AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1071:

  ABC Shop purchased an asset for $100,000 that has no salvage value and a 10-year life. ABC's effective income tax rate is 40 percent, and it uses the straight-line depreciation method for income tax reporting purposes. ABC's annual depreciation tax shield from the asset would be:

  A. $10,000
  B. $6,000
  C. $4,000
  D. $2,000
  C. $4,000

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  Choice "c" is correct. $4,000 annual depreciation tax shield. Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 1072:

  For capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management:

  A. Wants to use equity funding exclusively.
  B. Believes bank loans are riskier than capital investments.
  C. Believes capital investment proposals involve average risk.
  D. Wants to factor risk into its consideration of projects.
  D. Wants to factor risk into its consideration of projects.

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  Choice "d" is correct. Management would select a high hurdle rate for certain projects to factor risk into its consideration of projects. The higher hurdle rate discounts future cash flows more, creating a smaller present value. By "devaluing" the cash flows of certain projects, risk has been compensated for. Choices "a" and "b" are incorrect. The method and cost of funding are independent of the hurdle rate for screening investments. Choice "c" is incorrect. If capital investment proposals involve average risk, no adjustment upward is needed for risk.

• Question 1073:

  Limitations of the information provided by total asset turnover include:

  A. A good measure for trend analysis of a particular company, but variable ways of calculating cost of goods sold limit its usefulness for comparative analysis.
  B. The calculation can be affected by varying accounting assumptions, which affect the calculation of net income.
  C. Because of differing costs of capital, the measure cannot be effectively used for comparative analysis.
  D. When making the calculation, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.
  D. When making the calculation, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.

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  Choice "d" is correct. When calculating the turnover, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure. Choice "a" is incorrect. This option pertains to gross profit margin. Choice "b" is incorrect. This option pertains to return on the investment in assets. Choice "c" is incorrect. This option pertains to residual income.

• Question 1074:

  ABC Co.'s financial statements had the following balances at December 31:

  

  What amount should ABC report as comprehensive income for the year ended December 31?

  A. $400,000
  B. $420,000
  C. $520,000
  D. $570,000
  C. $520,000

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  Explanation Explanation/Reference:Choice "c" is correct. Comprehensive Income includes all items included in "Net Income" plus "Other Comprehensive Income" items. Since the $50,000 extraordinary gain is already included in Net Income, Comprehensive Income is:

• Question 1075:

  In which stage of supply chain management will the firm's management turn its attention to consolidation of the various departments that make up operations in order to solve the firm's problems, with a focus on customer service?

  A. Cross-functional teams.
  B. Integrated enterprise.
  C. Extended supply chain.
  D. Supply chain communities.
  A. Cross-functional teams.

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  Choice "a" is correct. In the cross-functional teams stage of supply chain management, the firm's management will turn its attention to consolidation of the various departments that make up operations in order to solve the firm's problems, and the focus will be on customer service. Choice "b" is incorrect. In the integrated enterprise stage of supply chain management, the firm's management will move away from simple consolidation of its operations to an internally-integrated supply chain, which all work together towards the main business issue of the cost of customer service. Choice "c" is incorrect. In the extended supply chain stage of supply chain management, integration moves external to the firm to involve those outside the firm who are able to work as a unified team in an attempt to obtain slow, profitable growth. Choice "d" is incorrect. In the supply chain communities stage of supply chain management, the extended supply chain forms a single competitive entity with a synchronized supply chain and a complex system of networks.

• Question 1076:

  Audit documentation should be prepared in enough detail so that:

  A. An experienced auditor who has worked with the client in the past can understand the procedures performed and the evidence obtained.
  B. A reader of the financial statements who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
  C. A reader of the financial statements who has a background in financial analysis can understand the procedures performed and the evidence obtained.
  D. An experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
  D. An experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.

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  Choice "d" is correct. Audit documentation should be prepared in enough detail so that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained. Choice "a" is incorrect. The requirement is that audit documentation be detailed enough that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained. This is a higher standard than simply requiring the audit documentation to be appropriate for an auditor who is already familiar with the client. Choices "b" and "c" are incorrect. Readers of the financial statements typically would not have access to the audit documentation.

• Question 1077:

  The amount of inventory that a company would tend to hold in stock would increase as the:

  A. Cost of carrying inventory decreases.
  B. Variability of sales decreases.
  C. Cost of running out of stock decreases.
  D. Length of time that goods are in transit decreases.
  A. Cost of carrying inventory decreases.

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  Choice "a" is correct. The amount of inventory that a company would tend to hold in stock would increase as the cost of carrying inventory decreases. The amount of inventory that a company would tend to hold in stock would decrease as the: B. Variability of sales decreases. C. Cost of running out of stock decreases. D. Length of time that goods are in transit decreases.

• Question 1078:

  Which of the following is not true regarding audit documentation for a specific audit?

  A. Audit documentation should be sufficient to enable members of the audit team with supervisory responsibilities to understand the nature, timing, extent, and results of auditing procedures performed.
  B. Audit documentation should indicate which member(s) of the audit team performed and reviewed the audit work.
  C. Audit documentation should demonstrate compliance with quality control standards.
  D. Audit documentation should demonstrate compliance with the standards of fieldwork.
  C. Audit documentation should demonstrate compliance with quality control standards.

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  Choice "c" is correct. Quality control standards relate to the conduct of a firm's audit practice as a whole, and compliance with such standards would not be demonstrated by audit documentation for one specific audit engagement. Choice "a" is incorrect. Audit documentation should clearly indicate the work performed and the evidence obtained. Choice "b" is incorrect. Audit documentation should indicate which parties performed and reviewed the work. Choice "d" is incorrect. Audit documentation should demonstrate compliance with the standards of fieldwork. It should indicate an appropriate level of planning and supervision, that a sufficient understanding of the entity and its environment, including its internal control, was obtained, and that a sufficient level of appropriate evidence was obtained.

• Question 1079:

  In assessing the competence and objectivity of an entity's internal auditor, an independent auditor least likely would consider information obtained from:

  A. Discussions with management personnel.
  B. External quality reviews of the internal auditor's activities.
  C. Previous experience with the internal auditor.
  D. The results of analytical procedures.
  D. The results of analytical procedures.

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  Choice "d" is correct. Analytical procedures may be used to enhance the auditor's understanding of the client's business or to evaluate financial statement assertions, but generally would not be helpful in assessing the competence and objectivity of an entity's internal auditor. Choice "a" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from discussions with management personnel. Choice "b" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from external quality reviews of internal audit activities. Choice "c" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from previous experience with the internal audit function.

• Question 1080:

  An accountant's compilation report on a financial forecast should include a statement that the:

  A. Compilation does not include evaluation of the support of the assumptions underlying the forecast.
  B. Hypothetical assumptions used in the forecast are reasonable.
  C. Range of assumptions selected is one in which one end of the range is less likely to occur than the other.
  D. Prospective statements are limited to presenting, in the form of a forecast, information that is the accountant's representation.
  A. Compilation does not include evaluation of the support of the assumptions underlying the forecast.

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  Choice "a" is correct. An accountant's compilation report on a financial forecast should include a statement that the compilation does not include evaluation of the support of the assumptions underlying the forecast. (An examination of the financial forecast would include evaluation of the support). Choice "b" is incorrect. An accountant does not give any form of assurance related to hypothetical assumptions, which are not used in financial forecasts anyway. (Hypothetical assumptions are used in financial projections). Choice "c" is incorrect. No mention of the range of assumptions selected is made in the compilation report. Choice "d" is incorrect. A compilation is limited to presenting, in the form of a forecast, information that is management's representation.