CPA FAR F2.M3 — Practice Questions
Select Financial Statement Accounts. Below are 7 real practice questions with worked explanations — a free sample of the F2.M3 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium
Tine Company uses FIFO. At year-end it holds 1,000 units of a product with a unit cost of $48. The product sells for $60 per unit; estimated costs to complete are $12 per unit and costs to sell are $3 per unit. At what amount should the inventory be reported?
- $48,000
- $57,000
- ✓ $45,000
- $60,000
Why: Non-LIFO inventory is measured at the lower of cost and net realizable value. NRV = 60 − 12 − 3 = $45 per unit, which is below the $48 cost, so inventory is written down to 1,000 × 45 = $45,000. $48,000 keeps cost (no write-down). $57,000 deducts only the selling cost and forgets the completion cost. $60,000 uses the selling price.
Q2 · medium
Lure Company overstated its December 31, Year 1 ending inventory by $20,000. The error is discovered in Year 3. Ignoring income taxes, what is the effect on net income for Year 1 and Year 2?
- Overstated in both Year 1 and Year 2
- Understated in Year 1; overstated in Year 2
- No effect on either year
- ✓ Overstated in Year 1; understated in Year 2
Why: Overstated ending inventory understates cost of goods sold, so Year 1 net income is overstated. That ending balance becomes Year 2 beginning inventory, overstating Year 2 COGS and understating Year 2 net income — the error counterbalances over two years. 'Both overstated' ignores the reversal; the second option reverses the direction; 'no effect' ignores the impact entirely.
Q3 · medium
A company using FIFO measures inventory at the lower of cost and:
- Replacement cost
- ✓ Net realizable value (estimated selling price less costs to complete and sell)
- Original cost
- Net realizable value less a normal profit margin
Why: For inventory measured with FIFO or weighted average, the rule is lower of cost and net realizable value (NRV = selling price minus costs to complete and sell). The older ceiling/floor 'market' computation (replacement cost bounded by NRV and NRV-less-margin) now applies only to LIFO and retail-method inventory.
Q4 · easy
Goods shipped FOB shipping point on the last day of the year are in transit at year-end. Which party includes them in inventory?
- The seller
- ✓ The buyer
- Neither party
- Both parties, split 50/50
Why: FOB shipping point transfers title (and risk) to the buyer when the goods leave the seller's dock, so the buyer owns goods in transit and includes them in inventory. Under FOB destination, the seller retains title until delivery.
Q5 · medium
During a period of rising prices, which inventory method generally produces the HIGHEST ending inventory and net income?
- LIFO
- ✓ FIFO
- Weighted average
- Specific identification
Why: With rising prices, FIFO leaves the newest, highest costs in ending inventory and expenses the oldest, lowest costs as COGS, producing higher ending inventory and higher net income. LIFO does the opposite (lower income, lower taxes).
Q6 · hard
A company estimates ending inventory for interim reporting using the gross profit method. If sales are $500,000 and the historical gross profit rate is 40%, estimated cost of goods sold is:
- $200,000
- ✓ $300,000
- $500,000
- $120,000
Why: Gross profit method: COGS = sales × (1 − gross profit rate) = 500,000 × (1 − 0.40) = $300,000. Estimated ending inventory is then goods available for sale minus this estimated COGS.
Q7 · medium
A company using FIFO measures its ending inventory at:
- Net realizable value only
- ✓ Lower of cost and net realizable value
- Lower of cost or market, with a ceiling and floor
- Current replacement cost
Why: Inventory measured with FIFO or weighted-average uses lower of cost and net realizable value (NRV equals estimated selling price minus costs to complete and sell). The older lower-of-cost-or-market rule with ceiling and floor now applies only to LIFO and the retail method.