CPA Exam: FAR · Financial Reporting
Written by AI · Not yet reviewed by staffCPA Exam: FAR General-Purpose Financial Statements Summary
- Importance
- ★★★★★ (5 / 5)
- Weight
- About 8 of 18 Financial Reporting questions (45%)
How businesses present the balance sheet, income statement, comprehensive income, changes in equity, cash flows, and notes.
📖 See General-Purpose Financial Statements concepts →General-Purpose Financial Statements: must-know points
- Classify cash flows as operating, investing, or financing.
- Know what goes in other comprehensive income.
- Separate current and noncurrent items on the balance sheet.
General-Purpose Financial Statements: 10 sample questions
Question 1. Lake Co. reports net income of $50,000. Depreciation expense was $8,000. Accounts receivable increased by $5,000 and accounts payable increased by $3,000. Using the indirect method, what is net cash provided by operating activities?
- ① $60,000
- ② $50,000
- ③ $56,000
- ④ $40,000
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Answer: ③ $56,000
Key point: Indirect method: add noncash items, adjust working capital
Start with net income and remove noncash items and working capital effects.
- Net income: $50,000
- Add depreciation (noncash): +$8,000 → $58,000
- Subtract increase in receivables (sales not yet collected): −$5,000 → $53,000
- Add increase in payables (costs not yet paid): +$3,000 → $56,000
Check: 50,000 + 8,000 − 5,000 + 3,000 = 56,000.
Wrong choices
- $60,000: This reverses the signs of both working capital changes: an increase in receivables lowers cash, and an increase in payables raises it.
- $50,000: This subtracts the increase in payables. A payables increase means cash was not yet paid, so it is added back.
- $40,000: This subtracts depreciation. Depreciation is a noncash expense and is added back to net income.
Question 2. Under US GAAP, how is cash paid for interest on a company's bank loan classified in the statement of cash flows?
- ① Financing activities
- ② Operating activities
- ③ Either operating or financing, as chosen by company policy
- ④ Investing activities
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Answer: ② Operating activities
Key point: US GAAP: interest paid is an operating cash flow
Under US GAAP, interest paid and interest received are both operating cash flows because interest expense and interest income are part of net income. Only the repayment of the loan principal is a financing cash outflow.
Wrong choices
- Financing activities: Repaying loan principal is financing, but interest paid is an operating cash flow under US GAAP.
- Either operating or financing, as chosen by company policy: A policy choice for interest paid is allowed under IFRS, not under US GAAP.
- Investing activities: Investing covers buying and selling long-term assets and investments, not paying interest.
Question 3. Which of the following cash flows is reported as an investing activity in a for-profit company's statement of cash flows?
- ① Cash paid for dividends to shareholders
- ② Cash received from issuing bonds
- ③ Cash paid to buy new equipment
- ④ Cash paid to suppliers for inventory
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Answer: ③ Cash paid to buy new equipment
Key point: Buying/selling long-term assets = investing
Investing activities are cash flows from buying and selling long-term assets (such as equipment, land, and buildings) and investments in other entities, and from making and collecting loans. Buying equipment is a classic investing outflow.
Wrong choices
- Cash paid for dividends to shareholders: Dividends paid are payments to owners, which are financing activities.
- Cash received from issuing bonds: Borrowing money by issuing bonds is a financing activity.
- Cash paid to suppliers for inventory: Buying inventory is part of normal operations, so it is an operating activity.
Question 4. Which of the following items is reported in other comprehensive income (OCI), not in net income?
- ① Unrealized holding gain on trading debt securities
- ② Unrealized holding gain on available-for-sale debt securities
- ③ Unrealized holding gain on equity securities with a readily determinable fair value
- ④ Gain on the sale of equipment
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Answer: ② Unrealized holding gain on available-for-sale debt securities
Key point: AFS debt unrealized gains/losses go to OCI
Unrealized gains and losses on available-for-sale (AFS) debt securities are reported in other comprehensive income and build up in accumulated OCI until the securities are sold. Other common OCI items include foreign currency translation adjustments and certain pension amounts.
Wrong choices
- Unrealized holding gain on trading debt securities: Changes in fair value of trading securities go straight to net income.
- Unrealized holding gain on equity securities with a readily determinable fair value: Under current GAAP, fair value changes on such equity securities are reported in net income.
- Gain on the sale of equipment: A realized gain on selling equipment is reported in net income.
Question 5. Stone Co. reported net income of $100,000, including depreciation expense of $15,000. During the year it sold equipment with a carrying amount of $30,000 for $42,000 cash. There were no other adjustments. What is net cash provided by operating activities using the indirect method?
- ① $127,000
- ② $115,000
- ③ $157,000
- ④ $103,000
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Answer: ④ $103,000
Key point: Subtract gains on asset sales in indirect method
The gain on sale is in net income, but the $42,000 cash received is reported in investing activities, so the gain is removed from operating cash flow.
- Gain on sale = 42,000 − 30,000 = $12,000
- Operating cash flow = 100,000 + 15,000 − 12,000 = $103,000
Check: the $42,000 proceeds appear once, as an investing inflow.
Wrong choices
- $127,000: This adds the gain. A gain increases net income but the related cash is investing, so the gain is subtracted.
- $115,000: This leaves the gain in operating cash flow; the $12,000 gain must be removed.
- $157,000: This adds the full sale proceeds. Proceeds from selling equipment are an investing inflow, not operating.
Question 6. Elm Co. reports net income of $120,000. Other data: depreciation $25,000; amortization of discount on bonds payable $2,000; loss on sale of equipment $5,000; inventory increased $10,000; prepaid expenses decreased $3,000; accounts payable decreased $8,000; income taxes payable increased $4,000. What is net cash provided by operating activities (indirect method)?
- ① $141,000
- ② $137,000
- ③ $157,000
- ④ $131,000
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Answer: ① $141,000
Key point: Add noncash items/losses; adjust each working capital line
Add back noncash expenses and losses, then adjust for changes in current operating assets and liabilities.
- Start: 120,000
- Add depreciation 25,000, discount amortization 2,000, loss 5,000 → 152,000
- Inventory increase −10,000 → 142,000
- Prepaid decrease +3,000 → 145,000
- Payables decrease −8,000 → 137,000
- Taxes payable increase +4,000 → 141,000
Check: 120 + 25 + 2 + 5 − 10 + 3 − 8 + 4 = 141 (thousand).
Wrong choices
- $137,000: This subtracts the bond discount amortization. It is a noncash part of interest expense and is added back.
- $157,000: This adds the decrease in payables. Paying down payables uses cash, so it is subtracted.
- $131,000: This subtracts the loss on sale. A loss lowered net income without using operating cash, so it is added back.
Question 7. A company sold a component that qualifies as a discontinued operation. Where are the results of the discontinued operation reported in the income statement?
- ① In a separate section after income from continuing operations, net of tax
- ② Within operating expenses as part of continuing operations
- ③ In other comprehensive income
- ④ As an adjustment to beginning retained earnings
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Answer: ① In a separate section after income from continuing operations, net of tax
Key point: Discontinued ops: separate line, net of tax
Results of a discontinued operation (its operating income or loss and any gain or loss on disposal) are shown as a separate line below income from continuing operations. The amount is shown net of income tax, so the tax on it is not included in continuing income tax expense.
Wrong choices
- Within operating expenses as part of continuing operations: Discontinued operations are kept out of continuing operations so readers can see the ongoing business.
- In other comprehensive income: Discontinued operations are part of net income, not OCI.
- As an adjustment to beginning retained earnings: Only error corrections and certain changes in principle adjust beginning retained earnings; discontinued operations are reported in the current income statement.
Question 8. Ridge Co. uses the direct method. For the year, cost of goods sold was $300,000. Inventory increased by $20,000 and accounts payable to suppliers increased by $15,000. How much cash did Ridge pay to suppliers?
- ① $320,000
- ② $285,000
- ③ $305,000
- ④ $335,000
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Answer: ③ $305,000
Key point: Cash to suppliers = COGS + inv. increase − AP increase
Work from cost of goods sold to purchases, then from purchases to cash paid.
- Purchases = COGS + inventory increase = 300,000 + 20,000 = $320,000
- Cash paid = purchases − increase in payables = 320,000 − 15,000 = $305,000
Check: 300,000 + 20,000 − 15,000 = 305,000.
Wrong choices
- $320,000: This is purchases. It ignores that part of the purchases was not yet paid because payables increased.
- $285,000: This subtracts the inventory increase instead of adding it.
- $335,000: This adds the payables increase. A higher payable means less cash was paid, so it is subtracted.
Question 9. Hill Co. had sales on account of $500,000 for the year. Accounts receivable were $60,000 at the beginning of the year and $45,000 at the end. There were no write-offs. How much cash did Hill collect from customers?
- ① $485,000
- ② $500,000
- ③ $545,000
- ④ $515,000
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Answer: ④ $515,000
Key point: Cash collected = sales + decrease in A/R
Cash collected equals sales plus what was owed at the start, minus what is still owed at the end.
- Beginning receivables + sales = 60,000 + 500,000 = $560,000
- Less ending receivables: 560,000 − 45,000 = $515,000
Check: receivables fell by 15,000, so cash collected is 500,000 + 15,000 = 515,000.
Wrong choices
- $485,000: This subtracts the decrease in receivables. A decrease means extra old balances were collected, so it is added.
- $500,000: This equals sales and ignores the change in receivables.
- $545,000: This adds the beginning receivables but then subtracts only the $15,000 change, not the $45,000 still owed at year-end.
Question 10. For the year, Pine Co. reported net income of $80,000. It also had an unrealized gain on available-for-sale debt securities of $6,000 (net of tax), a foreign currency translation loss of $2,000 (net of tax), and declared cash dividends of $10,000. What is Pine's total comprehensive income?
- ① $74,000
- ② $88,000
- ③ $86,000
- ④ $84,000
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Answer: ④ $84,000
Key point: Comprehensive income = net income + OCI (no dividends)
Comprehensive income is net income plus other comprehensive income. Dividends are not an expense or a loss; they reduce retained earnings directly.
- OCI = 6,000 − 2,000 = $4,000
- Comprehensive income = 80,000 + 4,000 = $84,000
Check: dividends of 10,000 are left out completely.
Wrong choices
- $74,000: This subtracts dividends. Dividends are distributions to owners and are not part of comprehensive income.
- $88,000: This adds the translation loss instead of subtracting it.
- $86,000: This includes the gain but leaves out the translation loss.
Test yourself.