AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1151:

  The segment margin of an investment center after deducting the imputed interest on the assets used by the investment center is known as:

  A. Return on investment.
  B. Residual income.
  C. Operating income.
  D. Return on assets.
  B. Residual income.

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  Choice "b" is correct. Residual income is the segment margin of an investment center after deducting the imputed interest (hurdle rate) on the assets used by the investment center. Choice "a" is incorrect. Return on investment is the ratio of income earned to the investment. Choice "c" is incorrect. Operating income is not well defined, but is generally the income from operations for the entire organization, not a segment. Choice "d" is incorrect. Return on assets is the ratio of income produced to assets employed (not the amount invested).

• Question 1152:

  When the federal government imposes health and safety regulations on certain products, one of the most likely results is:

  A. Greater consumption of the product.
  B. Lower prices for the product.
  C. Higher prices for the product.
  D. Increased supply of the product.
  C. Higher prices for the product.

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  Choice "c" is correct. One of the consequences of greater government regulation of certain products is the resulting higher cost to the consumer when the government imposes health and safety regulations on certain products it is likely that expenses will increase and that the added costs will be passed on to consumers in terms of higher prices. The total output for the product may decrease. Choice "a" is incorrect. Since the price goes up, consumption will decrease. Choice "b" is incorrect. The price can be expected to increase (see choice "c"above). Choice "d" is incorrect. Since the price goes up, supply goes down.

• Question 1153:

  ABC outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. ABC has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on ABC's two major vendors, including average monthly purchases and credit terms.

  

  Assuming a 360-day year and that ABC continues paying on the last day of the credit period, the company's weighted annual interest rate for trade credit (ignoring the effects of compounding) for these two vendors is:

  A. 27.0 percent.
  B. 28.0 percent.
  C. 29.3 percent.
  D. 30.2 percent.
  B. 28.0 percent.

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  Choice "b" is correct. 28% weighted annual interest rate. This question pertains to a complex computation of effective rates on lost discounts for multiple terms and multiple balances. The computation of the annual percentage cost of the lost discount is equal to the effective rate of interest for the period (for example 2/10, net 30 is 2% interest charge/ 98% proceeds) times the number of times this period occurs in a year (for example 2/10, net 20 is 360 days per year divided by 20 day period during which the lost discount is used or 18 times). Extension of this logic to the referenced question involves allocating the computed annual rates to the relative balances of the outstanding payables as follows:

• Question 1154:

  In 1990, ABC Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of ABC Corp. and the rights and duties of its stockholders, directors, and officers. ABC Corp.'s directors are elected by its:

  A. Officers.
  B. Outgoing directors.
  C. Stockholders.
  C. Stockholders.

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  Choice "c" is correct. Directors are elected by the stockholders.

• Question 1155:

  Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?

  A. FASB Technical Bulletins.
  B. AICPA Accounting Interpretations.
  C. FASB Statements of Financial Accounting Concepts.
  D. AICPA Technical Practice Aids.
  A. FASB Technical Bulletins.

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  Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB Statements, FASB Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, AICPA APB opinions, and AICPA Accounting Research Bulletins. When these pronouncements do not provide appropriate guidance, the next level of pronouncements (second floor) are AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and FASB Technical Bulletins. Choice "b" is incorrect. AICPA Accounting Interpretations are not as authoritative as FASB Technical Bulletins, since they are on the fourth floor. Choices "c" and "d" are incorrect. FASB Concepts Statements and AICPA Technical Practice Aids are among the least authoritative of accounting literature (fifth floor).

• Question 1156:

  Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of ABC, Inc. Smith, CPA, audits one of ABC's subsidiaries. In which situation(s) should Pell make reference to Smith's audit?

  A. Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a qualified opinion on ABC's financial statements. II. Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  B. I only.

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  Choice "b" is correct. The principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it. Choice "a" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed. Choice "c" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed. Choice "d" is incorrect. The principal auditor will make reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.

• Question 1157:

  Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

  A. This is a duplication of cutoff tests.
  B. Accounts payable balances at the balance sheet date may not be paid before the audit is completed.
  C. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment.
  D. There is likely to be other reliable external evidence available to support the balances.
  D. There is likely to be other reliable external evidence available to support the balances.

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  Choice "d" is correct. The documents available to support accounts payable balances come from external sources, which makes them more reliable. Choice "a" is incorrect. Confirmation of accounts payable is not a duplication of cutoff tests. Cutoff testing addresses questions about proper period (allocation) while confirmation of accounts payable balances generally tests for understated balances. Choice "b" is incorrect. If liabilities are not paid before the audit is completed, accounts payable confirmations would be more important, since there would be less other evidence supporting the liability. Choice "c" is incorrect. Legal action usually takes a long time and correspondence with an attorney may not disclose all nonpayment problems. (Notice the all-inclusive word "all," usually the tip-off to a wrong answer.)

• Question 1158:

  When evaluating capital budgeting analysis techniques, the payback period emphasizes:

  A. Liquidity.
  B. Profitability.
  C. Net income.
  D. The accounting period.
  A. Liquidity.

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  Explanation Explanation/Reference:Choice "a" is correct. The payback period is the time period required for cash inflows to recover the initial investment. The emphasis of the technique is on liquidity (i.e., cash flow). Choices "b", "c", and "d" are incorrect, per the above Explanation.

• Question 1159:

  In order to sell at the rate of output in markets controlled by monopolists, price is set where:

  A. Price equals marginal cost.
  B. Marginal revenue equals marginal cost.
  C. Marginal revenue equals average total cost.
  D. Price equals average total cost.
  B. Marginal revenue equals marginal cost.

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  Choice "b" is correct. In order to sell at the rate of output in markets controlled by monopolists, the price is set where marginal revenue equals marginal cost. No matter which model is representative of the industry in which the firm operates, the firm will maximize profits by producing at MR = MC. The monopolist's price will be higher than MR. Choice "a" is incorrect. Price exceeds both MR and MC. Choices "c" and "d" are incorrect, which are far-out distractors.

• Question 1160:

  A perfectly inelastic supply curve in a competitive market:

  A. Means the equilibrium price must be zero.
  B. Implies a vertical demand curve.
  C. Exists when firms cannot vary input usage.
  D. Says the market supply curve is horizontal.
  C. Exists when firms cannot vary input usage.

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  Choice "c" is correct. Price elasticity of supply is calculated the same way as demand except that quantity supplied is measured: Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price; i.e., the quantity supplied will not change as price changes. Perfectly inelastic supply curves would exist if firms cannot vary input usage. Regardless of price, the firm has to use all inputs if it produces at all. Choices "a", "b", and "d" are incorrect, as they are far-out distractors.