CPA Financial Accounting And Reporting Exam Pathway 2025/2026 Version: Challenge Yourself And Learn With Over 590+ Practice Questions

CPA Financial Accounting and Reporting

Exam Pathway

2025/2026 Version

Challenge Yourself and Learn with Over 590+ Practice Questions

Brittany Deaton

Copyright © 2025 Brittany Deaton

This book or parts thereof may not be reproduced in any form, stored in any retrieval system, or transmitted in any form by any means—electronic, mechanical, photocopy, recording, or otherwise—without prior written permission of the publisher, except as provided by United States of America copyright law and fair use.

Disclaimer and Terms of Use

This book is an independent educational resource and is not affiliated with, authorized, endorsed, or sponsored by any official certification bodies, including but not limited to the Uniform CPA Examination, the Financial Accounting and Reporting (FAR) section, the American Institute of Certified Public Accountants (AICPA), or any state boards of accountancy.

All trademarks, logos, and acronyms referenced in this publication are the property of their respective owners and are used solely for identification purposes. This guide has been developed exclusively for exam preparation and educational use. The author and publisher make no representations or warranties regarding the accuracy, applicability, or completeness of the content. Use of this book does not guarantee certification or exam success.

Printed in the United States of America

TABLE OF CONTENTS

TABLE OF CONTENTS

Chapter 1 Conceptual Framework & Financial Reporting

Conceptual Framework & Standard Setting

Presentation of Financial Statements & Disclosures

SEC Reporting & Regulatory Filings

Exam Format & Structure

Chapter 2 Accounting Methods & Transaction Recognition

Revenue Recognition & Contract Accounting

Leases, Financial Instruments & Fair Value

Inventory, Property, Plant & Equipment, and Intangible Assets

Chapter 3 Financial Statement Accounts Domain

Line-Item Measurement & Disclosure Requirements (100 Practice Questions)

Earnings Per Share, Other Comprehensive Income & Noncontrolling Interests (100 Practice Questions)

Chapter 4 Specialized Reporting & Emerging Topics Domain

Governmental & Not-for-Profit Entity Reporting (100 Practice Questions)

Post-Balance-Sheet Events, Segment Reporting & Emerging Standards (100 Practice Questions)

THEORY QUESTIONS

EXTRA QUESTIONS

GLOSSARY

Chapter 1 Conceptual Framework & Financial Reporting

Conceptual Framework & Standard Setting

When preparing for the CPA Financial Accounting and Reporting (FAR) Exam, one of the foundational topics that every candidate must fully understand is the Conceptual Framework and Standard Setting. This area not only lays the groundwork for how financial reporting functions in the United States, but it also sets the tone for understanding all the accounting principles and practices tested throughout the FAR exam. It is crucial because without understanding the why behind accounting rules, one might struggle to properly apply the how during both the exam and real-life scenarios.

What is the Conceptual Framework?

The Conceptual Framework in accounting is like the blueprint for the entire financial reporting process. Think of it as the architectural plan that guides the construction of financial statements. Developed by the Financial Accounting Standards Board (FASB), it provides a structure for setting accounting standards and for resolving accounting disputes that may not be directly addressed by existing rules. The framework defines the objectives and fundamental principles that underlie financial accounting and reporting.

The purpose of the conceptual framework is to:

Assist standard setters in developing consistent and logical accounting standards.

Guide accountants in areas where no standard exists.

Help users of financial statements better understand and interpret the information presented.

The Conceptual Framework does not override any specific accounting standards. Rather, it serves as a guiding philosophy for the FASB when setting new standards or revising existing ones.

The Objectives of Financial Reporting

At the core of the Conceptual Framework is its primary objective: to provide financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. This objective emphasizes the decision-usefulness of financial statements.

Financial reporting should provide:

Information about the entity’s economic resources and claims, such as assets and liabilities.

Information about changes in those resources and claims, which can include profits, losses, and cash flows.

This information helps users assess the company’s ability to generate cash and its financial health.

Qualitative Characteristics of Useful Financial Information

The framework outlines two main types of qualitative characteristics that make financial information useful:

1. Fundamental Characteristics

These are the qualities that all financial information must have to be useful:

Relevance: The information should be capable of making a difference in the decisions made by users. This includes predictive value, confirmatory value, or both.

Faithful Representation: The information must faithfully reflect the economic events it purports to represent. It should be complete, neutral, and free from error.

2. Enhancing Characteristics

These improve the usefulness of information that is already relevant and faithfully represented:

Comparability: Users should be able to compare the financial statements of different companies or the same company over different periods.

Verifiability: Independent observers should be able to verify that the information faithfully represents the underlying transactions.

Timeliness: Information must be provided in time to influence decisions.

Understandability: Information should be clear and concise so that users with a reasonable knowledge of business and accounting can comprehend it.

Elements of Financial Statements

The conceptual framework also defines the core elements that make up financial statements:

Assets: Resources controlled by the company from which future economic benefits are expected.

Liabilities: Obligations the company has to transfer resources to other entities.

Equity: The residual interest in the assets of the entity after deducting liabilities.

Revenues: Inflows of economic benefits resulting from normal operations.

Expenses: Outflows or the using up of assets during operations.

Gains and Losses: Result from peripheral or incidental transactions.

These elements form the building blocks of the income statement and balance sheet.

Recognition and Measurement Principles

To ensure that the elements mentioned above are properly included in financial statements, the framework also outlines recognition and measurement criteria.

Recognition involves the process of including items in the financial statements. An item should be recognized when:

It is probable that future economic benefits will flow to or from the entity.

The item has a cost or value that can be measured reliably.

Measurement refers to determining the monetary amounts to be included. The main measurement bases are:

Historical cost: Original transaction price.

Fair value: Current market value.

Net realizable value: Estimated selling price less costs of completion.

Present value: Discounted value of future cash flows.

The FASB uses these bases depending on the context of the transaction and what will provide the most useful information to users.

The Standard Setting Process

Understanding how accounting standards are created is crucial for CPA candidates. This process is governed by the FASB, an independent body recognized by the SEC and other regulatory agencies.

The process of setting a new accounting standard typically follows these steps:

Identifying the Issue: This can originate from various sources, such as stakeholders, SEC suggestions, or changes in the economic environment.

Agenda Decision: The FASB decides whether to add the issue to its technical agenda.

Preliminary Research and Discussion Memorandum: Extensive research is conducted, and findings are shared for feedback.

Public Meetings and Deliberations: The board holds public discussions to refine the issues.

Exposure Draft Issued: A draft of the proposed standard is made available to the public for comment.

Review of Comments: The FASB reviews all feedback and revises the proposal if necessary.

Issuance of Final Standard: A final standard (Accounting Standards Update or ASU) is issued and added to the FASB Accounting Standards Codification (ASC).

This transparent and collaborative process ensures that standards reflect real-world needs and challenges.

Role of the FASB and Other Regulatory Bodies

The Financial Accounting Standards Board (FASB) is the primary organization responsible for establishing GAAP in the U.S. It operates under the oversight of the Financial Accounting Foundation (FAF).

Key related entities include:

SEC (Securities and Exchange Commission): Oversees public companies and enforces adherence to GAAP.

AICPA (American Institute of Certified Public Accountants): Plays a key role in auditing standards and professional ethics.

PCAOB (Public Company Accounting Oversight Board): Oversees audits of public companies.

IASB (International Accounting Standards Board): Issues IFRS (International Financial Reporting Standards), which are increasingly important in a global economy.

Although the U.S. primarily uses GAAP, international harmonization efforts continue to bridge differences with IFRS, especially for multinational companies.

Importance of the Conceptual Framework in the CPA FAR Exam

In the CPA FAR exam, questions about the Conceptual Framework often test:

The definitions of financial statement elements.

Characteristics of useful financial information.

How the framework guides standard setting.

Real-world scenarios requiring application of recognition or measurement criteria.

Candidates may encounter questions like:

Which qualitative characteristic is most likely impaired if financial reports are not provided until six months after the period ends?

Which measurement basis best reflects current market conditions for a trading security?

Understanding these foundational principles will not only help in answering direct theory questions but also in solving computational and scenario-based problems in later chapters.

Final Thoughts

Mastering the Conceptual Framework and Standard Setting is more than just memorizing definitions and steps. It involves understanding the logic and purpose behind accounting practices. This foundation allows candidates to critically evaluate financial information, apply principles appropriately, and appreciate the structure that supports financial reporting standards.

Presentation of Financial Statements & Disclosures

One of the most essential areas of study in the CPA Financial Accounting and Reporting (FAR) Exam is the Presentation of Financial Statements and Disclosures. This subtopic not only lays the foundation for understanding how financial information is organized and presented to users, but it also trains candidates to recognize what disclosures are required and how they serve to enhance transparency and decision-making. Knowing how the financial statements are prepared and how information is disclosed ensures a candidate is well-equipped for both exam scenarios and real-world practice.

Introduction to Financial Statements

In financial accounting, financial statements are structured reports that present the financial performance, position, and cash flows of an entity. They are designed to meet the information needs of external users such as investors, creditors, regulators, and the public.

The primary financial statements include:

Balance Sheet (Statement of Financial Position)

Income Statement (Statement of Earnings or Profit and Loss)

Statement of Comprehensive Income

Statement of Cash Flows

Statement of Changes in Equity

Notes to the Financial Statements (Disclosures)

Each of these components plays a vital role in conveying useful financial information.

Balance Sheet (Statement of Financial Position)

The Balance Sheet provides a snapshot of an entity’s financial condition at a specific point in time. It follows the accounting equation:

Assets = Liabilities + Equity

Assets: Represent resources the company controls (e.g., cash, inventory, equipment).

Liabilities: Obligations the company owes to external parties (e.g., loans, accounts payable).

Equity: The residual interest in assets after deducting liabilities (e.g., common stock, retained earnings).

The presentation of the balance sheet may be in either a classified format, which separates current and non-current items, or in a liquidity format, where items are arranged based on their liquidity.

Income Statement (Statement of Earnings)

The Income Statement shows the company’s financial performance over a specific period (monthly, quarterly, annually). It includes:

Revenues: Earnings from the company’s core operations.

Expenses: Costs incurred in earning revenues.

Gains and Losses: From peripheral activities (e.g., asset sales, lawsuit settlements).

The goal is to calculate Net Income = Revenues - Expenses + Gains - Losses.

Companies may choose between a single-step format (all revenues and gains listed, followed by all expenses and losses) or a multi-step format, which includes subtotals like gross profit and operating income.

Statement of Comprehensive Income

Comprehensive Income includes net income plus other comprehensive income (OCI), which consists of revenues, expenses, gains, and losses not included in net income under GAAP. Examples of OCI include:

Unrealized gains/losses on available-for-sale securities

Foreign currency translation adjustments

Pension liability adjustments

This statement may be presented:

As a single continuous statement, or

In two separate but consecutive statements—the income statement followed by the statement of comprehensive income.

Statement of Cash Flows

The Statement of Cash Flows provides information about how cash is generated and used during a period. It categorizes cash flows into three main activities:

Operating Activities: Cash from core business operations (e.g., receipts from customers, payments to suppliers).

Investing Activities: Cash from the acquisition and disposal of long-term assets (e.g., purchase of equipment).

Financing Activities: Cash from changes in equity and borrowings (e.g., issuance of shares, payment of dividends).

There are two methods of presenting operating cash flows:

Direct Method: Lists actual cash receipts and payments.

Indirect Method: Starts with net income and adjusts for non-cash items.

Most U.S. companies use the indirect method, though both are acceptable under GAAP.

Statement of Changes in Equity

The Statement of Changes in Equity shows changes in the owners’ interest in the business during a period. It typically includes:

Beginning and ending balances for each equity component (common stock, retained earnings, etc.)

Contributions by owners

Dividends paid

Net income or loss for the period

Other comprehensive income

This statement helps users understand how profits are reinvested or distributed and how equity evolves over time.

Notes to Financial Statements (Disclosures)

Disclosures are essential in providing context to the numbers in the financial statements. They help users understand:

Accounting policies

Uncertainties and estimates

Contingent liabilities

Related party transactions

Subsequent events

Disclosures are governed by GAAP and are just as important as the statements themselves. Failure to disclose key information can mislead users and result in non-compliance.

Some common required disclosures include:

Significant Accounting Policies: Usually the first note, it describes the methods used (e.g., depreciation method, inventory valuation).

Fair Value Measurements: Explains how certain assets and liabilities are valued.

Revenue Recognition: Details how and when revenue is recognized based on contracts.

Leases: Provides information on lease terms, types of leases, and their effects.

Required Disclosures under GAAP

U.S. GAAP provides extensive guidance on what must be disclosed. These disclosures are especially important in complex areas such as:

1. Segment Reporting

Public companies must disclose financial data for segments of their business that generate revenues and incur expenses. Each segment must disclose:

Revenues

Operating profit or loss

Total assets

Description of products/services

2. Subsequent Events

These are events that occur after the balance sheet date but before the financial statements are issued. They are categorized as:

Recognized Events: Provide additional evidence about conditions existing at the balance sheet date.

Non-recognized Events: Concern conditions that arose after the balance sheet date (disclosed but not recorded).

3. Contingencies

These are potential liabilities or gains. For example:

Loss contingencies (e.g., pending litigation) must be disclosed if probable and estimable.

Gain contingencies are not recorded but may be disclosed.

4. Going Concern

If management believes that the company may not be able to continue as a going concern in the next 12 months, disclosures are required about:

The conditions causing concern

Management’s plans to address them

Presentation Considerations

In addition to including the right components, companies must adhere to certain presentation standards:

Comparative Statements: Generally, financial statements should present at least two years of data for comparison.

Classifications: Items should be clearly classified into operating, investing, or financing categories.

Consistency: Accounting policies and presentation formats must be consistent over time unless a change is justified.

Materiality: Only information that could influence user decisions needs to be disclosed.

Presentation errors or lack of clarity can mislead users and may result in audit issues or regulatory penalties.

IFRS vs. GAAP Presentation Differences

Though this exam focuses on U.S. GAAP, it’s useful to understand some key differences between GAAP and IFRS in presentation:

GAAP permits both single-step and multi-step income statements, whereas IFRS does not specify a format.

GAAP is more prescriptive about disclosures and presentation order.

IFRS requires a statement of financial position, comprehensive income, changes in equity, and cash flows.

IFRS emphasizes the classification of assets/liabilities into current and non-current categories.

Understanding these differences helps candidates interpret financial statements from international entities.

Common Exam Focus Areas

Candidates should be prepared to:

Identify which financial statement a specific item belongs to.

Recognize when a disclosure is required.

Understand presentation formats.

Analyze how changes in estimates or principles affect presentation.

For example, you may be asked:

Where should a contingent liability be disclosed in the financial statements?

What is the effect of a non-recognized subsequent event on the financial statements?

Thorough knowledge of these topics is key to answering both multiple-choice questions and simulations.

Final Thoughts

The Presentation of Financial Statements and Disclosures is a cornerstone topic in financial accounting. It bridges the gap between raw accounting data and the organized reports that users rely on to make informed decisions. For CPA candidates, understanding what is presented and how it is presented ensures clarity, compliance, and completeness.

SEC Reporting & Regulatory Filings

The Securities and Exchange Commission (SEC) plays a vital role in maintaining fair, orderly, and efficient markets in the United States. As a CPA candidate preparing for the Financial Accounting and Reporting (FAR) section of the CPA Exam, understanding SEC reporting and regulatory filings is essential. These reports are not just compliance measures—they are a key part of financial transparency, investor protection, and corporate accountability. In this section, we’ll dive deep into the nature and purpose of SEC reporting, the types of filings required, who must file them, and the detailed