CPA FAR F1.M3 — Practice Questions
Conceptual Framework & Financial Reporting. Below are 8 real practice questions with worked explanations — a free sample of the F1.M3 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium · ASC 250
A change from the FIFO inventory method to the weighted-average method is accounted for:
- Prospectively, in the current and future periods only
- As a correction of a prior period error, by restatement
- Through note disclosure only, with no adjustment to the statements
- ✓ Retrospectively, adjusting the opening retained earnings of the earliest period presented
Why: A change in accounting principle is applied retrospectively: prior periods presented are recast and the cumulative effect adjusts beginning retained earnings of the earliest period shown. A change to LIFO is the exception and is applied prospectively.
Q2 · medium · ASC 250
Revising the estimated useful life of a machine is treated as:
- A change in accounting principle, accounted for retrospectively
- ✓ A change in accounting estimate, accounted for prospectively
- A change in reporting entity
- A correction of an error, requiring restatement
Why: A change in an estimate, such as useful life, salvage value, or the bad debt rate, is accounted for prospectively in the period of change and future periods, with no restatement of prior periods.
Q3 · hard · ASC 250
Depreciation expense omitted in a prior year is discovered in the current year. The error is corrected by:
- ✓ Restating the prior period statements and adjusting beginning retained earnings
- Adjusting prospectively over the asset's remaining useful life
- Disclosing the error in the notes with no adjustment
- Including a cumulative-effect adjustment in current-year net income
Why: Correcting a prior period error is a prior period adjustment: the prior statements presented are restated and the beginning balance of retained earnings is adjusted for the cumulative effect, net of tax.
Q4 · medium · ASC 205-20
A disposal of a component of an entity is reported in discontinued operations only when it:
- Is expected to be completed within the entity's operating cycle
- ✓ Represents a strategic shift that has, or will have, a major effect on operations and results
- Involves the sale of any individual long-lived asset
- Produces any gain or loss, regardless of its significance
Why: Since ASU 2014-08, a disposal qualifies as a discontinued operation only when it represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results, such as exiting a major line of business or geographic area.
Q5 · medium · ASC 205-20
A component classified as discontinued had a $200,000 pretax operating loss, and its disposal produced a $50,000 pretax gain. At a 25% tax rate, the amount reported in discontinued operations is a:
- ✓ $(112,500) loss
- $(187,500) loss
- $(37,500) loss
- $(150,000) loss
Why: Combine the pretax amounts: -200,000 + 50,000 = -150,000, then apply tax: -150,000 x (1 - 0.25) = -112,500. Discontinued operations are reported net of tax.
Q6 · hard · ASC 280
An operating segment is a reportable segment if its reported revenue, including intersegment sales, is at least:
- 75% of the combined revenue of all operating segments
- 5% of consolidated external revenue
- 25% of consolidated external revenue
- ✓ 10% of the combined revenue of all operating segments
Why: A segment is reportable if it meets any 10% test - revenue, absolute reported profit or loss, or assets. Separately, the reportable segments together must represent at least 75% of consolidated external revenue.
Q7 · medium
On the balance sheet of a nonmonetary exchange that lacks commercial substance, the acquired asset is generally recorded at:
- The acquirer's estimated replacement cost for the asset
- Fair value of the asset received, with the full gain or loss recognized immediately in earnings
- Zero, until cash consideration is actually paid
- ✓ The book value of the asset given up (with limited gain only if boot is received)
Why: When an exchange lacks commercial substance, it is recorded at the carrying amount of the asset surrendered, and gains are generally deferred. A partial gain is recognized only to the extent of boot (cash) received. Exchanges with commercial substance, by contrast, use fair value and recognize full gain or loss.
Q8 · medium
When is a disposed component of an entity reported in discontinued operations?
- Only when the disposed component had been operating at a loss before its disposal
- Whenever management formally decides to sell the component, regardless of whether the disposal has a major effect
- ✓ When the disposal represents a strategic shift that has (or will have) a major effect on operations and results
- Whenever any component of the entity is sold at any point during the fiscal year
Why: Under ASC 205-20 a disposal is reported in discontinued operations only when it represents a strategic shift with a major effect on the entity (for example a major line of business or geographic area). A routine disposal that is not a strategic shift stays in continuing operations.