CPA FAR F3.M1 — Practice Questions
Select Transactions. Below are 8 real practice questions with worked explanations — a free sample of the F3.M1 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · easy · ASC 305
Which item is reported within 'cash and cash equivalents' on the balance sheet?
- ✓ Balances in a money market fund and a demand checking account
- Trade accounts receivable from customers
- A certificate of deposit maturing in nine months
- Equity securities held for trading
Why: Cash and cash equivalents include unrestricted demand deposits and highly liquid investments with original maturities of three months or less, such as money market funds. A nine-month CD, receivables, and trading securities do not qualify.
Q2 · medium · ASC 305
Per the bank statement the balance is $18,400. Deposits in transit are $3,200, outstanding checks total $4,500, and the bank erroneously charged the company $300 for another depositor's check. The correct cash balance is:
- ✓ $17,400
- $17,100
- $16,800
- $18,000
Why: Adjust the bank balance: add deposits in transit (+3,200), subtract outstanding checks (-4,500), and add back the bank's $300 error: 18,400 + 3,200 - 4,500 + 300 = 17,400.
Q3 · medium · ASC 305
In a bank reconciliation, which item is an adjustment to the company's BOOK balance rather than the bank balance?
- ✓ A bank service charge the company has not yet recorded
- A deposit in transit at the balance sheet date
- A deposit the bank credited to the wrong customer account
- An outstanding check the company wrote that has not yet cleared
Why: Items the bank has processed but the company has not yet recorded - service charges, NSF checks, interest earned, note collections - adjust the book balance. Deposits in transit, outstanding checks, and bank errors adjust the bank balance.
Q4 · medium · ASC 305
A customer's check that was previously deposited is returned by the bank marked NSF. On the company's books this requires:
- Recording bad debt expense for the full amount of the returned check
- Deferring any entry until the customer has been contacted about payment
- Reducing only the bank balance on the reconciliation, with no book entry
- ✓ Reducing cash and reinstating the receivable from the customer
Why: An NSF check means the deposit did not clear, so the company reduces cash and reinstates the customer receivable. It is a book-side reconciling item and is not automatically a bad debt.
Q5 · medium · ASC 210
Cash restricted for the retirement of bonds due in three years should be classified as:
- A direct reduction of the related long-term bonds payable on the balance sheet
- ✓ A noncurrent asset, reported separately from cash and cash equivalents
- Part of current cash and cash equivalents
- A current asset in every case despite the multi-year restriction
Why: Cash restricted for a noncurrent purpose, such as a sinking fund to retire bonds due in three years, is reported as a noncurrent asset separate from unrestricted cash and is not netted against the debt.
Q6 · medium · ASC 210
A legally restricted compensating balance maintained against a short-term loan should be:
- Included without distinction in cash and cash equivalents
- Reported as a noncurrent investment
- ✓ Reported separately as a current asset, apart from unrestricted cash
- Disclosed only in the notes, with no balance sheet effect
Why: A legally restricted compensating balance tied to a short-term borrowing is reported separately as a current restricted-cash asset, distinct from unrestricted cash and cash equivalents.
Q7 · easy · ASC 305
Outstanding checks in a bank reconciliation are checks that have been:
- Recorded by the bank but not yet by the company
- Returned by the bank unpaid because of insufficient funds in the account
- Received by the company but not yet deposited at the bank
- ✓ Written and recorded by the company but not yet cleared by the bank
Why: Outstanding checks have been issued and recorded by the company but have not yet cleared the bank, so they are subtracted from the bank balance in a reconciliation.
Q8 · hard · ASC 305
A company's general ledger cash balance is $10,500 and its bank statement shows $9,950. Deposits in transit are $2,500, outstanding checks $1,200, the bank collected a $1,000 note on the company's behalf (unrecorded), and there is an unrecorded $250 service charge. The reconciled cash balance is:
- $9,950
- $10,500
- ✓ $11,250
- $12,750
Why: Both sides reconcile to the same figure. Bank side: 9,950 + 2,500 - 1,200 = 11,250. Book side: 10,500 + 1,000 note collected - 250 service charge = 11,250.