based on cost of goods sold (10.5) is
deducted from inventory turnover based on sales (15), which
results in 4.5. Then, divide this amount into gross margin to
get $70,000 ($315,000 t 4.5).

16. (c) To calculate this amount, first calculate current assets
by deducting the amount of property, plant, and equipment from
total assets. Current assets is equal to $138,000 ($432,000 –
$294,000). If the current ratio is equal to 1.5 to 1, then
current liabilities are equal to $92,000 ($138,000 + 1.5).
Finally, accounts payable is equal to $67,000 ($93,000 CL –
$25,000 income taxes payable).

17. (b) Retained earnings is equal to $60,000 deficit ($432,000
total assets – $67,000 AP – $25,000 income taxes payable –
$100,000 long-term debt – $300,000 common stock).

18. (d) Goodwill is calculated as the consideration given of
$700,000 plus the fair value of the noncontrolling interest of
$100,000 less the fair value of the net identifiable assets of
the acquiree of $800,000, which equals zero.

19. (b) Rent earned is equal to $22,700 ($20,000 cash received –
$2,400 beg. rent receivable + $3,100 end. rent receivable ‘+
$8,000 beg. unearned rent – $6,000 end. unearned rent).

20. (d) The lower of cost or market value is the floor of $5.40
($8.00 sales price – $1.00 disposal costs – $1.60 normal

21. (d) Capitalized interest is equal to $71,500 ($650,000
average amount of accumulated expenditures x 11% interest rate).

22. (b) The total gain on the sales is $50,000 ($150,000 –
$100,000). Under GAAP the total gain is recognized unless there
is too much uncertainty about the amount to be collected.

23. (a) Since there were no other aspects to the transaction, no
interest is implicit, and none should be imputed.

24. (a) The amount realized is equal to $10,000 (collateral
value) + 50% of the remaining $40,000, or $30,000.

25. (b) The assets should be reported at their fair market
values of $202,000 [(2,000 x $80) + ($72,000 – $30,000)]. Note
that the insurance policy value is shown net of the loan.

26. (a) Footnotes should not correct errors in the financial

27. (b) Cash outflows to lenders for interest are classified as
financing activities.

28. (d) Initial direct costs incurred by a lessor should be
expensed as incurred.

29. (d) A “provision” is defined under IFRS as a liability that
is uncertain in timing or amount.

30. (a) IFRS requires cash advances and loans from bank
overdrafts to be classified as operating activities.

If these sample FAR questions were helpful you can more FAR practice questions in our FAR study guide.