CPA FAR F1.M4 — Practice Questions
Conceptual Framework & Financial Reporting. Below are 8 real practice questions with worked explanations — a free sample of the F1.M4 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · easy · ASC 230
Under U.S. GAAP, cash dividends paid to shareholders are classified in the statement of cash flows as a(n):
- Noncash activity
- Investing activity
- Operating activity
- ✓ Financing activity
Why: Dividends paid are a financing activity. By contrast, interest paid, and interest and dividends received, are operating activities under U.S. GAAP.
Q2 · medium · ASC 230
Under U.S. GAAP, interest paid on debt is reported in the statement of cash flows as a(n):
- Noncash financing activity
- Financing activity
- Investing activity
- ✓ Operating activity
Why: U.S. GAAP classifies interest paid, and interest and dividends received, as operating activities. Only dividends paid and the principal portion of debt are financing. IFRS allows more presentation choice.
Q3 · medium · ASC 230
Net income is $250,000. Depreciation was $40,000, accounts receivable increased $15,000, inventory decreased $10,000, and accounts payable decreased $8,000. Cash flow from operating activities under the indirect method is:
- $253,000
- $293,000
- ✓ $277,000
- $267,000
Why: Begin with net income, add back depreciation (+40,000), subtract the AR increase (-15,000), add the inventory decrease (+10,000), and subtract the AP decrease (-8,000): 250,000 + 40,000 - 15,000 + 10,000 - 8,000 = 277,000.
Q4 · medium · ASC 230
Under the indirect method, a gain on the sale of equipment is:
- ✓ Subtracted from net income in operating activities, with the proceeds shown in investing
- Reported as an inflow within financing activities
- Ignored entirely because the sale is treated as a noncash transaction disclosed only in the notes
- Added to net income within operating activities
Why: The gain is removed (subtracted) from operating cash flow because the entire cash proceeds, including the gain, are reported as an investing inflow. Leaving the gain in operating activities would double-count it.
Q5 · hard · ASC 230
Equipment with a carrying amount of $30,000 was sold at a $7,000 gain. The cash inflow reported in investing activities is:
- $7,000
- ✓ $37,000
- $30,000
- $23,000
Why: Cash proceeds = carrying amount + gain = 30,000 + 7,000 = 37,000, reported as an investing inflow. The 7,000 gain is removed from operating activities under the indirect method to avoid double-counting.
Q6 · easy · ASC 230
Acquiring a building by issuing common stock directly to the seller is reported:
- ✓ As a noncash investing and financing activity, disclosed separately
- Only within the statement of changes in stockholders' equity
- As an investing outflow and a financing inflow within the statement body
- As an operating activity in the period of acquisition
Why: A direct exchange of stock for a building involves no cash, so it is excluded from the body of the statement and disclosed separately as a noncash investing and financing activity.
Q7 · medium · ASC 230
To qualify as a cash equivalent, a highly liquid investment must have an original maturity to the holder of:
- ✓ Three months or less
- Three months or less measured from the balance sheet date
- Six months or less
- One year or less
Why: A cash equivalent must be highly liquid with an original maturity of three months or less when acquired by the holder. Maturity measured from the balance sheet date, or any longer maturity, does not qualify.
Q8 · medium · ASC 230
The purchase of treasury stock is reported in the statement of cash flows as a(n):
- Investing outflow
- Noncash transaction
- ✓ Financing outflow
- Operating outflow
Why: Treasury stock transactions are dealings with the entity's own owners, so a purchase of treasury stock is a financing outflow and a reissuance is a financing inflow.