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AICPA FAR Exam Questions
CPA Financial Accounting and Reporting (Page 3 )

Updated On: 21-Feb-2026
Page 3 of 34
PDF with 163 Questions

What is the underlying concept that supports the immediate recognition of a contingent loss?

  1. Substance over form.
  2. Consistency.
  3. Matching.
  4. Conservatism.

Answer(s): D

Explanation:

Choice "d" is correct. Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considereD. Recognition of a contingent loss is the recording of an amount representing uncertainty and risk in a business situation. SFAC 2, SFAS 5 para. 82
Choice "a" is incorrect. The substance over form concept presumes that the transaction form may not dictate the accounting treatment.
Choice "b" is incorrect. Consistency is conformity from period to period with unchanging policies and procedures. SFAC 2
Choice "c" is incorrect. The matching principle dictates that expenses be matched with the related revenues generated or the time period in which the expense is incurred and known. SFAS #5 cites
matching as the one concept supporting the immediate recognition of a contingent loss, but it is not the primary underlying concept. SFAS 5 para. 76



According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is:

  1. Allocation.
  2. Matching.
  3. Realization.
  4. Recognition.

Answer(s): D

Explanation:

Choice "d" is correct. Recognition is the process of recording an item in the financial statements of an entity. SFAC 5 para. 6
Choice "a" is incorrect. Allocation is the accounting process of assigning or distributing an amount according to a plan or a formulA. SFAC 6 para. 142
Choice "b" is incorrect. Matching of costs and revenues is simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or other events. SFAC 6 para. 146
Choice "c" is incorrect. Realization is the process of converting noncash resources and rights into money. SFAC 6 para. 143



What are the Statements of Financial Accounting Concepts intended to establish?

  1. Generally accepted accounting principles in financial reporting by business enterprises.
  2. The meaning of "Present fairly in accordance with generally accepted accounting principles."
  3. The objectives and concepts for use in developing standards of financial accounting and reporting.
  4. The hierarchy of sources of generally accepted accounting principles.

Answer(s): C

Explanation:

Choice "c" is correct. Statements of Financial Accounting Concepts are intended to establish the objectives and concepts that the Financial Accounting Standards Board will use in developing standards of financial accounting and reporting. SFAC 1 para. 3 Choice "a" is incorrect. The Statements of Financial Accounting Concepts do not specify financial accounting standards prescribing accounting procedures or practices. SFAC 1 para. 3 Choice "b" is incorrect. Auditing standards develop the meaning of "Present fairly in accordance with generally accepted accounting principles."
Choice "d" is incorrect. The hierarchy of sources of generally accepted accounting principles is determined by GAAP.



During a period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:

  1. Both enterprise performance and management performance.
  2. Management performance but not directly provide information about enterprise performance.
  3. Enterprise performance but not directly provide information about management performance.
  4. Neither enterprise performance nor management performance.

Answer(s): C

Explanation:

Choice "c" is correct. Financial reporting, and especially financial statements, usually cannot and do not separate management performance from enterprise performance. Financial reporting provides information about an enterprise during a period when it was under the direction of a particular management but does not directly provide information about that management's performance.
SFAC 1 para. 53



According to the FASB conceptual framework, which of the following statements conforms to the realization concept?

  1. Equipment depreciation was assigned to a production department and then to product unit costs.
  2. Depreciated equipment was sold in exchange for a note receivable.
  3. Cash was collected on accounts receivable.
  4. Product unit costs were assigned to cost of goods sold when the units were sold.

Answer(s): B

Explanation:

Choice "b" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83.
Choice "a" is incorrect. Assigning depreciation in a production department is an example of allocating overhead. There is no realization associated with the assignment. Choice "c" is incorrect. The realization concept is integral to accounting for revenues and expenses and is not connected to collection of receivables.
Choice "d" is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an example of matching. There is no realization associated with this assignment.






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