AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1001:

  Which of the following information should be included in ABC, Inc.'s 1992 summary of significant accounting policies?

  A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.
  B. During 1992, the Delay component was sold.
  C. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.
  D. Future common share dividends are expected to approximate 60% of earnings.
  A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.

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  Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of depreciation that should be described in the "summary of significant accounting policies." Choice "b" is incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on "discontinued operations" in the F1 class) but is not a "significant accounting policy." Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting policy." Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for the financial statements. They might be appropriate for the "presidents letter to shareholders."

• Question 1002:

  On January 1, 1991, ABC Co. installed cabinets to display its merchandise in customers' stores. ABC expects to use these cabinets for five years. ABC's 1991 multi-step income statement should include:

  A. One-fifth of the cabinet costs in cost of goods sold.
  B. One-fifth of the cabinet costs in selling, general, and administrative expenses.
  C. All of the cabinet costs in cost of goods sold.
  D. All of the cabinet costs in selling, general, and administrative expenses.
  B. One-fifth of the cabinet costs in selling, general, and administrative expenses.

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  Choice "b" is correct. One-fifth of the cabinet costs (depreciation expense) should be included in selling, general, and administrative expenses for 1991. Choice "a" is incorrect. Merchandise display cabinets in stores relate to selling activities, not to the purchase cost of goods sold. Choices "c" and "d" are incorrect. Merchandise display cabinets are fixed assets whose cost should be allocated systematically over their five-year useful life.

• Question 1003:

  An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an):

  A. "Except for" qualified opinion.
  B. Explanatory paragraph.
  C. Unqualified opinion.
  D. Consistency modification.
  C. Unqualified opinion.

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  Choice "c" is correct. If an accounting change has no material effect on the financial statements in the current year, but a material future effect, the auditor must ensure that the change is disclosed in the footnotes whenever the financial statements of the change period are presented, but does not have to recognize the change in the current year's audit report. Choice "a" is incorrect. Accounting changes that are accounted for properly do not result in qualified opinions. Choices "b" and "d" are incorrect. A consistency modification (explanatory paragraph) is not necessary when the effect of a change is immaterial.

• Question 1004:

  ABC Co.'s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000 respectively. Short-term interest rates are expected to average 5 percent. If ABC could increase inventory turnover from its current 8 times per year to 10 times per year, its expected cost savings in the current year would be:

  A. $165,625
  B. $331,250
  C. $81,812
  D. $250,000
  A. $165,625

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  Explanation Explanation/Reference:Choice "a" is correct. $165,625 expected cost savings by increasing inventory turnover from its current 8 times to 10 times per year.

• Question 1005:

  Which of the following correctly lists the three ways to increase the money supply?

  A. Raise the required reserve ratio, increase the discount rate, sell bonds in the open market.
  B. Raise the required reserve ratio, increase the discount rate, buy bonds in the open market.
  C. Lower the required reserve ratio, increase the discount rate, buy bonds in the open market.
  D. Lower the required reserve ratio, decrease the discount rate, buy bonds in the open market.
  D. Lower the required reserve ratio, decrease the discount rate, buy bonds in the open market.

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  Choice "d" is correct. The three ways the Fed can increase the money supply are: (1) buy (purchase) government securities in the open market, (2) lower the discount rate, and (3) lower the required reserve ratio. Choice "a" is incorrect, perabove. Choice "b" is incorrect, perabove. Choice "c" is incorrect, perabove.

• Question 1006:

  A client that recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change their passwords at initial log-in nor do passwords ever expire. Which of the following statements does not reflect a limitation of the client's computer access control?

  A. Employees can easily guess fellow employees' passwords.
  B. Employees are not required to change passwords.
  C. Employees can circumvent procedures to segregate duties.
  D. Employees are not required to take regular vacations.
  D. Employees are not required to take regular vacations.

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  Choice "d" is correct. The requirement that employees take regular vacations is a good internal control, but it is unrelated to computer-access controls. Choice "a" is incorrect. Using employee's names as their passwords is an ineffective computer-access control, because passwords are easily guessed. Choice "b" is incorrect. It would be acceptable to assign employee names as passwords, as long as the employees were required to change their passwords at initial log-in as well as periodically in the future. The fact that this requirement is not in place is a limitation of the client's computer-access controls. Choice "c" is incorrect. If password controls are used to segregate the duties of individual employees, using employee names as passwords allows an employee to circumvent this segregation by logging in with another employee's password.

• Question 1007:

  Tom and Joan Moore, both CPAs, filed a joint 1994 federal income tax return showing $70,000 in taxable income. During 1994, Tom's daughter Laura, age 16, resided with Tom. Laura had no income of her own and was Tom's dependent.

  Determine the amount of income or loss, if any that should be included on page one of the Moores' 1994 Form 1040.

  Tom received $10,000, consisting of $5,000 each of principal and interest, when he redeemed a Series EE savings bond in 1994. The bond was issued in his name in 1990 and the proceeds were used to pay for Laura's college tuition. Tom

  had not elected to report the yearly increases in the value of the bond.

  A. $0
  B. $500
  C. $900
  D. $1,000
  E. $1,250
  F. $1,300
  G. $1,500
  H. $2,000
  I. $2,500
  J. $3,000 K. $10,000 L. $25,000 M. $50,000 N. $55,000 O. $75,000
  A. $0

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  "A" is correct. $0. Generally, if a taxpayer does not make an election to accrue interest income from Series EE bonds, the interest is taxable at the time the bonds are cashed. However, an exception applies in this case because Tom Moore meets the criteria (assume he was 24 years or older in 1990). Savings bonds is tax-exempt when: (1) It is used to pay for qualified higher-education expenses for the taxpayer, spouse, or dependents; (2) There is taxpayer or joint ownership with spouse; (3) The taxpayer is age 24 (or over) when the bonds are issued; and (4) The bonds are acquired after 1989.

• Question 1008:

  In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report:

  A. A statement of assurance that all controls over fraud and illegal acts were tested.
  B. Material instances of fraud and illegal acts that were discovered.
  C. The materiality criteria used by the auditor in considering whether instances of noncompliance were significant.
  D. An opinion on whether compliance with laws and regulations affected the entity's goals and objectives.
  B. Material instances of fraud and illegal acts that were discovered.

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  Choice "b" is correct. Only material instances of fraud and illegal acts discovered need to be communicated in the auditor's report on compliance. If applicable, the report should state that other instances of noncompliance were communicated to management in a separate letter. Choice "a" is incorrect. The report would state that consideration of internal control over compliance would not necessarily disclose all significant deficiencies (reportable conditions). Not only would there be no assurance that all controls were tested, the auditor would assert the exact opposite. Choice "c" is incorrect. The auditor would not disclose the materiality criteria used in considering whether instances of noncompliance were significant. Choice "d" is incorrect. The auditor does not express an opinion on whether the compliance affected the entity's goals and objectives.

• Question 1009:

  A preferred stock is sold for $101 per share, has a face value of $100 per share, underwriting fees of $5 per share, and annual dividends of $10 per share. If the tax rate is 40 percent, the cost of funds (capital) for the preferred stock is:

  A. 4.2 percent.
  B. 6.2 percent.
  C. 10.0 percent.
  D. 10.4 percent.
  D. 10.4 percent.

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  Choice "d" is correct. The stock is issued for a net of $96 per share ($101 less $5 underwriting fee). Because preferred stock dividends are not tax deductible, the cost to the company is $10/share (the tax rate is a distractor). Therefore, the cost of the preferred stock is: Choices "a", "b", and "c" are incorrect, per the above Explanation/calculation.

• Question 1010:

  An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should:

  A. Add an explanatory paragraph to the auditor's report that refers to the required supplementary information.
  B. State that the audit is not being performed in accordance with generally accepted auditing standards.
  C. Document in the working papers that the required supplementary information is presented, but should not apply any procedures to the information.
  D. Compare the required supplementary information for consistency with the audited financial statements.
  D. Compare the required supplementary information for consistency with the audited financial statements.

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  Choice "d" is correct. The auditor should perform certain limited procedures on supplementary information accompanying the financial statements, including evaluating whether the information is consistent with the audited financial statements. Choice "a" is incorrect. Generally, the auditor's report on the financial statements would not include a reference to required supplementary information unless there were a problem with it (e.g., it was omitted, inappropriately prepared, or the auditor was unable to satisfactorily complete required procedures). Choice "b" is incorrect. An audit can and should be performed in accordance with generally accepted auditing standards even when required supplementary information is presented. Choice "c" is incorrect. The auditor should perform certain limited procedures on supplementary information accompanying the financial statements.