CPA FAR F1.M2 — Practice Questions
Conceptual Framework & Financial Reporting. Below are 8 real practice questions with worked explanations — a free sample of the F1.M2 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium · ASC 855
A customer that was already in financial difficulty at the balance sheet date settled its receivable for a reduced amount before the statements were issued. This is:
- An event that is neither recognized nor disclosed
- A change in accounting estimate applied prospectively
- ✓ A recognized subsequent event requiring adjustment of the financial statements
- A nonrecognized subsequent event requiring only note disclosure
Why: A recognized (Type I) subsequent event provides more evidence about a condition that existed at the balance sheet date - here the customer's difficulty existed at year end - so the statements are adjusted. Conditions arising only after year end are nonrecognized (Type II) and merely disclosed.
Q2 · medium · ASC 855
After the balance sheet date but before issuance, a fire destroyed one of the company's major plants. This event should be:
- ✓ Disclosed in the notes as a nonrecognized subsequent event
- Recorded as a loss in the current-year income statement
- Reported as a prior period adjustment to retained earnings
- Ignored until the following reporting period
Why: The fire reflects a condition that arose after the balance sheet date, so it is a nonrecognized (Type II) subsequent event. The statements are not adjusted, but a material event like this is disclosed so the statements are not misleading.
Q3 · easy · ASC 235
The summary of significant accounting policies note would most likely disclose:
- The detailed components of the income tax provision
- The maturity dates of the company's long-term debt
- The detailed composition of the plant assets balance
- ✓ The depreciation method used for property, plant, and equipment
Why: The significant accounting policies note describes the methods chosen, such as depreciation method, inventory costing, and revenue recognition. Specific balances and their composition are disclosed in other notes, not the policies note.
Q4 · medium · ASC 850
Disclosure of related party transactions must include all of the following EXCEPT:
- The nature of the relationship between the related parties that entered into the transactions
- A description of the transactions, including their terms and manner of settlement
- ✓ A representation that the transactions were on arm's-length terms, absent substantiation
- The dollar amounts of the transactions for each period presented
Why: Related party disclosures cover the nature of the relationship, a description of the transactions, and the dollar amounts. An entity must not assert that terms were equivalent to arm's-length transactions unless that representation can be substantiated.
Q5 · medium · ASC 820
An unadjusted quoted price for an identical asset in an active market is categorized within the fair value hierarchy as:
- Level 2
- Outside the fair value hierarchy
- Level 3
- ✓ Level 1
Why: Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 uses other observable inputs, and Level 3 uses unobservable inputs.
Q6 · hard · ASC 275
Under the risks and uncertainties guidance, disclosure of a concentration is required when the concentration exists at the balance sheet date and:
- It is expected to be eliminated within the next five years
- ✓ It makes the entity vulnerable to the risk of a near-term severe impact
- Management has concluded the concentration is immaterial
- It relates to a single customer rather than a group
Why: A concentration is disclosed when it exists at the balance sheet date, it makes the entity vulnerable to a near-term severe impact, and it is at least reasonably possible that the impact will occur in the near term.
Q7 · easy · ASC 205-40
Management must evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a period of:
- The length of the entity's normal operating cycle
- An indefinite period extending into the foreseeable future, with no fixed assessment horizon
- Five years after the balance sheet date
- ✓ One year after the date the financial statements are issued or available to be issued
Why: Under ASU 2014-15, management evaluates going concern for one year from the date the financial statements are issued (or available to be issued) and discloses the conditions when substantial doubt exists.
Q8 · medium
A material lawsuit is filed against a company after the balance-sheet date but before the financial statements are issued, arising from an incident that occurred after year-end. This is:
- A recognized (Type I) subsequent event requiring adjustment
- ✓ A nonrecognized (Type II) subsequent event requiring disclosure only
- Ignored entirely
- A prior-period adjustment
Why: The triggering incident happened after the balance-sheet date, so no condition existed at year-end. That makes it a nonrecognized (Type II) subsequent event: do not adjust the statements, but disclose it if material. A Type I event reflects a condition that already existed at the balance-sheet date and requires adjustment.