AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 991:

  When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a (an):

  A. "Except for" qualified opinion.
  B. "Subject to" qualified opinion.
  C. Unqualified opinion with a separate explanatory paragraph.
  D. Adverse opinion.
  D. Adverse opinion.

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  Choice "d" is correct. When an accountant examines a financial forecast that fails to disclose significant assumptions used to prepare the forecast, the accountant should issue an adverse opinion. Choice "a" is incorrect. A qualified opinion might be appropriate when AICPA presentation guidelines are not followed, but would not be used when "several significant assumptions used to prepare the forecast" are not disclosed. Choice "b" is incorrect. "Subject to" is not acceptable wording for an accountant's report. Choice "c" is incorrect. An unqualified opinion is not acceptable when significant assumptions are not disclosed.

• Question 992:

  ABC Company presently sells 400,000 bottles of perfume each year. Each bottle costs $.84 to produce and sells for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends of $2,000 per year, and a 40 percent tax rate. ABC uses the following formulas to determine the company's leverage.

  

  If ABC Company did not have preferred stock, the degree of total leverage would:

  A. Decrease in proportion to a decrease in financial leverage.
  B. Increase in proportion to an increase in financial leverage.
  C. Decrease but not be proportional to the decrease in financial leverage.
  D. Decrease but not have an effect on financial leverage.
  A. Decrease in proportion to a decrease in financial leverage.

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  Choice "a" is correct. Without preferred stock, the denominator in the total leverage calculation would be larger (because preferred stock is subtracted to arrive at the denominator). The same holds true for financial leverage. Therefore, both financial and total leverage would decrease in proportion. Choices "b", "c", and "d" are incorrect, per above Explanation.

• Question 993:

  An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to:

  A. Provide the data necessary to prepare a proof of cash.
  B. Request a cutoff bank statement and related checks be sent to the auditor.
  C. Detect kiting activities that may otherwise not be discovered.
  D. Seek information about contingent liabilities and security agreements.
  D. Seek information about contingent liabilities and security agreements.

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  Choice "d" is correct. The standard confirmation request seeks information on contingent liabilities and security agreements in addition to information related to deposit account balances. Choice "a" is incorrect. The standard confirmation request does not provide all of the data necessary to prepare a "proof of cash" (i.e., bank reconciliation), since it only confirms the balances at the end of a period, and does not provided information about the activity during the period under audit. Such information is necessary to perform a bank reconciliation and would be provided in a bank statement. Choice "b" is incorrect. A request for a cut-off statement, and not the standard bank confirmation form, is used to obtain a cut-off bank statement and related checks. Choice "c" is incorrect. The bank cut-off statement, not the standard confirmation request, is used to detect kiting activities that may not otherwise be discovered.

• Question 994:

  Which of the following sets of information does an auditor usually confirm on one form?

  A. Accounts payable and purchase commitments.
  B. Cash in bank and collateral for loans.
  C. Inventory on consignment and contingent liabilities.
  D. Accounts receivable and accrued interest receivable.
  B. Cash in bank and collateral for loans.

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  Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank. Choice "a" is incorrect. Purchase commitments are not typically confirmed on an accounts payable confirmation request. Choice "c" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or bank) and inventory on consignment (confirmed with the consignee) are not confirmed together. Choice "d" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is not typically confirmed along with trade accounts receivable.

• Question 995:

  Which one of the following is not a key assumption of perfect competition?

  A. Customers are indifferent about which firm they buy from.
  B. The level of a firm's output is small relative to the industry's total output.
  C. Each firm can price its product above the industry price.
  D. There is freedom of entry into and exit out of the industry.
  C. Each firm can price its product above the industry price.

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  Choice "c" is correct. A key assumption of perfect competition is that the firm is a "price taker," that is, it cannot fix the price. Accordingly, it is not true that each firm can price its product above the industry price. Key assumptions of perfect competition include: A. Customers are indifferent about which firm they buy from. B. The level of a firm's output is small relative to the industry's total output. D. There is freedom of entry into and exit out of the industry.

• Question 996:

  A firm's target or optimal capital structure is consistent with which one of the following?

  A. Minimum cost of debt.
  B. Minimum risk.
  C. Minimum cost of equity.
  D. Minimum weighted average cost of capital.
  D. Minimum weighted average cost of capital.

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  Choice "d" is correct. Minimum weighted average cost of capital is consistent with a firm's target or optimal capital structure. Choice "a" is incorrect. Minimum cost of debt is a component of minimum weighted average cost of capital. Choice "b" is incorrect. Minimum risk results in a cost of capital heavily weighted in equity. Choice "c" is incorrect. Minimum cost of equity results in a cost of capital heavily weighted in debt.

• Question 997:

  Heather, Erika, and Shelby are members in ABC LLC. Heather dies. Absent an agreement to the contrary, what is the result?

  A. The LLC must dissolve.
  B. The LLC ceases to exist.
  C. The LLC is dissolved unless the other members consent to continue.
  D. The LLC continues as though nothing happened.
  C. The LLC is dissolved unless the other members consent to continue.

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  Choice "c" is correct. Absent an agreement to the contrary, if a member of an LLC dies, the LLC is dissolved unless the other members consent to continue. Choice "a" is incorrect, because the LLC does not have to dissolve upon the death of a member. Choice "b" is incorrect, because the LLC does not cease to exist immediately. Choice "d" is incorrect, because the LLC does not continue unless the members consent to continue.

• Question 998:

  Which one of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?

  A. The borrower avoids the expense of maintaining a compensating balance with a commercial bank.
  B. There are no restrictions as to the type of corporation that can enter into this market.
  C. This market provides a broad distribution for borrowing.
  D. A benefit accrues to the borrower because its name becomes more widely known.
  B. There are no restrictions as to the type of corporation that can enter into this market.

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  Choice "b" is correct. There are restrictions as to the type of corporation that can enter into the commercial paper market for short-term financing, since the use of the open market is restricted to a comparatively small number of the most credit-worthy large corporations. The commercial paper market: A. Avoids the expense of maintaining a compensating balance with a commercial bank. C. Provides a broad distribution for borrowing. D. Accrues a benefit to the borrower because its name becomes more widely known.

• Question 999:

  Which of the following is not a reason justifying the use of accounting estimates?

  A. The valuation or measurement of some accounts is uncertain pending the outcome of future events.
  B. Data about past events cannot be accumulated in a cost-effective manner.
  C. Data about future events cannot be accumulated in a cost-effective manner.
  D. Data about past events cannot be accumulated in a timely manner.
  C. Data about future events cannot be accumulated in a cost-effective manner.

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  Choice "c" is correct. Accounting estimates are not used to measure future events. (Although, the measurement of some accounts may be uncertain pending the outcome of future events.) Choice "a" is incorrect. Valuation of certain historical accounts is uncertain, and may be dependent upon the outcome of future events. Accounting estimates are used in such situations to more properly reflect the account balance. Choices "b" and "d" are incorrect. If data about past events cannot be accumulated in a timely, cost- effective manner, accounting estimates may be required.

• Question 1000:

  ABC Corp. owned a restaurant called XYZ. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, "T.J. Jones for XYZ." Two invoices for restaurant repairs were paid by ABC Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paid. The contractor sued ABC Corp. Which of the following statements is correct regarding the liability of ABC Corp.?

  A. It is not liable because Jones is liable.
  B. It is not liable because the corporation was an undisclosed principal.
  C. It is liable because Jones is not liable.
  D. It is liable because Jones had authority to make the contract.
  D. It is liable because Jones had authority to make the contract.

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  Choice "d" is correct. Where an agent enters into a contract on behalf of a principal and discloses the existence and identity of the principal and acts with authority, the principal is liable and the agent is not liable. Here, Jones signed the contract with an indication that he was signing for the corporation. The president of a corporation is an agent of the corporation and has apparent authority to enter contracts that appear to be within the ordinary scope of the corporation's business. The restaurant repairs here appear to be with the scope of ABC Corp.'s business. Therefore, ABC Corp. will be bound because Jones had at least apparent authority. Choice "a" is incorrect, per the rule stated above. Choice "b" is incorrect. The president signed as acting on behalf of the corporation, thus disclosing the principal. Choice "c" is incorrect, per the rule stated above.