CPA FAR F1.M1 — Practice Questions
Conceptual Framework & Financial Reporting. Below are 8 real practice questions with worked explanations — a free sample of the F1.M1 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · easy · ASC 225
On which income statement format does gross profit appear as a separate subtotal?
- A single-step income statement
- Both formats, in the same position
- The statement of cash flows
- ✓ A multi-step income statement
Why: A multi-step income statement presents gross profit (net sales minus cost of goods sold) as a subtotal before operating expenses. A single-step statement groups all revenues and all expenses with no gross profit line.
Q2 · medium · ASC 220
Comprehensive income for a period is best described as the change in equity from:
- Revenues minus expenses from continuing operations only
- Net income excluding the results of discontinued operations
- ✓ Nonowner sources, equal to net income plus other comprehensive income
- Net income plus dividends declared during the period
Why: Comprehensive income is the change in equity during a period from transactions and events with nonowners; it equals net income plus other comprehensive income. Owner transactions such as dividends and stock issuances are excluded.
Q3 · medium · ASC 320
Under U.S. GAAP, which item is reported in other comprehensive income rather than in net income?
- An unrealized holding gain on a trading debt security
- An unrealized holding gain on an equity security with a readily determinable fair value
- A realized gain on the sale of equipment
- ✓ An unrealized holding gain on an available-for-sale debt security
Why: Unrealized holding gains and losses on available-for-sale debt securities are recognized in OCI. Trading securities and, since ASU 2016-01, equity securities with readily determinable fair values are remeasured through net income.
Q4 · hard · ASC 220
Net income is $400,000. During the year there was a $30,000 unrealized gain on available-for-sale debt securities, a $12,000 foreign currency translation loss, a $5,000 unrealized loss on the effective portion of a cash flow hedge, and $50,000 of dividends declared. Comprehensive income is:
- $400,000
- $363,000
- ✓ $413,000
- $430,000
Why: Comprehensive income = net income + net OCI. Net OCI = 30,000 - 12,000 - 5,000 = 13,000, so 400,000 + 13,000 = 413,000. Dividends declared are a transaction with owners and are excluded.
Q5 · medium · ASC 220
When an available-for-sale debt security whose gain was previously recognized in OCI is sold at that gain, the effect on other comprehensive income in the period of sale is:
- An increase in OCI equal to the realized gain
- A direct credit to retained earnings
- No effect, because the gain was already recognized in a prior period
- ✓ A reclassification adjustment that decreases OCI so the gain is not counted twice
Why: The previously unrealized gain held in accumulated OCI is reclassified out of OCI and into net income when realized. The reclassification adjustment prevents the same gain from being included in comprehensive income twice.
Q6 · easy · ASC 220
U.S. GAAP allows an entity to present comprehensive income:
- Only within the statement of changes in stockholders' equity
- ✓ In a single continuous statement, or in two consecutive statements
- Only in the notes to the financial statements
- Only as a single combined statement of income and comprehensive income
Why: Comprehensive income may be shown either in one continuous statement of comprehensive income or in two consecutive statements (an income statement followed by a statement of comprehensive income). Presenting it solely within the equity statement is not permitted.
Q7 · medium · ASC 205-20
Which item is presented, net of tax, in a separate section below income from continuing operations?
- ✓ The results of discontinued operations
- A loss caused by a labor strike
- A write-down of inventory to net realizable value
- The effect of a change in an accounting estimate
Why: Discontinued operations are reported separately, net of tax, below income from continuing operations. The other items remain within continuing operations; separate extraordinary-item treatment was eliminated by ASU 2015-01.
Q8 · medium · ASC 225
Net sales were $900,000, cost of goods sold $540,000, selling and administrative expenses $180,000, interest expense $20,000, and there was a $15,000 gain on the sale of equipment. Operating income is:
- ✓ $180,000
- $160,000
- $195,000
- $175,000
Why: Operating income = gross profit - operating expenses = (900,000 - 540,000) - 180,000 = 180,000. Interest expense and the gain on sale of equipment are nonoperating and excluded from operating income.