The Financial Accounting & Reporting (FAR) section of the CPA exam is one of the most challenging parts, testing a candidate’s knowledge of GAAP, IFRS, financial reporting, and government/nonprofit accounting standards. To help you prepare effectively, we’ve created a set of 50 practice MCQs with correct answers and explanations. These questions are designed to simulate real exam scenarios, build confidence, and strengthen your accounting fundamentals.
Whether you’re focusing on financial statements, reporting frameworks, or complex accounting treatments, these MCQs will give you valuable practice and ensure you’re exam-ready.
📘 CPA FAR Practice Questions – Part 1 (MCQs 1–50)
1. Which financial statement provides information about a company’s financial position at a specific point in time?
a) Income Statement
b) Balance Sheet
c) Cash Flow Statement
d) Statement of Retained Earnings
Answer: b) Balance Sheet
Explanation: The balance sheet shows a company’s assets, liabilities, and equity on a specific date, reflecting its financial position.
2. Under U.S. GAAP, which basis of accounting is primarily used for financial reporting?
a) Cash basis
b) Accrual basis
c) Hybrid basis
d) Tax basis
Answer: b) Accrual basis
Explanation: GAAP requires accrual accounting, where revenues and expenses are recorded when earned/incurred, not when cash is exchanged.
3. Which of the following is an example of a current asset?
a) Land
b) Equipment
c) Inventory
d) Goodwill
Answer: c) Inventory
Explanation: Current assets are expected to be converted into cash or used within one year. Inventory qualifies as a current asset.
4. IFRS uses the term “statement of financial position” instead of which GAAP term?
a) Balance Sheet
b) Income Statement
c) Cash Flow Statement
d) Statement of Equity
Answer: a) Balance Sheet
Explanation: Under IFRS, the balance sheet is referred to as the “statement of financial position.”
5. Which financial reporting framework is primarily used in the U.S.?
a) IFRS
b) GAAP
c) IPSAS
d) GASB
Answer: b) GAAP
Explanation: Generally Accepted Accounting Principles (GAAP) are used for financial reporting in the United States.
6. Which section of the cash flow statement includes cash paid for equipment purchases?
a) Operating Activities
b) Financing Activities
c) Investing Activities
d) Retained Earnings
Answer: c) Investing Activities
Explanation: Cash used for buying/selling long-term assets like equipment is shown under investing activities.
7. Under GAAP, revenue is recognized when:
a) Cash is received
b) Customer signs a contract
c) Performance obligation is satisfied
d) Invoice is sent
Answer: c) Performance obligation is satisfied
Explanation: According to the revenue recognition principle, revenue is recognized when goods/services are delivered.
8. Which entity sets accounting standards for U.S. public companies?
a) FASB
b) GASB
c) SEC
d) PCAOB
Answer: a) FASB
Explanation: The Financial Accounting Standards Board (FASB) sets U.S. GAAP.
9. Governmental accounting standards in the U.S. are issued by:
a) FASB
b) GASB
c) SEC
d) AICPA
Answer: b) GASB
Explanation: The Governmental Accounting Standards Board (GASB) develops standards for state and local governments.
10. Which of the following is an intangible asset?
a) Inventory
b) Patents
c) Buildings
d) Cash
Answer: b) Patents
Explanation: Intangible assets lack physical substance but provide economic value, like patents, trademarks, or goodwill.
11. Which type of account is “Unearned Revenue”?
a) Asset
b) Liability
c) Equity
d) Revenue
Answer: b) Liability
Explanation: Unearned revenue represents money received before services are performed, so it is a liability.
12. Which principle requires accountants to record expenses in the same period as the revenues they help generate?
a) Revenue Recognition
b) Matching Principle
c) Conservatism Principle
d) Full Disclosure
Answer: b) Matching Principle
Explanation: The matching principle ensures expenses are recorded in the same period as related revenues.
13. Which of the following is NOT part of the fundamental qualitative characteristics of financial reporting under the FASB Conceptual Framework?
a) Relevance
b) Faithful Representation
c) Comparability
d) Consistency
Answer: d) Consistency
Explanation: Relevance and faithful representation are fundamental. Comparability, consistency, timeliness, and understandability are enhancing qualities.
14. Which inventory method is prohibited under IFRS but allowed under GAAP?
a) FIFO
b) LIFO
c) Weighted Average
d) Specific Identification
Answer: b) LIFO
Explanation: LIFO (Last-in, First-out) is allowed under GAAP but prohibited under IFRS.
15. Which of the following is NOT a component of owners’ equity?
a) Retained Earnings
b) Common Stock
c) Additional Paid-in Capital
d) Accounts Payable
Answer: d) Accounts Payable
Explanation: Accounts Payable is a liability, not part of equity.
16. What does OCI stand for in financial reporting?
a) Other Comprehensive Income
b) Operating Cash Inflow
c) Outstanding Capital Investments
d) Official Current Income
Answer: a) Other Comprehensive Income
Explanation: OCI includes unrealized gains/losses not reported in net income (e.g., foreign currency translation).
17. A company’s net income is $100,000. If depreciation expense is $10,000, what will be added back in the cash flow from operating activities (indirect method)?
a) $0
b) $5,000
c) $10,000
d) $100,000
Answer: c) $10,000
Explanation: Depreciation is a non-cash expense, so it is added back in the cash flow statement.
18. Which body is responsible for enforcing accounting rules for public companies in the U.S.?
a) FASB
b) PCAOB
c) SEC
d) GASB
Answer: c) SEC
Explanation: The Securities and Exchange Commission (SEC) enforces accounting rules for publicly traded companies.
19. What is the primary purpose of financial reporting?
a) To calculate taxes
b) To provide information useful to investors and creditors
c) To comply with legal requirements
d) To assist management in decision-making
Answer: b) To provide information useful to investors and creditors
Explanation: The main objective is to provide useful information for decision-making.
20. Which type of account is “Allowance for Doubtful Accounts”?
a) Asset
b) Contra-Asset
c) Liability
d) Expense
Answer: b) Contra-Asset
Explanation: Allowance for Doubtful Accounts reduces accounts receivable and is classified as a contra-asset.
21. Which measurement attribute is used most commonly in financial reporting?
a) Current Cost
b) Fair Value
c) Historical Cost
d) Net Realizable Value
Answer: c) Historical Cost
Explanation: Most assets are recorded at historical cost, though fair value is increasingly used.
22. Which principle requires disclosing all material facts affecting financial statements?
a) Matching Principle
b) Revenue Recognition
c) Full Disclosure Principle
d) Prudence
Answer: c) Full Disclosure Principle
Explanation: Full disclosure requires companies to reveal all material financial information.
23. Which of the following is an example of a contra-equity account?
a) Treasury Stock
b) Accounts Payable
c) Retained Earnings
d) Dividends
Answer: a) Treasury Stock
Explanation: Treasury stock reduces total shareholders’ equity, making it a contra-equity account.
24. Which reporting standard emphasizes a principle-based approach?
a) GAAP
b) IFRS
c) SEC
d) PCAOB
Answer: b) IFRS
Explanation: IFRS is principle-based, while GAAP is rule-based.
25. Which of the following accounts is classified as a current liability?
a) Bonds Payable (20 years)
b) Accounts Payable
c) Common Stock
d) Retained Earnings
Answer: b) Accounts Payable
Explanation: Accounts Payable is due within one year, so it is a current liability.
26. Which of the following statements best describes the accrual basis of accounting?
a) Revenues and expenses are recognized when cash is received or paid.
b) Revenues are recognized when earned and expenses when incurred.
c) Revenues are recognized when cash is received, expenses when incurred.
d) Revenues and expenses are recognized when approved by management.
Answer: b) Revenues are recognized when earned and expenses when incurred.
Explanation: Under accrual accounting, revenue and expenses are recorded regardless of cash flows.
27. Which of the following transactions increases stockholders’ equity?
a) Payment of dividends
b) Issuance of common stock
c) Purchase of treasury stock
d) Recognition of an expense
Answer: b) Issuance of common stock
Explanation: Issuing stock increases equity, while dividends and treasury stock reduce it.
28. If a company purchases equipment by issuing a note payable, how is it reported on the cash flow statement?
a) Operating activity
b) Investing activity
c) Financing activity
d) Non-cash investing and financing activity
Answer: d) Non-cash investing and financing activity
Explanation: Since no cash is exchanged, it’s disclosed as a non-cash activity in the notes.
29. Which of the following is NOT considered a current liability?
a) Accounts Payable
b) Wages Payable
c) Unearned Revenue
d) Bonds Payable (10 years)
Answer: d) Bonds Payable (10 years)
Explanation: Long-term bonds are not current liabilities unless due within 12 months.
30. What is the primary purpose of the Statement of Cash Flows?
a) To show company profitability
b) To reconcile retained earnings
c) To report cash inflows/outflows by activity
d) To measure working capital
Answer: c) To report cash inflows/outflows by activity
Explanation: It helps users understand how cash is generated and used in operating, investing, and financing activities.
31. Which depreciation method results in the highest expense in the early years?
a) Straight-line
b) Double-declining balance
c) Units of production
d) Sum-of-years-digits
Answer: b) Double-declining balance
Explanation: Accelerated methods like DDB front-load depreciation expense.
32. Which principle requires accountants to use the same accounting methods from period to period?
a) Conservatism
b) Consistency
c) Full Disclosure
d) Matching
Answer: b) Consistency
Explanation: Consistency allows comparability across periods. Changes require disclosure.
33. Which of the following is included in comprehensive income?
a) Net income only
b) Net income + Other Comprehensive Income
c) Retained earnings
d) Cash from operations
Answer: b) Net income + Other Comprehensive Income
Explanation: Comprehensive income = Net income + unrealized gains/losses (OCI).
34. Which is a characteristic of an operating lease under old GAAP rules?
a) Lessee records asset and liability
b) Lease expense recognized evenly
c) Lessee has ownership rights
d) Lease treated as a purchase
Answer: b) Lease expense recognized evenly
Explanation: Operating leases under old GAAP were off-balance sheet, expensed straight-line.
35. Which statement about IFRS vs GAAP is true?
a) Both permit LIFO inventory method
b) IFRS is rule-based, GAAP is principle-based
c) IFRS requires component depreciation, GAAP does not
d) GAAP requires fewer disclosures
Answer: c) IFRS requires component depreciation, GAAP does not
Explanation: Under IFRS, assets are depreciated by components, while GAAP doesn’t require it.
36. Which of the following is an example of a contra-revenue account?
a) Accounts Receivable
b) Sales Returns & Allowances
c) Unearned Revenue
d) Prepaid Expenses
Answer: b) Sales Returns & Allowances
Explanation: Contra-revenue accounts reduce gross revenue to net revenue.
37. The adjusting entry to record accrued salaries includes:
a) Debit Salaries Expense; Credit Cash
b) Debit Salaries Expense; Credit Salaries Payable
c) Debit Salaries Payable; Credit Salaries Expense
d) Debit Salaries Expense; Credit Unearned Revenue
Answer: b) Debit Salaries Expense; Credit Salaries Payable
Explanation: Salaries incurred but unpaid increase liability (payable).
38. Which assumption states that the business will continue into the foreseeable future?
a) Periodicity
b) Going Concern
c) Monetary Unit
d) Economic Entity
Answer: b) Going Concern
Explanation: Financial statements assume the company will continue operations.
39. Which of the following would appear in the financing section of the cash flow statement?
a) Purchase of machinery
b) Payment of dividends
c) Sale of inventory
d) Interest expense
Answer: b) Payment of dividends
Explanation: Financing activities include equity and debt transactions, like dividends.
40. What is the primary purpose of depreciation?
a) To measure asset fair value
b) To allocate cost of asset over useful life
c) To provide cash for replacement
d) To match revenues with cash flows
Answer: b) To allocate cost of asset over useful life
Explanation: Depreciation is cost allocation, not valuation.
41. Which of the following accounts would appear on the income statement?
a) Unearned Revenue
b) Accounts Receivable
c) Rent Expense
d) Notes Payable
Answer: c) Rent Expense
Explanation: Expenses are reported on the income statement.
42. When a company declares a dividend, which accounts are affected?
a) Debit Cash, Credit Dividends
b) Debit Dividends, Credit Cash
c) Debit Dividends, Credit Dividends Payable
d) Debit Retained Earnings, Credit Accounts Payable
Answer: c) Debit Dividends, Credit Dividends Payable
Explanation: At declaration, liability is created until paid.
43. Which of the following is NOT part of the accounting equation?
a) Assets
b) Liabilities
c) Equity
d) Revenues
Answer: d) Revenues
Explanation: Accounting equation: Assets = Liabilities + Equity. Revenues affect equity but are not part of the equation itself.
44. Which organization develops IFRS?
a) SEC
b) IASB
c) FASB
d) PCAOB
Answer: b) IASB
Explanation: The International Accounting Standards Board (IASB) issues IFRS.
45. Which basis of accounting is required for government-wide financial statements in the U.S.?
a) Cash basis
b) Accrual basis
c) Modified accrual basis
d) Tax basis
Answer: b) Accrual basis
Explanation: Government-wide statements follow the accrual basis, unlike fund statements (modified accrual).
46. Which principle states that expenses should not be understated or overstated?
a) Prudence
b) Conservatism
c) Faithful Representation
d) Matching
Answer: c) Faithful Representation
Explanation: Financial information must be complete, neutral, and free from error.
47. Which section of the cash flow statement includes issuing stock for cash?
a) Operating Activities
b) Investing Activities
c) Financing Activities
d) Retained Earnings
Answer: c) Financing Activities
Explanation: Cash inflow from issuing equity is a financing activity.
48. Which type of opinion is issued when financial statements are fairly presented in all material respects?
a) Adverse opinion
b) Disclaimer of opinion
c) Qualified opinion
d) Unqualified (clean) opinion
Answer: d) Unqualified (clean) opinion
Explanation: An unqualified opinion indicates financials are fairly presented.
49. Which inventory method results in higher net income when prices are rising?
a) FIFO
b) LIFO
c) Weighted Average
d) Specific Identification
Answer: a) FIFO
Explanation: Under FIFO, older (lower-cost) inventory is expensed first, leaving higher-cost items in ending inventory → higher net income.
50. Which of the following is a cash equivalent?
a) 6-month certificate of deposit
b) Treasury bills (maturing in 2 months)
c) Accounts Receivable
d) Inventory
Answer: b) Treasury bills (maturing in 2 months)
Explanation: Cash equivalents are highly liquid investments with maturities ≤ 3 months.
👉 Next, check out:
- CPA FAR Batch 2
- CPA FAR Batch 3
- CPA FAR Batch 4
- CPA AUD (Auditing and Attestation) MCQs
- CPA REG (Regulation) MCQs
This was Part 1 (MCQs 1–50) of CPA FAR practice questions. By practicing regularly, you’ll gain a strong command over financial reporting, GAAP, IFRS, and government/nonprofit accounting. In the upcoming parts, we’ll cover more advanced and scenario-based questions to sharpen your problem-solving skills.