AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1011:

  Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the U.S. should:

  A. Understand the accounting principles generally accepted in the other country.
  B. Be certified by the appropriate auditing or accountancy board of the other country.
  C. Notify management that the auditor is required to disclaim an opinion on the financial statements.
  D. Receive a waiver from the auditor's state board of accountancy to perform the engagement.
  A. Understand the accounting principles generally accepted in the other country.

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  Choice "a" is correct. Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, the auditor practicing in the U.S. should understand the accounting principles generally accepted in the other country. Choice "b" is incorrect. The auditor practicing in the U.S. would be able to report on the financial statements of the U.S. entity without obtaining certification in the other country. Choice "c" is incorrect. The auditor need not disclaim an opinion on the financial statements prepared in conformity with another country's accounting principles. Choice "d" is incorrect. A waiver to perform the engagement is not necessary.

• Question 1012:

  Which of the following statements regarding the existence of substitute products is true?

  A. The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are readily available for customers to obtain.
  B. When the cost of buyers switching to new products is high, the effect of substitutes on the competitive environment of a firm is high.
  C. If many close substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available.
  D. If substitutes have equal performance and are priced at or below the firm's product, the competitive force of substitutes with respect to the firm is weak.
  A. The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are readily available for customers to obtain.

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  Choice "a" is correct. The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are readily available to consumers. Choice "b" is incorrect. When the cost of buyers switching to new products is low (not high), the effect of substitutes on the competitive environment of a firm is high. Choice "c" is incorrect. If few (not many close) substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available. Choice "d" is incorrect. If substitutes have equal performance and are priced at or below the firm's product, the competitive force of substitutes with respect to the firm is strong (not weak).

• Question 1013:

  ABC, Inc. reported a retained earnings balance of $150,000 at December 31,1990. In June 1991, ABC discovered that merchandise costing $40,000 had not been included in inventory in its 1990 financial statements. ABC has a 30% tax rate. What amount should ABC report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 1991?

  A. $190,000
  B. $178,000
  C. $150,000
  D. $122,000
  B. $178,000

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  Explanation Explanation/Reference: Choice "b" is correct. $178,000.

• Question 1014:

  Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:

  A. Valuation.
  B. Classification.
  C. Existence.
  D. Completeness.
  C. Existence.

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  Choice "c" is correct. Confirmation of accounts receivable provides evidence that the customer and the receivable exist. Choice "a" is incorrect. Accounts receivable confirmations do not provide evidence regarding valuation, since they do not indicate whether customers have the intent or the ability to pay. Choice "b" is incorrect. Accounts receivable confirmations do not provide evidence regarding the appropriate classification of receivables in the financial statements. Choice "d" is incorrect. Accounts receivable confirmations are sent to recorded customers, so they do not provide evidence regarding the possible omission of valid accounts (i.e., completeness).

• Question 1015:

  The trough of a business cycle is generally characterized by:

  A. Shortages of essential raw materials and rising costs.
  B. Increasing purchasing power and increasing capital investments.
  C. Unused productive capacity and an unwillingness to risk investments.
  D. Declining purchasing power and unused productive capacity.
  C. Unused productive capacity and an unwillingness to risk investments.

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  Choice "c" is correct. The trough of a business cycle is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments. Choice "a" is incorrect. Shortages may occur during a peak. Choice "b" is incorrect. Increasing purchasing power and increasing capital investments come with recovery. Choice "d" is incorrect. Declining purchasing power comes with inflation; unlikely in a trough.

• Question 1016:

  Frictional unemployment refers to unemployment resulting from:

  A. The skills of workers do not correspond to the skills demanded by employers.
  B. The time needed to match qualified job seekers with available jobs.
  C. Seasonal decreases in demand for labor.
  D. A recession in the economy.
  B. The time needed to match qualified job seekers with available jobs.

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  Choice "b" is correct. Frictional unemployment is the unemployment that arises from workers routinely changing jobs or from workers being temporarily laid off. It results from the time needed to match qualified job seekers with available jobs. Choice "a" is incorrect. This is structural unemployment. Choice "c" is incorrect. This is seasonal unemployment. Choice "d" is incorrect. This is cyclical unemployment.

• Question 1017:

  An accountant's standard report on a compilation of a projection should not include a statement that:

  A. There will usually be differences between the forecasted and actual results.
  B. The hypothetical assumptions used in the projection are reasonable in the circumstances.
  C. The accountant has no responsibility to update the report for future events and circumstances.
  D. The compilation of a projection is limited in scope.
  B. The hypothetical assumptions used in the projection are reasonable in the circumstances.

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  Choice "b" is correct. An accountant's standard report on a compilation of a projection does not include a statement that the hypothetical assumptions used in the projection are reasonable in the circumstances. Choice "a" is incorrect. An accountant's standard report on a compilation of a projection does state that there will usually be differences between the forecasted and actual results. Choice "c" is incorrect. An accountant's standard report on a compilation of a projection does state that the accountant has no responsibility to update the report for future events and circumstances. Choice "d" is incorrect. An accountant's standard report on a compilation of a projection does state that the compilation of a projection is limited in scope ("A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection.")

• Question 1018:

  On February 1, 1993, Hall learned that he was bequeathed 500 shares of common stock under his father's will. Hall's father had paid $2,500 for the stock in 1990. Fair market value of the stock on February 1, 1993, the date of his father's death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, 1993, the date that the executor distributed the stock to him. How much income should Hall include in his 1993 individual income tax return for the inheritance of the 500 shares of stock, which he received from his father's estate?

  A. $5,500
  B. $4,000
  C. $2,500
  D. $0
  D. $0

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  Choice "d" is correct. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor. This is the value 6 months after date of death or date distributed if before 6 months. The property was distributed 4 months after death and the value that day ($4,500) is used for the basis. $4,500 -$4,500 = 0. Choice "a" is incorrect. There is no income tax on the value of inherited property. Choice "b" is incorrect. This is the basis of the stock if the alternate date had not been used. Heirs are not taxed on inheritances. The income or loss results when inherited property is sold. Choice "c" is incorrect. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor.

• Question 1019:

  Assume the following facts about ABC Corporation:

  ?The long-term debt was originally issued at par ($1,000/bond) and is currently trading at $1,250 per bond. ?ABC Corporation can now issue debt at 150 basis points over U.S. treasury bonds. ?The current risk-free rate (U.S. treasury bonds)

  is 7 percent. ?ABC's common stock is currently selling at $32 per share.

  ?The expected market return is currently 15 percent.

  ?The beta value for ABC is 1.25.

  ?Martin's effective corporate income tax rate is 40 percent.

  Based on these assumptions, what is the current net after-tax cost of debt for ABC Corporation?

  A. 5.5 percent.
  B. 7.0 percent.
  C. 5.1 percent.
  D. 8.5 percent.
  C. 5.1 percent.

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  Choice "c" is correct. 5.1 percent current net cost of debt. The fact pattern states that debt can be currently secured at 150 basis points above the Treasury bond rate. A basis point is equal to 1/100 of 1% (1% of 1%). Applying the decimals it's: 150 basis points x 1/100 of 1% (or .0001) this yields .015 or 1.5% Add the additional basis points converted to percentage (1.5%) to the Treasury bond rate of 7% to arrive at the pre-tax debt cost of 8.5%. Apply 1 - tax rate to arrive at the current net cost of debt as follows:

• Question 1020:

  In ABC Co.'s 1992 annual report, ABC described its social awareness expenditures during the year as follows:

  "The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human-service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company's commitment to the environment, the Company spent $100,000 to redesign product packaging."

  What amount of the above should be included in ABC's income statement as charitable contributions expense?

  A. $310,000
  B. $390,000
  C. $410,000
  D. $490,000
  A. $310,000

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  Choice "a" is correct. Charitable contributions include amounts the company gave to recognized charities. This includes: Note: Of the $140,000, employees gave $80,000, and the company $60,000. Redesigning packaging is not a contribution to a charity. Choice "b" is incorrect. The company gave only $60,000 of the $140,000. Employees gave $80,000. Choice "c" is incorrect. Redesigning packaging is not a contribution to a charity. Choice "d" is incorrect. The company gave only $60,000 of the $140,000. Employees gave $80,000. Redesigning packaging is not a contribution to a charity.