Preparing for the CPA FAR exam requires mastering complex concepts from GAAP, IFRS, government accounting, and financial reporting. To help you practice effectively, we’ve created a set of CPA FAR Practice MCQs (101–150) designed to simulate real exam questions. Each multiple-choice question includes the correct answer with a clear explanation, making it easier for you to understand tricky accounting concepts and improve your exam readiness. Whether you’re revising core topics or testing your exam strategy, this practice set will strengthen your knowledge and boost your confidence.
CPA FAR Practice MCQs (101–150)
Q101. Under IFRS, how is investment property measured after initial recognition?
A) Cost only
B) Fair value or cost model (entity’s choice)
C) Revaluation model only
D) Equity method
Answer: B) Fair value or cost model (entity’s choice)
Explanation: IFRS allows companies to choose either the cost model or fair value model for investment property, while U.S. GAAP generally does not permit revaluation.
Q102. Which of the following is an example of a Level 1 input under ASC 820 (Fair Value Measurement)?
A) Quoted prices in active markets
B) Discounted cash flow analysis
C) Internal models with assumptions
D) Broker quotes in inactive markets
Answer: A) Quoted prices in active markets
Explanation: Level 1 inputs are directly observable market prices for identical assets or liabilities in active markets.
Q103. Under U.S. GAAP, how should R&D costs be treated?
A) Expensed as incurred
B) Capitalized as an intangible asset
C) Deferred until commercialization
D) Treated as extraordinary items
Answer: A) Expensed as incurred
Explanation: U.S. GAAP requires immediate expensing of R&D costs. IFRS allows capitalization under specific conditions for development costs.
Q104. Which ratio best measures a company’s ability to meet long-term obligations?
A) Current ratio
B) Quick ratio
C) Debt-to-equity ratio
D) Accounts receivable turnover
Answer: C) Debt-to-equity ratio
Explanation: Debt-to-equity compares total liabilities to equity and is a key solvency ratio for long-term financial health.
Q105. Under GAAP, which method of inventory valuation is not permitted?
A) FIFO
B) Weighted Average
C) LIFO
D) Specific Identification
Answer: B) Weighted Average
❌ Wait correction: all are allowed except LIFO is not allowed under IFRS (but allowed under GAAP). So correct answer: None of the above.
Corrected Answer: All methods listed are permitted under GAAP.
Explanation: GAAP permits FIFO, LIFO, weighted average, and specific identification. IFRS prohibits LIFO.
Q106. When accounting for a finance lease, the lessee should initially recognize:
A) Lease expense only
B) Right-of-use asset and lease liability
C) Lease liability only
D) No recognition until payment
Answer: B) Right-of-use asset and lease liability
Explanation: Under both GAAP and IFRS, finance leases require recording a right-of-use asset and corresponding lease liability.
Q107. Which type of opinion is issued if financial statements are fairly presented but include a material uncertainty adequately disclosed?
A) Adverse opinion
B) Unqualified opinion
C) Qualified opinion
D) Disclaimer of opinion
Answer: C) Qualified opinion
Explanation: A qualified opinion is issued when the auditor finds a material misstatement or uncertainty but overall financials are fairly presented.
Q108. What is the correct journal entry to record the issuance of $1,000,000 bonds at 98?
A) Cash 980,000; Discount on Bonds 20,000; Bonds Payable 1,000,000
B) Cash 1,000,000; Bonds Payable 1,000,000
C) Cash 980,000; Bonds Payable 980,000
D) Bonds Payable 980,000; Premium 20,000
Answer: A) Cash 980,000; Discount on Bonds 20,000; Bonds Payable 1,000,000
Explanation: Issuing at 98 means bonds are sold at a 2% discount. The difference is recorded as a contra-liability.
Q109. Which type of subsequent event requires adjustment to financial statements?
A) Decline in market value of investments
B) Loss from natural disaster occurring after year-end
C) Bankruptcy of a customer due to conditions existing before year-end
D) Announcement of a new product launch
Answer: C) Bankruptcy of a customer due to conditions existing before year-end
Explanation: Adjusting events are those that provide evidence of conditions existing at the balance sheet date.
Q110. What is the purpose of a statement of comprehensive income?
A) To show only net income
B) To show cash inflows and outflows
C) To report all changes in equity not resulting from owner transactions
D) To reconcile retained earnings
Answer: C) To report all changes in equity not resulting from owner transactions
Explanation: Comprehensive income includes net income and other comprehensive income (OCI), such as unrealized gains/losses.
Q111. Under ASC 606, when is revenue recognized?
A) When cash is collected
B) When control of goods or services is transferred to the customer
C) When the contract is signed
D) When production is complete
Answer: B) When control of goods or services is transferred to the customer
Explanation: ASC 606 requires recognition when the performance obligation is satisfied and control transfers, not just when cash is received.
Q112. Which of the following is included in Other Comprehensive Income (OCI)?
A) Revenue from sales
B) Unrealized gains on available-for-sale securities
C) Dividends received
D) Gain on sale of equipment
Answer: B) Unrealized gains on available-for-sale securities
Explanation: OCI includes unrealized gains/losses, foreign currency adjustments, and pension adjustments.
Q113. How should impairment of goodwill be tested under U.S. GAAP?
A) Using a one-step test comparing carrying amount and fair value of reporting unit
B) Amortized over 10 years
C) Compared to historical cost
D) Tested only when disposed
Answer: A) Using a one-step test comparing carrying amount and fair value of reporting unit
Explanation: Goodwill is tested annually or when impairment indicators arise.
Q114. Which of the following is classified as a financing activity in the statement of cash flows?
A) Collection of receivables
B) Issuance of bonds
C) Purchase of equipment
D) Payment of suppliers
Answer: B) Issuance of bonds
Explanation: Financing activities include raising funds via debt/equity and paying dividends.
Q115. What method does IFRS require for inventory write-down reversals?
A) Prohibited
B) Allowed up to original cost
C) Required for all declines
D) Adjusted through OCI
Answer: B) Allowed up to original cost
Explanation: IFRS permits reversing inventory write-downs if values recover, GAAP does not.
Q116. How are contingent liabilities recorded?
A) Always expensed immediately
B) Disclosed only, never recorded
C) Recorded if probable and reasonably estimable
D) Ignored until settlement
Answer: C) Recorded if probable and reasonably estimable
Explanation: Contingent liabilities are recognized only when probable and measurable, otherwise disclosed.
Q117. Which of the following qualifies as a cash equivalent?
A) Treasury bills with 2-month maturity
B) Long-term bonds
C) Accounts receivable
D) Prepaid insurance
Answer: A) Treasury bills with 2-month maturity
Explanation: Cash equivalents are short-term, highly liquid investments with maturities of 3 months or less.
Q118. Under GAAP, how is an extraordinary item reported?
A) Separately on the income statement
B) Not reported as extraordinary
C) Included in discontinued operations
D) Classified under OCI
Answer: B) Not reported as extraordinary
Explanation: FASB eliminated extraordinary items; all unusual/infrequent events are included in continuing operations.
Q119. Which method of depreciation allocates higher expense in 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 depreciation methods (double-declining, sum-of-years-digits) allocate higher expense earlier.
Q120. A company issues $100,000 6% bonds at par. Annual interest expense is:
A) $6,000
B) $60,000
C) $600
D) Depends on market rate
Answer: A) $6,000
Explanation: Annual interest = Face value × coupon rate = $100,000 × 6% = $6,000.
Q121. Under IFRS, which of the following can be revalued?
A) Goodwill
B) Intangible assets with active market
C) Inventory
D) R&D costs
Answer: B) Intangible assets with active market
Explanation: IFRS permits revaluation of intangibles if an active market exists; GAAP prohibits.
Q122. What does the quick ratio measure?
A) Long-term solvency
B) Liquidity excluding inventory
C) Cash flow adequacy
D) Profitability
Answer: B) Liquidity excluding inventory
Explanation: Quick ratio = (Cash + AR + marketable securities) ÷ current liabilities.
Q123. Which is true about noncontrolling interest (NCI) in consolidation?
A) Reported as liability
B) Included in equity section
C) Not reported in consolidated financials
D) Included in revenue
Answer: B) Included in equity section
Explanation: NCI is part of consolidated equity, representing ownership not held by parent.
Q124. What is the journal entry for recording bad debt expense under the allowance method?
A) Bad Debt Expense Dr.; Allowance for Doubtful Accounts Cr.
B) Bad Debt Expense Dr.; Accounts Receivable Cr.
C) Accounts Receivable Dr.; Bad Debt Expense Cr.
D) Cash Dr.; Bad Debt Expense Cr.
Answer: A) Bad Debt Expense Dr.; Allowance for Doubtful Accounts Cr.
Explanation: The allowance method matches bad debt expense with related revenues.
Q125. Which of the following is NOT a characteristic of governmental fund accounting?
A) Uses modified accrual basis
B) Focuses on current financial resources
C) Long-term assets are capitalized
D) Emphasis on budgetary compliance
Answer: C) Long-term assets are capitalized
Explanation: Governmental funds do not capitalize long-term assets; they record expenditures when incurred.
Q126. Which of the following is a derivative instrument?
A) Common stock
B) Forward contract
C) Treasury bond
D) Preferred stock
Answer: B) Forward contract
Explanation: Derivatives derive value from underlying assets, such as forwards, futures, options, swaps.
Q127. Which type of lease under IFRS is similar to finance lease under GAAP?
A) Capital lease
B) Operating lease
C) Service lease
D) Finance lease
Answer: D) Finance lease
Explanation: IFRS uses “finance lease” for leases that transfer substantially all risks and rewards.
Q128. What is the maximum life of goodwill under IFRS?
A) 10 years
B) 20 years
C) 40 years
D) Indefinite
Answer: D) Indefinite
Explanation: Goodwill is not amortized under GAAP or IFRS; it is tested for impairment.
Q129. Which of the following best describes deferred tax liabilities?
A) Future taxable amounts
B) Future deductible amounts
C) Current tax payable
D) Non-taxable items
Answer: A) Future taxable amounts
Explanation: DTLs arise when income is recognized earlier for financial reporting than for tax purposes.
Q130. Which assumption underlies GAAP?
A) Going concern
B) Historical cost
C) Prudence
D) Revaluation
Answer: A) Going concern
Explanation: GAAP assumes the entity will continue operations indefinitely.
Q131. What is the effect of a stock split?
A) Increases retained earnings
B) Decreases par value per share
C) Increases total equity
D) Increases total assets
Answer: B) Decreases par value per share
Explanation: Stock splits reduce par value and increase number of shares but do not change equity.
Q132. Which of the following is NOT a government-wide financial statement?
A) Statement of net position
B) Statement of activities
C) Statement of revenues, expenditures, and changes in fund balance
D) Both A and B
Answer: C) Statement of revenues, expenditures, and changes in fund balance
Explanation: That statement is prepared for governmental funds, not government-wide.
Q133. Which accounting concept requires expenses to be matched with revenues?
A) Conservatism
B) Matching principle
C) Consistency
D) Full disclosure
Answer: B) Matching principle
Explanation: Matching ensures expenses are recognized in the same period as related revenues.
Q134. Which of the following is a deferred inflow of resources in governmental accounting?
A) Property taxes collected in advance
B) Capital assets
C) Bonds payable
D) Accounts payable
Answer: A) Property taxes collected in advance
Explanation: Deferred inflows represent resources received but not yet available to finance expenditures.
Q135. What is the primary objective of financial reporting for governmental entities?
A) Profitability
B) Accountability
C) Investor return
D) EPS growth
Answer: B) Accountability
Explanation: Governmental reporting focuses on accountability to the public and resource providers.
Q136. Which of the following is a permanent account?
A) Revenue
B) Expenses
C) Retained earnings
D) Dividends
Answer: C) Retained earnings
Explanation: Retained earnings is a permanent equity account carried over each year.
Q137. Which measurement basis is used for reporting most plant, property, and equipment?
A) Current market value
B) Net realizable value
C) Historical cost less depreciation
D) Replacement cost
Answer: C) Historical cost less depreciation
Explanation: GAAP requires PPE at cost, adjusted for accumulated depreciation.
Q138. Which type of fund uses the accrual basis of accounting?
A) General fund
B) Capital projects fund
C) Proprietary funds
D) Special revenue fund
Answer: C) Proprietary funds
Explanation: Proprietary and fiduciary funds use accrual accounting; governmental funds use modified accrual.
Q139. Which organization establishes accounting standards for U.S. state and local governments?
A) FASB
B) GASB
C) SEC
D) PCAOB
Answer: B) GASB
Explanation: GASB sets standards for government entities, while FASB governs private companies.
Q140. Which is a limitation of the balance sheet?
A) Assets are stated at fair value
B) Current market values are reflected
C) Many items rely on estimates
D) Liabilities are overstated
Answer: C) Many items rely on estimates
Explanation: Balance sheets use historical cost and estimates, limiting accuracy.
Q141. Which method of inventory produces lowest taxable income during inflation?
A) FIFO
B) LIFO
C) Weighted average
D) Specific identification
Answer: B) LIFO
Explanation: LIFO matches higher costs with current revenues, reducing taxable income during inflation.
Q142. Which accounting principle requires companies to use the same methods consistently?
A) Comparability
B) Consistency
C) Matching
D) Relevance
Answer: B) Consistency
Explanation: Consistency ensures comparability of results across periods.
Q143. Which type of opinion is issued if the auditor cannot obtain sufficient evidence?
A) Unqualified
B) Adverse
C) Qualified
D) Disclaimer
Answer: D) Disclaimer
Explanation: Disclaimer means the auditor cannot form an opinion due to insufficient evidence.
Q144. Which basis of accounting recognizes revenue when earned and expenses when incurred?
A) Accrual basis
B) Cash basis
C) Modified cash basis
D) Regulatory basis
Answer: A) Accrual basis
Explanation: Accrual accounting matches revenues and expenses in the period earned/incurred.
Q145. What is the effect of declaring a cash dividend?
A) Increase assets
B) Decrease liabilities
C) Increase liabilities
D) Increase equity
Answer: C) Increase liabilities
Explanation: Declaration creates a dividend payable liability.
Q146. Which of the following ratios measures profitability?
A) Gross profit margin
B) Current ratio
C) Quick ratio
D) Debt-to-equity ratio
Answer: A) Gross profit margin
Explanation: Profitability ratios (e.g., net margin, ROA, ROE) show earnings relative to revenue.
Q147. Which body enforces accounting standards for public companies in the U.S.?
A) SEC
B) FASB
C) AICPA
D) PCAOB
Answer: A) SEC
Explanation: SEC has authority over financial reporting of public companies.
Q148. Which of the following is NOT an intangible asset?
A) Patent
B) Trademark
C) Copyright
D) Inventory
Answer: D) Inventory
Explanation: Intangible assets lack physical substance and provide future benefits.
Q149. Which accounting principle requires disclosure of all relevant information?
A) Conservatism
B) Full disclosure
C) Matching
D) Relevance
Answer: B) Full disclosure
Explanation: All relevant facts must be disclosed in notes to financial statements.
Q150. Which type of event would be considered non-adjusting under subsequent events?
A) Bankruptcy of customer due to pre-year-end conditions
B) Settlement of a lawsuit from pre-year-end events
C) Fire destroying plant after year-end
D) Discovery of fraud related to year-end financials
Answer: C) Fire destroying plant after year-end
Explanation: Non-adjusting events occur after year-end and do not affect prior period financials, but are disclosed.
You’ve now completed CPA FAR Part 3 (MCQs 101–150). These questions are structured to reflect the actual CPA exam and help you identify knowledge gaps before test day. For a full preparation experience, explore Part 1 (1–50), Part 2 (51–100), and the upcoming Part 4 (151–200). By consistently practicing these MCQs, you’ll be able to manage time, improve accuracy, and feel more confident walking into the exam. Stay tuned for the CPA FAR Master Post where we’ll combine all 200 MCQs into a single comprehensive study resource for your final revision.
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