How to Answer 10 High-Yield FAR Questions (With Full Explanations)
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Roughly 85% to 95% of FAR tests application and analysis rather than recall. That is the whole problem with studying FAR by reading. You can follow every lecture, understand every rule as it is explained, and still freeze when a question hands you six numbers and expects you to know which three matter.
The only fix is working problems. Below are ten FAR questions covering the areas the exam returns to most: the statement of cash flows, earnings per share, inventory, depreciation, finance leases and error corrections. Every answer is hidden behind a toggle, so you can actually attempt each one before you see how it works out.
Try each question cold. Then open the explanation and read the reasoning, not just the number. Getting a question right for the wrong reason is worse than getting it wrong, because it feels like progress.
Practice these in the interactive quiz first
If you would rather answer all ten in one pass and see your score before reading anything, work through the quiz, then come back here for the explanations.
Or watch the walkthrough
I work through all ten questions in the video below, talking through the reasoning I would actually use under exam conditions.
Prefer the app? Watch the walkthrough on YouTube.
The ten questions
- Operating cash flow, indirect method
- Basic earnings per share
- Cash to accrual conversion
- Debt-to-equity after a stock issuance
- What counts as cash
- Bad debt expense, aging method
- Cost of goods sold under FIFO
- Double-declining balance depreciation
- Finance lease interest expense
- Prior period error correction
How do you calculate operating cash flow under the indirect method?
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
- Gain on sale of equipment: $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?
- A. $90,000
- B. $85,000
- C. $105,000
- D. $110,000
Show the answer and explanation
B. $85,000.
Start with net income, reverse the non-cash and non-operating items, then adjust for changes in operating working capital.
Depreciation + 20,000
Gain on sale − 15,000
AR increase − 30,000
Prepaid increase − 25,000
AP increase + 35,000
─────────────────────────
Operating cash flow 85,000
The gain comes out because the entire proceeds from that sale belong in investing activities. Leaving the gain in operating would count part of it twice.
The trap: the $60,000 increase in nontrade notes payable. It is a financing activity, and it is placed in the middle of a list of working capital items specifically to see whether you will sweep it in with the rest.
How do you calculate basic earnings per share?
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 basic earnings per share?
- A. $3.00
- B. $2.85
- C. $3.20
- D. $3.40
Show the answer and explanation
B. $2.85.
Basic EPS is net income less preferred dividends, divided by the weighted average number of common shares outstanding. Build the two halves separately.
Net income 360,000
Preferred div − 32,000 (8,000 × $4)
328,000
Denominator
100,000 × 6/12 50,000
130,000 × 6/12 65,000
115,000
328,000 / 115,000 = $2.85
The preferred stock is nonconvertible, so it never enters the denominator. Its only role is reducing income available to common shareholders.
Study tip: always finish the numerator before you start the denominator. Most EPS errors are bookkeeping errors, not conceptual ones, and they come from trying to hold both halves in your head at once.
How do you convert cash-basis income to accrual-basis income?
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, Merton's accrual-basis income is:
- A. Lower by $15,000
- B. Higher by $15,000
- C. Higher by $35,000
- D. Lower by $35,000
Show the answer and explanation
B. Higher by $15,000.
Accrual accounting recognizes revenue when earned and expenses when incurred, so each balance sheet change tells you about something that happened without cash moving.
AR increase + 25,000 earned, not collected
AP increase − 10,000 incurred, not paid
─────────────────────────
Accrual-basis income 215,000
The difference is $15,000, and accrual is the higher of the two.
Why this works: a receivable is revenue you earned but have not been paid for, so accrual counts it and cash basis does not. A payable is an expense you incurred but have not paid, so accrual counts it and cash basis does not. Receivables push accrual income up, payables push it down.
How does issuing stock change the debt-to-equity ratio?
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 its debt-to-equity ratio be after the share issue?
- A. 0.47
- B. 0.54
- C. 0.62
- D. 0.71
Show the answer and explanation
A. 0.47.
Debt-to-equity is total liabilities divided by total equity. The question gives you assets and liabilities, so equity is the plug.
Shares issued + 200,000
Equity after 680,000
320,000 / 680,000 = 0.47
Issuing stock brings in $200,000 of cash, so assets rise to $1,000,000 and equity rises to $680,000. Liabilities do not move at all, which is the point of the question. Equity financing lowers leverage because it grows the denominator while leaving the numerator alone.
What counts as cash on the balance sheet?
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, 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 January 4 and cleared January 10.
What amount should Frost report as cash on its December 31 balance sheet?
- A. $15,000
- B. $18,000
- C. $13,000
- D. $16,000
Show the answer and explanation
C. $13,000.
Two items, and the entire question turns on whether each one is already sitting inside the $15,000.
Postdated check 0 not included, so no adjustment
NSF check − 2,000 included, but bounced
─────────────────────────
Cash 13,000
A postdated check is not cash, because it cannot be deposited yet. It belongs in receivables. But it was never in the checkbook balance, so removing it would be subtracting something that was never added.
The NSF check is the opposite. It was recorded as a deposit, then bounced, so the $15,000 overstates cash by $2,000. That it cleared on January 10 changes nothing about the December 31 balance sheet.
The trap: answer B is what you get if you add the postdated check instead of ignoring it. Answer D is what you get if you net the two.
How do you calculate bad debt expense using the aging method?
Orion Inc. has accounts receivable aging as follows:
- $30,000 that are 1 to 30 days late, estimated 2% uncollectible
- $40,000 that are 31 to 60 days late, estimated 5% uncollectible
- $20,000 that are 61 to 90 days late, estimated 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 also purchased new equipment for $250,000 and issued 1,500 shares of common stock. What is bad debt expense for the year?
- A. $4,200
- B. $3,200
- C. $5,000
- D. $3,800
Show the answer and explanation
B. $3,200.
The aging method tells you what the ending allowance must be. Bad debt expense is whatever it takes to get there, so you solve for it rather than computing it directly.
30,000 × 2% 600
40,000 × 5% 2,000
20,000 × 8% 1,600
4,200
Roll the allowance forward
Beginning 3,000
Write-offs − 2,000
Expense X
Ending 4,200
3,000 − 2,000 + X = 4,200 → X = 3,200
Answer A is the required ending allowance, which is the number you compute on the way to the answer rather than the answer itself. That is why it is offered.
The trap: the equipment purchase and the stock issuance are pure noise. Neither touches the allowance. Expect one or two irrelevant facts in almost every receivables question.
How do you calculate cost of goods sold under FIFO?
Maple Co. uses a perpetual inventory system. Inventory transactions for February:
- Feb 1 beginning inventory: 15,000 units at $14
- Feb 15 purchase: 25,000 units at $16
- Feb 18 purchase: 30,000 units at $18
- Feb 28 sale: 45,000 units at $22
Maple uses FIFO. What amount should Maple report as cost of goods sold for February?
- A. $610,000
- B. $810,000
- C. $700,000
- D. $780,000
Show the answer and explanation
C. $700,000.
Under FIFO the oldest costs leave first. Fill the 45,000 units sold from the top of the list downward.
25,000 × $16 400,000 Feb 15 purchase
5,000 × $18 90,000 part of Feb 18 purchase
─────────────────────────
45,000 units 700,000
The $22 selling price is not part of this calculation. It would matter for gross profit, and it is included so you have something to ignore.
Worth noting: under FIFO, perpetual and periodic produce the same cost of goods sold. The oldest units are the oldest units regardless of when you do the arithmetic. That equivalence does not hold for LIFO or weighted average, which is exactly why the exam mentions the system used.
How does double-declining balance depreciation work?
On January 1, Apex Co. purchased a forklift for $50,000. Salvage value is $5,000 and estimated useful life is 8 years. The productive life of the forklift is estimated at 80,000 miles, and during the first year it was driven 10,000 miles. Apex uses the double-declining balance method. What depreciation expense should Apex record for the first year?
- A. $10,000
- B. $11,250
- C. $12,500
- D. $8,750
Show the answer and explanation
C. $12,500.
Double it 25%
Year 1 50,000 × 25% = 12,500
Double-declining balance applies the rate to the full carrying amount, so salvage value is not subtracted before you start. Salvage still matters, but only as a floor: you stop depreciating once carrying amount reaches $5,000, and the final year is usually a partial catch-up rather than a full computation.
The trap: the mileage figures. They support units-of-production, which the question does not use. Answer B is $45,000 divided by 8 doubled, which is what you get if you subtract salvage first. Answer D is the units-of-production answer using depreciable cost.
How do you calculate interest expense on a finance lease?
Ocean Co. acquired machinery under a finance lease for five years. 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 equals the fair market value of the machinery. What amount should Ocean report as interest expense at the end of the first year?
- A. $15,000
- B. $12,637
- C. $13,561
- D. $18,106
Show the answer and explanation
B. $12,637.
Two steps, in this order. Establish the liability, then charge interest on it.
Year 1 interest 210,618 × 6% = 12,637
Because payments are made at year-end, the full liability is outstanding for the entire first year. The year-one entry is interest expense of $12,637, a reduction of the lease liability for the remaining $37,363, and a credit to cash of $50,000.
Watch the payment timing. Had the payments been due at the beginning of each year, the first payment would reduce the liability immediately and year-one interest would be computed on the smaller remaining balance. Annuity due versus ordinary annuity changes the answer, and the question always tells you which one applies.
How do you correct a prior period error?
In early Year 4, a company realized 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 entry should be made in Year 4 on discovering this error?
- A. Debit retained earnings $30,000; credit accumulated depreciation $30,000
- B. Debit retained earnings $20,000; credit accumulated depreciation $20,000
- C. Debit depreciation expense $20,000; credit accumulated depreciation $20,000
- D. Debit depreciation expense $30,000; credit accumulated depreciation $30,000
Show the answer and explanation
B. Debit retained earnings $20,000; credit accumulated depreciation $20,000.
Missed in Year 2 10,000
Missed in Year 3 10,000
─────────────────────────
Correction 20,000
Two decisions are being tested here, and both have to be right.
The first is the amount. Only Years 2 and 3 are prior periods. Year 4 depreciation has not been missed, because Year 4 is barely underway, and it gets recorded normally as current-year expense.
The second is the account. Correcting an error from a closed period never runs through current-year income, because the expense belonged to a different year. It goes directly to the opening balance of retained earnings, and prior period statements shown for comparison are restated. Answers C and D route the correction through depreciation expense, which would misstate Year 4 income.
One simplification: the entry above ignores income taxes. In practice a prior period adjustment is reported net of its tax effect, so a real correction would also adjust deferred taxes. Exam questions usually tell you to disregard tax, but read the stem to be sure.
Where does Maxwell CPA Review fit?
Some honest concessions first. If you want the largest question bank available, that goes to Gleim or UWorld. If your firm sponsors a course, it is usually Becker, and there is no reason to decline something already paid for. If you want adaptive software that scores your readiness, Surgent does that better than I do.
What Maxwell CPA Review does is different. Every other option in this category answers a shortage: more questions, longer explanations, more visuals. Maxwell answers a surplus. Ten thousand questions do not help if nobody has told you which two hundred of them represent the patterns the exam actually repeats.
The explanations above are the format the whole course uses. Not just the correct number, but why the distractors exist and what the question is testing underneath the arithmetic. That is what lets you reason your way through questions you have never seen before.
Here is what is in the FAR section:
| Video lessons | 7 hours |
|---|---|
| Practice MCQs | 800 |
| Task-based simulations | 36 |
| Textbook | 233 pages |
| Study outlines | 74 pages |
| Also included | Baseline assessment, final review, mock exam, 10 interactive apps |
Across the whole course: 50 hours of video content, 5,000 practice MCQs and 150 task-based simulations, covering all six sections, FAR, AUD, REG, BAR, ISC and TCP, with no discipline upcharge. It is built to the current AICPA Blueprint, and every lecture, textbook and outline was created by one CPA who scored a 95 on this exam.
Best for candidates who understand the lectures but freeze on the questions: Maxwell CPA Review, with bite-sized lessons focused on the concepts that matter most, at $49 per month, billed monthly, cancel anytime.
Use it as your primary course. Use it to retake a section you failed. Use it alongside what you already bought.
Start free with CPA 101
Practice all 25 of the 2026 AICPA released MCQs, plus a free study outline. No credit card required.
Frequently asked questions
How do you calculate basic earnings per share?
Net income less preferred dividends, divided by the weighted average number of common shares outstanding. The weighting is where most errors happen: each block of shares counts for the fraction of the year it was actually outstanding.
What is the difference between cash basis and accrual basis accounting?
Cash basis recognizes revenue when cash arrives and expenses when cash leaves. Accrual recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash moves. An increase in receivables raises accrual income relative to cash basis; an increase in payables lowers it.
How does the indirect method for the statement of cash flows work?
Start with net income, add back non-cash expenses such as depreciation, remove gains and losses that belong to investing or financing activities, then adjust for changes in operating current assets and liabilities. Increases in operating assets reduce cash; increases in operating liabilities increase it.
Which FAR topics appear most often in practice questions?
Statement of cash flows, earnings per share, leases, inventory, depreciation, revenue recognition, consolidations and error corrections. Those are the areas the exam returns to again and again, which is why all ten questions above are drawn from them.
How many practice questions should I do for FAR?
Enough that you start recognizing question types rather than solving each one from scratch. Volume alone is not the goal. Reviewing why each distractor was offered does more than doubling the number of questions attempted.
Can I use Maxwell CPA Review alongside Becker, UWorld, Gleim or Surgent?
Yes. It is built to the current AICPA Blueprint and covers the same sections, so it slots alongside a course you already own. Most candidates use it for the video lessons and outlines and keep their existing question bank.
What does Maxwell CPA Review cost?
$49 per month, billed monthly, cancel anytime. All six sections are included with no discipline upcharge.
Ready for more than ten questions?
Start with the 2026 AICPA released questions and the free study outline, and see whether the explanations work the way you need them to.
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, where he creates every lecture, textbook and study outline himself.
Reach him at MaxwellCPAreview@gmail.com.
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