FREE CPA FAR PRACTICE

Build FAR Skill in Financial Reporting and Account Balances

Financial reporting questions become more manageable when you separate the reporting objective from the calculation. Identify the statement, account, or transaction first. Then use the applicable measurement rule and show the direction of each adjustment before choosing an answer.

These are public teaching exercises, separate from protected prediction reports. They are original practice examples for reviewing concepts and do not reproduce secure CPA Exam questions.

Practice the skill, then review the reasoning

PRACTICE 1

A company’s accounts receivable increased during the year. In an indirect-method operating cash-flow reconciliation, what is the usual effect of that increase?

Add it to net incomeSubtract it from net incomeClassify it as an investing inflowIgnore it because receivables are noncash

PRACTICE 2

Gross trade receivables are $240,000. Management estimates 4% will not be collected. What net receivables amount should be presented?

Your answer (dollars)

PRACTICE 3

Which pair names the two NFP net asset classes?

Unrestricted and permanently restrictedWith donor restrictions and without donor restrictionsOperating and investing net assetsCurrent and noncurrent net assets

PRACTICE 4

FIFO inventory costs $160,000. Estimated selling price is $170,000, completion cost is $9,000, and disposal cost is $4,000. What amount should be reported under lower of cost and NRV?

Your answer (dollars)

Classify cash flows by purpose

Under U.S. GAAP, cash flows are operating, investing, or financing. Start with investing and financing definitions. Buying productive assets is investing. Borrowing, issuing shares, repaying debt principal, and paying dividends are financing. Cash effects that do not meet those definitions are generally operating.

For the indirect method, reconcile net income to operating cash. Add back noncash expenses, remove gains or losses whose full cash proceeds belong in investing activities, and adjust for changes in operating assets and liabilities.

Measure an account before calculating it

Trade receivables are shown at the net amount expected to be collected. The allowance for credit losses is a valuation account deducted from the receivable balance, and the estimate uses history, current conditions, and reasonable supportable forecasts.

For most FIFO or average-cost inventory, compare cost with NRV. NRV equals estimated selling price less reasonably predictable completion, disposal, and transportation costs. Calculate NRV first, then compare it with cost.

Keep entity-specific reporting straight

Not-for-profits report net assets with donor restrictions and without donor restrictions. A board designation is an internal decision and does not turn an amount into a donor restriction. NFP reporting also includes a location that analyzes expenses by both natural and functional classification.

Government-wide statements use accrual accounting and economic resources. Governmental funds use modified accrual and current financial resources. Do not transfer a rule from one reporting model to another without checking the entity and statement involved.

Turn a missed item into a usable rule

For a missed calculation, write the formula with labels before reviewing the answer. For example, write selling price minus completion and disposal costs before computing inventory NRV. This makes it easier to see whether the error was a formula, direction, or arithmetic issue.

For a missed classification item, write one sentence that explains the business purpose. A payment to acquire equipment is investing because it obtains a productive asset. A dividend is financing because it returns capital to owners. Reuse that sentence on a fresh fact pattern.

Questions about this practice

Are these official CPA Exam questions?

No. These are original public teaching exercises. They are not official AICPA questions and do not reproduce secure exam content.

Why can a profitable company have weak operating cash flow?

Net income includes noncash items and accruals. For example, a large increase in accounts receivable can reduce operating cash flow even when revenue and net income increased.

Is a board-designated NFP amount donor restricted?

No. A board designation is an internal limit. Net assets have donor restrictions only when a donor imposes a restriction.

How should I use a wrong answer here?

Name the underlying rule, redo the calculation or classification without looking at the answer, and then apply the same rule to a new scenario.

References

Updated October 25, 2026 · PassPredictor