Studying for the CPA exam is no small undertaking. It demands months of focused preparation, and the sheer volume of content across the four sections can make it hard to know where your real weak spots are. This free practice test gives you 50 original CPA-style questions focused on the REG (Regulation) and FAR (Financial Accounting and Reporting) sections -- two of the most content-heavy parts of the exam -- with clear explanations for every answer. No login, no paywall, just real practice.
The CPA exam is administered by the American Institute of Certified Public Accountants (AICPA) in partnership with the National Association of State Boards of Accountancy (NASBA). It is one of the most respected professional credentials in accounting and finance, and it opens doors across public accounting, corporate finance, government, and beyond. The questions below are written in the same application-focused style used on the actual exam -- testing how you think through accounting scenarios, not just whether you've memorized a definition.
Study tip: Don't just check whether you got the answer right. Read the explanation even when you're correct. On the real CPA exam, understanding why the other options are wrong is just as valuable as knowing the right answer -- especially for FAR, where several options can look correct at first glance.
- ✔ Federal individual & entity taxation
- ✔ Business law & contract fundamentals (UCC)
- ✔ US GAAP financial reporting standards
- ✔ Lease, revenue & bad debt accounting
- ✔ Governmental fund accounting (GASB)
- ✔ Nonprofit accounting under ASC 958
- ✔ S corporation & pass-through taxation
- ✔ Application-based exam reasoning
CPA Exam Format Overview (2026)
Before jumping into the questions, here is a quick snapshot of the current CPA exam structure. AICPA has been updating the exam blueprint under the CPA Evolution initiative, so always confirm the latest format on the official AICPA website before your exam date.
| Section | What It Covers | Testing Time |
|---|---|---|
| FAR (Financial Accounting and Reporting) | GAAP, governmental accounting, nonprofit reporting, IFRS | 4 hours |
| AUD (Auditing and Attestation) | Auditing standards, ethics, evidence, reporting | 4 hours |
| REG (Taxation and Regulation) | Federal tax law, business law, professional ethics | 4 hours |
| Discipline Section | BAR, ISC, or TCP (candidate's choice) | 4 hours |
| Passing Score | 75 or higher (scaled score, not a raw percentage) | -- |
| Question Types | Multiple-choice questions (MCQs) and Task-Based Simulations (TBSs) | -- |
REG Section: Federal Taxation (Q1-20)
REG SECTION -- FEDERAL TAXATIONFederal taxation typically makes up the largest chunk of the REG section. These questions cover individual income tax, corporate tax, partnerships, and tax treatment of common transactions -- the areas where most candidates lose points if they have not prepared thoroughly.
1. Sarah, a single taxpayer, had wages of $85,000 and received $2,500 in interest from a municipal bond. How is the municipal bond interest treated for federal income tax purposes?
Show Answer & Explanation
Correct Answer: C -- Interest earned on state and municipal bonds (also called "munis") is generally excluded from federal gross income under IRC Section 103. This is a frequently tested concept on REG because it is one of the most common statutory exclusions individual taxpayers use.
2. A taxpayer sells their primary residence for a $280,000 gain. They are married, filing jointly, and have lived in the home as their primary residence for 3 of the last 5 years. How much of the gain is excluded?
Show Answer & Explanation
Correct Answer: D -- Section 121 allows married couples filing jointly to exclude up to $500,000 of gain from the sale of a primary residence, provided they meet the ownership and use tests (2 of the last 5 years). Since the gain is $280,000 -- well below the $500,000 ceiling -- the entire amount is excluded.
3. A calendar-year corporation had taxable income of $400,000. Under current US tax law, what is the flat corporate income tax rate applied to this amount?
Show Answer & Explanation
Correct Answer: C -- The Tax Cuts and Jobs Act of 2017 established a flat 21% corporate income tax rate, replacing the previous graduated rate structure. This is a fundamental REG fact that appears frequently.
4. Which of the following is a deductible business expense for a self-employed taxpayer on Schedule C?
Show Answer & Explanation
Correct Answer: C -- Ordinary and necessary business expenses, including professional development directly related to the taxpayer's trade or business, are deductible under Section 162. Commuting, personal meals at home, and personal life insurance are not business expenses.
5. An individual taxpayer receives a $10,000 gift from a relative. What is the income tax consequence to the recipient?
Show Answer & Explanation
Correct Answer: B -- Gifts are excluded from the recipient's gross income under IRC Section 102. Note that the annual gift tax exclusion applies to the donor, not the recipient -- these are two different concepts that the exam loves to conflate.
6. Jake converts a traditional IRA to a Roth IRA when the account balance is $40,000. He is in the 24% federal tax bracket. What is the immediate income tax result?
Show Answer & Explanation
Correct Answer: B -- A traditional-to-Roth conversion is a taxable event. The converted amount ($40,000) is included in gross income in the year of conversion because traditional IRA contributions were made pre-tax and those dollars have never been taxed.
7. A sole proprietor has $120,000 in net self-employment income. What percentage of the self-employment tax can the taxpayer deduct for income tax purposes?
Show Answer & Explanation
Correct Answer: C -- Self-employed taxpayers can deduct one-half of their self-employment tax as an above-the-line deduction when calculating adjusted gross income, mirroring the employer-side deduction that traditional employees receive through their employer.
8. A partnership has three equal partners. The partnership earns $90,000 in ordinary income during the year and distributes $60,000 in cash. How is each partner taxed?
Show Answer & Explanation
Correct Answer: B -- Partnerships are pass-through entities. Income is taxed at the partner level based on their allocable share of income, regardless of how much was actually distributed. Each partner reports $30,000 (one-third of $90,000) on their individual return.
9. Under the Uniform Capitalization (UNICAP) rules, which cost must a manufacturer generally capitalize into inventory?
Show Answer & Explanation
Correct Answer: B -- UNICAP rules under Section 263A require manufacturers to capitalize direct material costs, direct labor, and allocable indirect costs into the cost of inventory. Marketing, selling, and certain corporate overhead expenses are excluded.
10. An S corporation has one shareholder. The S corporation earns $75,000 during the year and distributes $40,000 to the shareholder. What amount is included in the shareholder's gross income?
Show Answer & Explanation
Correct Answer: B -- Like partnerships, S corporations are pass-through entities. The shareholder includes their allocable share of S corporation income ($75,000) in their gross income, regardless of how much was distributed. The distribution itself reduces basis but is not separately taxed again.
11. A taxpayer has a $20,000 net capital loss for the year. How much can be deducted against ordinary income in the current year for an individual taxpayer?
Show Answer & Explanation
Correct Answer: B -- Individual taxpayers can deduct up to $3,000 of net capital losses against ordinary income per year. Any remaining capital loss is carried forward indefinitely until fully used.
12. An accrual-basis corporation receives a $12,000 advance payment on December 1 for services to be rendered equally over the following 12 months. When is the income recognized for tax purposes?
Show Answer & Explanation
Correct Answer: C -- For tax purposes, accrual-basis taxpayers generally recognize advance payments in the year of receipt, but under the one-year deferral rule, they may defer amounts earned in the following year. So $1,000 (one month) is recognized in December, and $11,000 carries into the next year.
13. Which filing status generally results in the lowest federal income tax liability for an eligible taxpayer?
Show Answer & Explanation
Correct Answer: C -- Married Filing Jointly provides the widest tax brackets and highest standard deduction, generally resulting in the lowest tax liability for eligible couples compared to all other filing statuses.
14. A taxpayer withdraws $15,000 from a traditional IRA at age 45. In addition to income tax, what additional penalty typically applies?
Show Answer & Explanation
Correct Answer: C -- Distributions from a traditional IRA before age 59.5 are generally subject to a 10% early withdrawal penalty in addition to ordinary income tax, unless an exception applies (such as disability or first-time home purchase).
15. What is the primary difference between a tax credit and a tax deduction?
Show Answer & Explanation
Correct Answer: B -- A deduction reduces taxable income (so its value depends on your tax rate), while a credit reduces the actual tax owed dollar-for-dollar, making credits generally more valuable than equivalent deductions.
16. A corporation has a net operating loss (NOL) in the current year. Under current tax law, how can this NOL be used?
Show Answer & Explanation
Correct Answer: B -- Under TCJA rules, NOLs generated after 2017 may be carried forward indefinitely but can only offset up to 80% of taxable income in any carryforward year. The carryback provision was eliminated for most taxpayers (with limited exceptions).
17. Which of the following income items is included in a taxpayer's gross income?
Show Answer & Explanation
Correct Answer: C -- Unemployment compensation is fully taxable and included in gross income. Life insurance death proceeds, qualifying scholarships, and child support payments are all excluded from gross income.
18. A taxpayer donates stock held for 14 months to a qualified charitable organization. The stock has a fair market value of $10,000 and an adjusted basis of $4,000. What is the charitable contribution deduction?
Show Answer & Explanation
Correct Answer: C -- When a taxpayer donates long-term capital gain property (held more than 12 months) to a qualifying charity, the deduction is based on the fair market value of the property, and no gain is recognized on the donation.
19. Which of the following is an example of a below-the-line deduction (itemized deduction)?
Show Answer & Explanation
Correct Answer: C -- Mortgage interest on a primary residence is an itemized (below-the-line) deduction taken on Schedule A. Student loan interest, self-employment tax deduction, and HSA contributions are all above-the-line (adjustments to income).
20. In a like-kind exchange under Section 1031, which of the following is true?
Show Answer & Explanation
Correct Answer: B -- Section 1031 allows deferral of gain when qualifying real property is exchanged for other qualifying real property. After TCJA, personal property no longer qualifies. Stocks, bonds, and other securities are excluded.
REG Section: Business Law & Ethics (Q21-25)
REG SECTION -- BUSINESS LAW & ETHICSThis part of REG catches a lot of candidates off guard. If you came from a pure accounting background without much law coursework, these questions require extra attention. The exam tests contracts, agency, business structures, and professional ethics.
21. Under the Uniform Commercial Code (UCC), which of the following is required to form a valid contract for the sale of goods worth $600?
Show Answer & Explanation
Correct Answer: B -- The UCC Statute of Frauds requires contracts for the sale of goods priced at $500 or more to be evidenced by a writing signed by the party against whom enforcement is sought. It does not need to be a formal contract document -- even a memo or receipt can suffice.
22. Under agency law, which type of authority arises when a principal's conduct leads a third party to reasonably believe that an agent has authority to act?
Show Answer & Explanation
Correct Answer: C -- Apparent authority arises from the principal's actions or representations (not the agent's), which lead a third party to reasonably believe the agent is authorized. The principal is bound by these actions even if they gave no actual authority to the agent.
23. Which business structure offers its owners (members) limited liability protection while allowing pass-through taxation without the ownership restrictions of an S corporation?
Show Answer & Explanation
Correct Answer: C -- An LLC provides limited liability for all members and default pass-through taxation, with no restrictions on the number or type of owners -- making it more flexible than an S corporation, which limits shareholders to 100 US citizens or residents.
24. A CPA discovers that a client has materially misstated their tax return that was already filed. The client refuses to allow the CPA to notify the IRS. What should the CPA do?
Show Answer & Explanation
Correct Answer: B -- Under AICPA Statements on Standards for Tax Services, the CPA must inform the client of the error and the need to correct it. If the client refuses, the CPA should consider withdrawing from the engagement -- but may not unilaterally notify the IRS due to confidentiality obligations, unless required by law.
25. Which element is NOT required to form a legally binding contract?
Show Answer & Explanation
Correct Answer: D -- The basic elements of a valid contract are offer, acceptance, consideration, and legal capacity/purpose. Written documentation is not required for most contracts (though some types must be in writing under the Statute of Frauds).
FAR Section: Financial Reporting (Q26-40)
FAR SECTION -- FINANCIAL REPORTINGFAR is broad by design. It covers the full spectrum of US GAAP financial reporting, and many candidates find it the most time-intensive section to prepare for. The questions below focus on the core financial statement concepts that consistently appear on the exam.
26. Under US GAAP, which inventory costing method is prohibited under IFRS?
Show Answer & Explanation
Correct Answer: C -- LIFO is permitted under US GAAP but prohibited under IFRS. This distinction comes up repeatedly in FAR, especially in questions comparing GAAP and IFRS treatment.
27. A company purchases equipment for $80,000 with an estimated useful life of 10 years and a salvage value of $5,000. Using straight-line depreciation, what is the annual depreciation expense?
Show Answer & Explanation
Correct Answer: B -- Straight-line depreciation: (Cost - Salvage Value) / Useful Life = ($80,000 - $5,000) / 10 = $7,500 per year.
28. Which of the following is classified as an operating activity on the statement of cash flows under the indirect method?
Show Answer & Explanation
Correct Answer: C -- Under the indirect method, operating activities begin with net income and adjust for non-cash items (like depreciation) and changes in working capital. Dividend payments and debt issuance are financing activities; equipment purchases are investing activities.
29. Under the revenue recognition standard (ASC 606), at what point should revenue generally be recognized?
Show Answer & Explanation
Correct Answer: C -- ASC 606 requires revenue to be recognized when (or as) control of the promised good or service transfers to the customer -- not necessarily when cash changes hands or invoices are issued.
30. A company issues 1,000 shares of $1 par value common stock for $15 per share. How should this transaction be recorded?
Show Answer & Explanation
Correct Answer: B -- Cash increases by $15,000. Common Stock is credited at par value ($1 x 1,000 = $1,000), and the excess above par ($14,000) goes to Additional Paid-In Capital (APIC).
31. Under US GAAP, how should a contingent liability be recorded?
Show Answer & Explanation
Correct Answer: B -- Under ASC 450, a contingent liability is accrued on the balance sheet when it is probable that a liability has been incurred and the amount can be reasonably estimated. If reasonably possible, it is disclosed in the notes. Remote contingencies require no action.
32. Which of the following is a current liability?
Show Answer & Explanation
Correct Answer: C -- Current liabilities are obligations expected to be settled within one year or within the operating cycle. Wages payable due within 30 days clearly qualifies; the others are long-term obligations.
33. A company receives a long-term operating lease for office space. Under ASC 842, how should the lessee initially record this lease?
Show Answer & Explanation
Correct Answer: B -- ASC 842 brought most leases onto the balance sheet. For operating leases, the lessee records a right-of-use (ROU) asset and a lease liability equal to the present value of future lease payments at commencement.
34. When using the allowance method for bad debts, what is the journal entry when a specific account is written off?
Show Answer & Explanation
Correct Answer: B -- When writing off a specific account under the allowance method, the Allowance for Doubtful Accounts is debited (reducing the reserve) and Accounts Receivable is credited. Bad Debt Expense is not affected at the point of write-off -- it was recorded when the allowance was originally estimated.
35. A company's quick ratio is 0.85. What does this indicate?
Show Answer & Explanation
Correct Answer: A -- The quick ratio measures a company's ability to meet short-term obligations using liquid assets (cash, marketable securities, receivables -- excluding inventory). A quick ratio below 1.0 suggests potential short-term liquidity pressure.
36. How are trading securities reported on the balance sheet?
Show Answer & Explanation
Correct Answer: C -- Trading securities are reported at fair value, with unrealized gains and losses flowing directly through net income (the income statement). This differs from available-for-sale securities, where unrealized gains and losses go through Other Comprehensive Income.
37. Under US GAAP, research costs are generally:
Show Answer & Explanation
Correct Answer: B -- Under US GAAP (ASC 730), research and most development costs are expensed as incurred because future benefits are too uncertain to capitalize. This is a key GAAP vs. IFRS difference -- IFRS allows capitalization of certain development costs once specific criteria are met.
38. A company declares a 3-for-1 stock split. Before the split, it has 100,000 shares outstanding at $30 par value. What is the effect on total stockholders' equity?
Show Answer & Explanation
Correct Answer: C -- A stock split increases the number of shares while proportionally reducing par value per share. Total stockholders' equity is unaffected because no assets are distributed and no consideration is received. After the split: 300,000 shares at $10 par = same total.
39. Which of the following would be found on the statement of stockholders' equity?
Show Answer & Explanation
Correct Answer: C -- The statement of stockholders' equity shows changes in equity components including common stock issued, net income, and dividends declared. Revenue belongs on the income statement; total assets on the balance sheet; cash flows on the cash flow statement.
40. A company issues bonds at a discount. How should the bond discount be treated over the life of the bond?
Show Answer & Explanation
Correct Answer: B -- Bond discounts are amortized over the life of the bond using the effective interest method (or straight-line if immaterial). Amortization of a discount increases interest expense each period and increases the carrying value of the bond toward face value.
FAR Section: Governmental & Nonprofit Accounting (Q41-50)
FAR SECTION -- GOVERNMENTAL & NONPROFITThis is the area candidates most often underestimate. Governmental and nonprofit accounting follows different rules from for-profit GAAP, and the terminology can be confusing at first. Give these questions your full focus -- they are very testable and not especially difficult once you understand the framework.
41. Which basis of accounting do governmental funds use for their financial statements?
Show Answer & Explanation
Correct Answer: C -- Governmental funds (like the General Fund) use the modified accrual basis, where revenues are recognized when measurable and available (collectible within 60 days after year-end), and expenditures are generally recognized when the liability is incurred.
42. Under GASB standards, which fund type is used to account for a city's general operating revenues and expenditures?
Show Answer & Explanation
Correct Answer: C -- The General Fund accounts for a government's primary operating activities that are not accounted for in other specific funds. Every governmental entity has one General Fund.
43. A nonprofit organization receives a donation of $50,000 with the donor stipulating it must be used for a new building. How is this classified?
Show Answer & Explanation
Correct Answer: C -- Under ASC 958, nonprofits classify net assets as either "without donor restrictions" or "with donor restrictions." A purpose-restricted gift is classified as net assets with donor restrictions until the restriction is met.
44. Which of the following is a proprietary fund type used to report business-like activities of a government (such as a municipal water utility)?
Show Answer & Explanation
Correct Answer: B -- Enterprise Funds are proprietary funds used when a government charges the public for services on a user-fee basis, like a water utility, airport, or transit system. They use full accrual accounting, similar to for-profit entities.
45. Under GASB standards, a government's comprehensive annual report includes which of the following primary financial statements?
Show Answer & Explanation
Correct Answer: A -- GASB requires government-wide financial statements (prepared on full accrual) and fund financial statements (prepared on modified accrual for governmental funds), plus required supplementary information.
46. A nonprofit receives donated services from volunteers. Under what condition are these services recognized as contribution revenue?
Show Answer & Explanation
Correct Answer: B -- Under ASC 958, donated services are recognized when they require specialized skills (such as accounting, legal, or medical services) that the organization would otherwise need to pay for. General volunteer labor is not recognized.
47. What is the primary purpose of an encumbrance system in governmental accounting?
Show Answer & Explanation
Correct Answer: B -- Encumbrances are used in governmental accounting to set aside (reserve) a portion of an appropriation when a purchase order or contract is issued, preventing overspending before actual payment is made.
48. In a government-wide statement of activities, how are revenues from property taxes treated?
Show Answer & Explanation
Correct Answer: B -- Property taxes are general-purpose revenues and are classified as general revenues in government-wide statements. Program revenues, by contrast, are directly tied to specific functions (like fees charged for a service).
49. A private nonprofit university receives a $500,000 gift designated as permanent endowment. The principal must remain intact forever, and only investment income can be spent. How should the original gift be classified?
Show Answer & Explanation
Correct Answer: B -- A permanent endowment where the principal can never be spent is classified as net assets with donor restrictions. The restriction here is perpetual rather than time-based or purpose-based, but it still falls within the "with donor restrictions" classification under ASC 958.
50. Under GASB, infrastructure assets such as roads and bridges reported under the modified approach are:
Show Answer & Explanation
Correct Answer: B -- The modified approach allows governments to avoid depreciating certain infrastructure assets if they document that the assets are being maintained at or above a specified condition level through an asset management system with regular condition assessments. Instead, maintenance costs are expensed as incurred.
📝 How did you score? Drop your result in the comments below and let us know which section gave you the hardest time -- FAR, REG Tax, or Business Law.
Frequently Asked Questions About the CPA Exam
How many questions are on the CPA exam?▾
The CPA exam has four separate sections: FAR, AUD, REG, and one Discipline section (BAR, ISC, or TCP -- your choice). Each section includes multiple-choice questions and task-based simulations across several testlets. Total testing time is 4 hours per section. Always confirm the current blueprint on the AICPA website before your exam date, as the format has been evolving under the CPA Evolution initiative.
Which CPA exam section is the hardest?▾
FAR is widely regarded as the most challenging section because of its sheer content breadth -- US GAAP, governmental accounting, nonprofit reporting, and IFRS comparisons all in one sitting. That said, "hardest" depends heavily on your background. Candidates without tax coursework often find REG just as difficult. Many experienced CPA educators recommend sitting for FAR early while the material is fresh from school.
What is the passing score for the CPA exam?▾
You need a score of 75 or higher on a 0-to-99 scale to pass each section. This is not a raw percentage -- it is a scaled score that accounts for the difficulty of the specific questions you received. You do not need to answer 75% of questions correctly to pass; the scoring model is more nuanced than that.
Is this practice test affiliated with the AICPA?▾
No. This is an independently created study resource for educational purposes. It is not affiliated with, endorsed by, or sponsored by the American Institute of Certified Public Accountants (AICPA) or the National Association of State Boards of Accountancy (NASBA).