CPA FAR F4.M2 — Practice Questions
State & Local Government Accounting. Below are 8 real practice questions with worked explanations — a free sample of the F4.M2 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · hard
A company reports net income of $500,000 with 100,000 weighted-average common shares outstanding. It also has 10,000 shares of $100 par, 6% cumulative preferred stock; no preferred dividends were declared this year. What is basic EPS?
Why: Cumulative preferred dividends are subtracted from the numerator whether or not declared. The annual preferred dividend is $60,000 (10,000 x $100 x 6%), so income available to common is $440,000, and basic EPS is $440,000 / 100,000 = $4.40.
Q2 · medium
A company has net income of $300,000 and 50,000 weighted-average common shares. It also has noncumulative preferred stock with a $20,000 annual dividend that was not declared this year. What is basic EPS?
Why: Noncumulative preferred dividends reduce the numerator only if declared. Because no dividend was declared, nothing is subtracted, so basic EPS is $300,000 / 50,000 = $6.00.
Q3 · medium
A company had 120,000 common shares outstanding on January 1 and issued 60,000 additional shares for cash on October 1. What is the weighted-average number of shares outstanding for the year?
- 180,000
- 165,000
- 150,000
- ✓ 135,000
Why: Newly issued shares are weighted for the portion of the year outstanding. The 60,000 shares issued on October 1 count for 3 months (60,000 x 3/12 = 15,000), giving 120,000 + 15,000 = 135,000 weighted-average shares.
Q4 · medium
A company had 100,000 common shares outstanding for the entire year and executed a 2-for-1 stock split on November 1. What weighted-average share count is used for EPS?
- ✓ 200,000
- 116,667
- 150,000
- 100,000
Why: Stock splits and stock dividends are applied retroactively to the beginning of the earliest period presented, as if they had always existed. The 2-for-1 split makes the weighted-average 200,000 shares for the whole year.
Q5 · hard
A company has 10,000 stock options outstanding with a $20 exercise price; the average market price during the year was $25. Using the treasury stock method, how many incremental shares are added to the diluted EPS denominator?
Why: Under the treasury stock method, assumed exercise proceeds of $200,000 (10,000 x $20) repurchase 8,000 shares at the $25 average price. The 2,000 net new shares (10,000 - 8,000) are added to the diluted denominator.
Q6 · medium
Orr Company, a calendar-year corporation, reported net income of $500,000 for Year 1. Throughout Year 1 it had 100,000 shares of common stock and 10,000 shares of 6%, $100 par preferred stock outstanding. No dividends were declared in Year 1. What is Year 1 basic earnings per share?
Why: Preferred stock is noncumulative unless the stem says 'cumulative.' For noncumulative preferred, dividends reduce the EPS numerator only if declared; none were declared, so basic EPS = 500,000 / 100,000 = $5.00. $4.40 subtracts the $60,000 annual preferred dividend as if it were cumulative. $5.60 adds it (wrong direction). $4.70 subtracts only a partial dividend.
Q7 · medium
Basic earnings per share is computed as:
- Net income divided by the entity's total assets at year end
- (Net income plus interest) divided by diluted shares outstanding
- ✓ (Net income − preferred dividends) divided by the weighted-average common shares outstanding
- Net income divided by the number of common shares outstanding at the end of the reporting period
Why: Basic EPS = (net income available to common, i.e., net income minus preferred dividends) ÷ weighted-average common shares outstanding. Using a weighted average reflects shares actually outstanding during the period.
Q8 · hard
In computing diluted EPS, outstanding stock options are reflected using the:
- If-converted method
- ✓ Treasury stock method
- Effective-interest method
- Equity method
Why: Dilutive options/warrants use the treasury stock method: assume exercise at the strike price and assume the proceeds buy back shares at the average market price; the net new shares increase the denominator. Convertible securities, by contrast, use the if-converted method.