Top 10 FAR Exam Practice Questions
Top 10 FAR Exam Practice Questions | Master Cash Flows, Leases & EPS
Use these high-yield FAR questions to sharpen your calculations, fix common mistakes, and build exam-day confidence.
FAR is not just about memorizing rules. It is about applying those rules quickly and accurately under pressure. That is why practice questions matter so much.
In this guide, you will work through 10 high-yield FAR questions covering some of the most tested areas on the exam, including the statement of cash flows, earnings per share, inventory, depreciation, and finance leases.
How to use this article: First, try each question on your own. Then review the explanation to understand not just the right answer, but the logic behind it. That is the habit that helps FAR concepts actually stick.
This guide is especially helpful if:
- You want realistic FAR-style practice without getting lost in hundreds of random questions.
- You need stronger explanations for why an answer is right, not just what the right answer is.
- You want to focus on high-yield topics that show up repeatedly on the exam.
Interactive FAR Quiz App
Want to solve the questions first before reading the explanations? Use the interactive quiz below, then come back to this guide to review the logic step by step.
Video: Complete 10-Question Walkthrough
Prefer a guided explanation? Watch me work through all 10 FAR questions step by step and talk through the exact thought process I would use on exam day.
Jump to a Question:
- Question 1: Statement of Cash Flows
- Question 2: Earnings Per Share (EPS)
- Question 3: Cash to Accrual Conversion
- Question 4: Debt-to-Equity Ratio
- Question 5: Cash Balance Reconciliation
- Question 6: Bad Debt Expense (Aging)
- Question 7: Inventory FIFO Method
- Question 8: Depreciation (DDB)
- Question 9: Finance Lease Interest Expense
- Question 10: Prior Period Error
Want more FAR practice than just these 10 questions?
My CPA course includes thousands of MCQs, task-based simulations, and video lessons designed to help you actually understand the material—not just guess your way through it.
Get My Free CPA 101 CourseQuestion 1: Thompson Co. - Statement of Cash Flows Difficulty: 3/5
Thompson Co. had net income of $100,000 during the year. Depreciation expense was $20,000. The following information is available:
- Accounts receivable increase: $30,000
- Equipment gain on sale: $15,000
- Nontrade notes payable increase: $60,000
- Prepaid expenses increase: $25,000
- Accounts payable increase: $35,000
What amount should Thompson report as net cash provided by operating activities in its statement of cash flows for the year?
Explanation: Under the indirect method, start with net income and adjust for non-cash items plus changes in operating working capital.
- Start with net income: $100,000
- Add depreciation expense: +$20,000
- Subtract gain on sale of equipment: -$15,000
- Subtract increase in accounts receivable: -$30,000
- Subtract increase in prepaid expenses: -$25,000
- Add increase in accounts payable: +$35,000
Calculation: $100,000 + $20,000 - $15,000 - $30,000 - $25,000 + $35,000 = $85,000.
Common trap: The increase in nontrade notes payable is a financing activity, not an operating activity, so it does not belong in this calculation.
Question 2: Elm Co. - Earnings Per Share (EPS) Difficulty: 3/5
Elm Co. had 100,000 shares of common stock outstanding at January 1. On July 1, it issued 30,000 additional shares of common stock. Outstanding all year were 8,000 shares of nonconvertible preferred stock on which a dividend of $4 per share was declared during the year. Net income for the year was $360,000. What should Elm report as earnings per share (EPS) for the year?
Explanation: Basic EPS formula: (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding.
- Preferred dividends = 8,000 × $4 = $32,000
- Numerator = $360,000 - $32,000 = $328,000
- Weighted-average shares:
- 100,000 shares × 6/12 = 50,000
- 130,000 shares × 6/12 = 65,000
- Total weighted-average shares = 115,000
EPS: $328,000 / 115,000 = $2.85.
Study tip: In EPS questions, always separate the problem into two parts: numerator first, then denominator. That prevents careless errors.
Question 3: Merton Co. - Cash to Accrual Conversion Difficulty: 2/5
Merton Co. had $200,000 in cash-basis pretax income for the year. At the current year-end, accounts receivable increased by $25,000 and accounts payable increased by $10,000 from their previous year-end balances. Compared to the cash-basis method of accounting, Merton's accrual-basis income is:
Explanation: Accrual income recognizes revenue when earned and expenses when incurred.
- Increase in AR = revenue earned but not yet collected, so add $25,000
- Increase in AP = expense incurred but not yet paid, so subtract $10,000
Accrual income: $200,000 + $25,000 - $10,000 = $215,000.
That means accrual-basis income is $15,000 higher than cash-basis income.
Question 4: XYZ Corp. - Debt-to-Equity Ratio Difficulty: 3/5
XYZ Corp. has total assets of $800,000 and total liabilities of $320,000. If the company issues additional shares worth $200,000, what will be its debt-to-equity ratio post the share issue?
Explanation: Debt-to-equity ratio = Total Liabilities / Total Equity.
- Initial equity = $800,000 - $320,000 = $480,000
- Issue of shares increases equity by $200,000
- New equity = $480,000 + $200,000 = $680,000
- Liabilities remain at $320,000
Final ratio: $320,000 / $680,000 = 0.47 (rounded).
Question 5: Frost Co. - Cash Balance Reconciliation Difficulty: 3/5
Frost Co.'s checkbook balance on December 31 was $15,000. On that date, Frost held the following items in its safe:
- A $3,000 check payable to Frost, postdated January 5, and not included in the December 31 checkbook balance, in collection of a sale made in December.
- A $2,000 check payable to Frost, deposited December 20 and included in the December 31 checkbook balance, but returned by the bank on December 28 stamped "NSF." The check was redeposited on January 4 and cleared on January 10.
What amount should Frost report as cash in its December 31 balance sheet?
Explanation: Start with the reported checkbook balance, then remove items that are not actually cash at year-end.
- The postdated check is not cash yet, but it was not included in the $15,000, so no adjustment is needed.
- The NSF check was included in the $15,000 but bounced, so it must be subtracted.
Correct cash balance: $15,000 - $2,000 = $13,000.
Question 6: Orion Inc. - Bad Debt Expense (Aging Method) Difficulty: 4/5
Orion Inc. has accounts receivable aging as follows:
- $30,000 that are 1-30 days late, estimated to be 2% uncollectible
- $40,000 that are 31-60 days late, estimated to be 5% uncollectible
- $20,000 that are 61-90 days late, estimated to be 8% uncollectible
The beginning balance in the allowance for doubtful accounts is $3,000, and during the year, the company wrote off $2,000 as uncollectible. During the year, Orion Inc. also purchased new equipment for $250,000 and issued 1,500 shares of common stock. What is the bad debt expense for the year?
Explanation: With the aging method, you first calculate the required ending allowance.
- $30,000 × 2% = $600
- $40,000 × 5% = $2,000
- $20,000 × 8% = $1,600
Required ending balance: $600 + $2,000 + $1,600 = $4,200.
Now solve for bad debt expense:
Beginning allowance + Bad debt expense - Write-offs = Ending allowance
$3,000 + X - $2,000 = $4,200
X = $3,200
Common trap: The equipment purchase and stock issuance are distractors. They have nothing to do with the allowance calculation.
Question 7: Maple Co. - Inventory FIFO Method Difficulty: 4/5
Maple Co. uses a perpetual inventory system. The following are inventory transactions for the month of February:
- 2/1 Beginning inventory: 15,000 units at $14
- 2/15 Purchase: 25,000 units at $16
- 2/18 Purchase: 30,000 units at $18
- 2/28 Sales at $22 per unit: 45,000 units
Maple uses the FIFO method to determine the value of its inventory. What amount should Maple report as cost of goods sold on its income statement for the month of February?
Explanation: Under FIFO, the oldest costs are assigned to COGS first.
- 15,000 units @ $14 = $210,000
- 25,000 units @ $16 = $400,000
- 5,000 units @ $18 = $90,000
Total COGS: $210,000 + $400,000 + $90,000 = $700,000.
Question 8: Apex Co. - Depreciation (Double-Declining Balance) Difficulty: 4/5
On January 1, Apex Co. purchased a forklift for $50,000. The forklift's salvage value is $5,000, and its estimated useful life is 8 years. The productive life of the forklift is estimated to be 80,000 miles. During the first year, the forklift was driven 10,000 miles. Apex uses the double-declining balance method of depreciation. What amount of depreciation expense should Apex record for the first year?
Explanation: The question specifically says to use the double-declining balance method, so the mileage data is irrelevant.
- Straight-line rate = 1 / 8 = 12.5%
- Double-declining rate = 2 × 12.5% = 25%
- Year 1 depreciation = $50,000 × 25% = $12,500
Under DDB, salvage value is not subtracted first in the initial depreciation calculation.
Common trap: The exam often includes units-of-activity data to distract you. Always use the method the question actually asks for.
Question 9: Ocean Co. - Finance Lease Interest Expense Difficulty: 4/5
Ocean Co. acquired machinery under a finance lease for five years. The minimum lease payments are $50,000 payable annually at year-end. The interest rate is 6% with an annuity factor for five years of 4.21236. The present value of the payments is equal to the fair market value of the machinery. What amount should Ocean report as interest expense at the end of the first year of the lease?
Explanation: First compute the initial lease liability, then apply the interest rate.
- Initial liability = $50,000 × 4.21236 = $210,618
- First-year interest expense = $210,618 × 6% = $12,637 (rounded)
Study tip: For finance lease questions, slow down and separate the problem into two pieces: present value first, then interest expense.
Question 10: Prior Period Error - Depreciation Correction Difficulty: 4/5
In early Year 4, a company realized that it had failed to record depreciation on a vehicle purchased in Year 2 for $40,000 with a 4-year life and no salvage value. What journal entry should be made in Year 4 upon discovering this error?
Explanation: This is a prior period error, so the correction goes through retained earnings, not current-year depreciation expense.
- Annual depreciation = $40,000 / 4 = $10,000
- Missed depreciation for Year 2 and Year 3 = $20,000
Correcting entry: Debit Retained Earnings $20,000 and credit Accumulated Depreciation $20,000.
Frequently Asked Questions (FAR Exam Prep)
How do you calculate Earnings Per Share (EPS)?
The basic EPS formula is (Net Income - Preferred Dividends) / Weighted-Average Common Shares Outstanding. The most important part is correctly weighting the common shares based on how long they were outstanding during the year.
What is the difference between cash basis and accrual basis accounting?
Cash basis recognizes revenue when cash is received and expenses when cash is paid. Accrual basis recognizes revenue when it is earned and expenses when they are incurred, regardless of when the cash moves.
How does the indirect method for the statement of cash flows work?
You start with net income, add back non-cash expenses like depreciation, remove gains and losses tied to investing or financing activities, and then adjust for changes in current operating assets and liabilities.
What FAR topics show up most often in practice questions?
Some of the most commonly tested FAR areas include the statement of cash flows, EPS, leases, inventory, depreciation, revenue recognition, consolidations, and adjusting journal entries.
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