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CPA Exam: FAR · Select Balance Sheet Accounts

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CPA Exam: FAR Cash, Receivables, and Investments Summary

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About 6 of 18 Select Balance Sheet Accounts questions (35%)

Cash and bank reconciliations, receivables and credit losses, and investments in debt and equity securities.

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Cash, Receivables, and Investments: must-know points

  • Debt securities are held-to-maturity, available-for-sale, or trading.
  • Equity securities are generally measured at fair value through net income.
  • Credit losses use an expected-loss allowance.

Cash, Receivables, and Investments: 10 sample questions

Practice questionReviewedSelect Balance Sheet Accounts › Cash, Receivables, and Investments★★★★★

Question 1. Which item should a company include in cash and cash equivalents on its balance sheet?

  1. ① A U.S. Treasury bill bought 2 months before it matures
  2. ② A 1-year certificate of deposit bought on the day it was issued
  3. ③ A customer's postdated check
  4. ④ Postage stamps on hand
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Answer: ① A U.S. Treasury bill bought 2 months before it matures

Key point: Cash equivalents: original maturity of 3 months or less

Cash equivalents are very liquid investments that will turn into a known amount of cash soon. The rule of thumb is that the original maturity, counted from the day the company buys it, is 3 months or less. A Treasury bill bought 2 months before maturity meets this test.

Wrong choices

  • A 1-year certificate of deposit bought on the day it was issued: Its original maturity to the company is more than 3 months, so it is a short-term investment, not a cash equivalent.
  • A customer's postdated check: A postdated check cannot be cashed yet, so it is a receivable.
  • Postage stamps on hand: Stamps are a prepaid expense (supplies), not cash.
Practice questionReviewedSelect Balance Sheet Accounts › Cash, Receivables, and Investments★★★★★

Question 2. The bank statement shows a balance of $20,000 on June 30. Deposits in transit are $3,000 and outstanding checks are $4,500. The bank also charged a $50 service fee that the company has not yet recorded. What is the correct cash balance on June 30?

  1. ① $18,450
  2. ② $21,500
  3. ③ $18,500
  4. ④ $27,500
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Answer: ③ $18,500

Key point: Bank side: + deposits in transit, − outstanding checks

Start from the bank balance and fix items the bank does not know about yet.

  1. Bank balance: $20,000
  2. Add deposits in transit: +$3,000
  3. Subtract outstanding checks: −$4,500
  4. Correct cash = $18,500

Check: the service fee is already in the bank balance, so it only affects the book side.

Wrong choices

  • $18,450: The $50 service fee is already deducted in the bank balance. It is a book-side adjustment, so it is not subtracted again from the bank balance.
  • $21,500: This adds the outstanding checks and subtracts the deposits in transit, which is backwards.
  • $27,500: Outstanding checks must be subtracted, not added.
Practice questionReviewedSelect Balance Sheet Accounts › Cash, Receivables, and Investments★★★★★

Question 3. A company's cash account (book balance) shows $15,000. The bank statement shows: a customer's $600 check returned for insufficient funds (NSF), a $2,000 note receivable the bank collected for the company, and a $40 service charge. None of these has been recorded by the company. What is the correct cash balance?

  1. ① $16,960
  2. ② $16,360
  3. ③ $14,360
  4. ④ $17,640
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Answer: ② $16,360

Key point: Book side: add bank collections, subtract NSF and fees

Items the bank already recorded but the company has not are adjusted on the book side.

  1. Book balance: $15,000
  2. Add note collected by bank: +$2,000
  3. Subtract NSF check: −$600
  4. Subtract service charge: −$40
  5. Correct cash = $16,360

Check: $15,000 + $2,000 − $640 = $16,360.

Wrong choices

  • $16,960: This forgets to subtract the $600 NSF check, which the company can no longer count as cash.
  • $14,360: The note collected by the bank increases cash; it should be added, not subtracted.
  • $17,640: The NSF check and service charge reduce cash; they should be subtracted.
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Question 4. A company owns 2% of another company's common stock. The shares trade on a stock exchange. Where does the company report an increase in the shares' fair value during the year?

  1. ① In other comprehensive income
  2. ② In net income
  3. ③ Nowhere until the shares are sold
  4. ④ Directly in retained earnings
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Answer: ② In net income

Key point: Equity securities (no influence): fair value through NI

Equity securities that the company does not have significant influence over, and that have a readily determinable fair value, are carried at fair value. Both unrealized gains and losses go into net income each period.

Wrong choices

  • In other comprehensive income: OCI treatment was removed for equity securities; it is still used for available-for-sale debt securities, not stock.
  • Nowhere until the shares are sold: Equity securities with a readily determinable fair value are remeasured to fair value every reporting date.
  • Directly in retained earnings: Fair value changes go through the income statement first; they are not posted straight to retained earnings.
Practice questionReviewedSelect Balance Sheet Accounts › Cash, Receivables, and Investments★★★★★

Question 5. At year-end, a company's accounts receivable total $200,000. Its aging analysis shows expected credit losses of $9,000. Because of write-offs during the year, the allowance for credit losses has a $1,500 debit balance before adjustment. What credit loss expense should the company record?

  1. ① $9,000
  2. ② $7,500
  3. ③ $1,500
  4. ④ $10,500
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Answer: ④ $10,500

Key point: Expense = target allowance − current balance

With an aging (balance-sheet) approach, the ending allowance must equal the expected loss. The expense is whatever amount is needed to reach that target.

  1. Target allowance (credit): $9,000
  2. Current balance: $1,500 debit
  3. Expense needed = $9,000 + $1,500 = $10,500

Check: −$1,500 + $10,500 = $9,000 credit balance.

Wrong choices

  • $9,000: This ignores the $1,500 debit balance that must first be brought back to zero.
  • $7,500: This treats the $1,500 debit balance as if it were a credit balance.
  • $1,500: This only clears the debit balance and does not build the needed $9,000 allowance.
Practice questionReviewedSelect Balance Sheet Accounts › Cash, Receivables, and Investments★★★★★

Question 6. On January 1, a company buys 30% of the common stock of an investee for $300,000, which equals 30% of the investee's book value. The company has significant influence. During the year, the investee earns net income of $100,000 and pays dividends of $40,000. What is the investment's carrying amount at December 31?

  1. ① $318,000
  2. ② $330,000
  3. ③ $288,000
  4. ④ $300,000
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Answer: ① $318,000

Key point: Equity method: + share of income, − share of dividends

Under the equity method, the investment goes up by the investor's share of investee income and down by its share of dividends received.

  1. Cost: $300,000
  2. Share of income: 30% × $100,000 = +$30,000
  3. Share of dividends: 30% × $40,000 = −$12,000
  4. Carrying amount = $318,000

Wrong choices

  • $330,000: This adds the share of income but forgets that dividends reduce the investment.
  • $288,000: This subtracts dividends but forgets to add the share of income.
  • $300,000: Under the equity method the investment changes with the investee's income and dividends; it does not stay at cost.
Practice questionReviewedSelect Balance Sheet Accounts › Cash, Receivables, and Investments★★★★★

Question 7. On January 1, a company buys $100,000 face value bonds for $96,000 and classifies them as held-to-maturity. The bonds pay 7% interest once a year on December 31. The effective (market) rate at purchase is 8%. Using the effective interest method, what is the bonds' carrying amount at December 31 of the first year?

  1. ① $96,680
  2. ② $96,000
  3. ③ $95,320
  4. ④ $100,000
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Answer: ① $96,680

Key point: HTM bonds: amortized cost via effective interest

Held-to-maturity debt is carried at amortized cost. Each year, interest income is the carrying amount times the effective rate, and the difference from the cash received reduces the discount.

  1. Interest income: $96,000 × 8% = $7,680
  2. Cash received: $100,000 × 7% = $7,000
  3. Discount amortized: $7,680 − $7,000 = $680
  4. Carrying amount: $96,000 + $680 = $96,680

Wrong choices

  • $96,000: The discount must be amortized each year, so the carrying amount moves up toward face value.
  • $95,320: Amortizing a discount increases the carrying amount; it does not decrease it.
  • $100,000: Held-to-maturity bonds are carried at amortized cost, and face value is only reached at maturity.
Practice questionReviewedSelect Balance Sheet Accounts › Cash, Receivables, and Investments★★★★★

Question 8. Under current U.S. GAAP (ASC 326), how does a company measure the allowance for credit losses on its trade accounts receivable?

  1. ① Only losses that are probable and have already been incurred at the balance sheet date
  2. ② Expected credit losses for the next 12 months only
  3. ③ No allowance; bad debts are expensed only when an account is written off
  4. ④ Expected credit losses over the full life of the receivables, recorded starting when the receivables are first recognized
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Answer: ④ Expected credit losses over the full life of the receivables, recorded starting when the receivables are first recognized

Key point: CECL: lifetime expected credit losses from day one

The current expected credit loss (CECL) model requires an allowance for the losses the company expects over the whole life of its receivables. The estimate uses past experience, current conditions, and reasonable forecasts, and it starts when the receivable is recorded.

Wrong choices

  • Only losses that are probable and have already been incurred at the balance sheet date: This is the old incurred-loss model that ASC 326 (CECL) replaced.
  • Expected credit losses for the next 12 months only: A 12-month expected loss is part of the international (IFRS 9) model, not U.S. CECL.
  • No allowance; bad debts are expensed only when an account is written off: The direct write-off method is not allowed under GAAP when losses are material.
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Question 9. On January 1, a company sells land and receives a $100,000 non-interest-bearing note due in 2 years. The market interest rate for this type of note is 10%. The present value of $1 for 2 periods at 10% is 0.826. How much interest income should the company report on the note in the first year?

  1. ① $10,000
  2. ② $17,400
  3. ③ $8,260
  4. ④ $0
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Answer: ③ $8,260

Key point: Non-interest-bearing note: record at PV, earn the discount

A note with no stated interest is recorded at its present value, and the difference from face value is earned as interest over time.

  1. Present value: $100,000 × 0.826 = $82,600
  2. Year 1 interest: $82,600 × 10% = $8,260

Check: Year 2 interest is ($82,600 + $8,260) × 10% = $9,086; total ≈ $17,346, which is about the $17,400 discount (difference is factor rounding).

Wrong choices

  • $10,000: Interest is earned on the note's present value ($82,600), not on the $100,000 face amount.
  • $17,400: This is the total discount for both years, not the first year's interest.
  • $0: A non-interest-bearing note still has interest built in; the discount is earned as interest income over time.
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Question 10. A company buys a debt security at its $50,000 face value and classifies it as available-for-sale. At year-end, its fair value is $47,000. The decline is caused only by higher market interest rates (no credit loss), and the company does not intend to sell it. How is the $3,000 decline reported?

  1. ① As an unrealized loss in net income
  2. ② It is not recorded; the security stays at $50,000
  3. ③ As an unrealized loss in other comprehensive income
  4. ④ As a direct reduction of retained earnings
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Answer: ③ As an unrealized loss in other comprehensive income

Key point: AFS debt: non-credit fair value changes go to OCI

Available-for-sale debt securities are shown at fair value. Changes in fair value that are not caused by credit losses are reported in other comprehensive income until the security is sold.

Wrong choices

  • As an unrealized loss in net income: Net income is used for trading securities and for credit losses, but this decline is not credit-related.
  • It is not recorded; the security stays at $50,000: Available-for-sale securities are reported at fair value on the balance sheet.
  • As a direct reduction of retained earnings: Unrealized AFS changes go to accumulated other comprehensive income, not retained earnings.

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